Open your mind to a new retirement outlook

The impact of T-Day, even though it has been delayed, has caused ripples across the financial service industry in light of the anticipated harmonisation of the tax treatment of institutional and personal retirement savings vehicles.

The question many people are asking is whether to consider Retirement Annuities (RAs) as a credible alternative to pension funds in this upcoming new context. The issues to consider when comparing these options go beyond just the tax treatment, and relate to the nature and cost of advice provided under these structures, accessibility, risk cover, economies of scale and differences in buying power, amongst other issues.

What does advice hold?

The primary value add of an individual arrangement is the opportunity to receive personalised and professional advice that is tailored to one’s unique circumstances. In doing so, people are able to appropriately contextualise their financial decisions with the help of a professional adviser and at a cost.

On a structural level, institutional retirement funds cannot aim to deliver the same degree of personalisation, but do offer alternatives appropriate to the generalised context of the underlying group.

In doing so, pension funds offer a broader value proposition, as the Sanlam Benchmark research indicates, and while most retirement fund members appreciate the value of advice, they are unwilling to pay for it.

An opportunity does exist to close the advice gap between the individual and institutional space as the lines between these constructs begin to blur.

Is it accessible?

RA’s are typically not accessible to all working South Africans due to minimum contribution levels, and the distribution model that requires the product to be sold via an intermediated salesforce remunerated on a retail scale.

This has resulted in the structural exclusion of a large number of South Africans from the RA pool as they simply do not invest enough to qualify for existing cut off criteria. Under a group arrangement, their needs can be met to a much higher degree by virtue of the superior accessibility to savings provided to lower income earners via this structure.

Risk differences

Members of institutional funds typically enjoy a range of risk cover by virtue of simply being members of these funds. This would be without the need for a medical up to the proof free cover limit, which means that individuals who would be denied individual cover via a personal lines policy would still qualify for cover via the group arrangement.

Subsidies would also exist depending on the underlying pool of lives forming the group for pricing purposes suggesting that a price comparison to individual rates is highly dependent on both the group and the individual concerned.

Economies of scale

Institutional structures tend to offer better cost economies of scale as expenses are charged on a wholesale basis. This effect is directly influenced by the size of the fund with larger funds being cheaper to administer than smaller ones.

That being said, the consolidation of smaller funds into umbrella funds provides smaller employers to benefit from the economies of scale which result from being part of a larger collective.

Buying power

Individuals have very limited scope to negotiate rates and fees with financial companies. This is due to the minimal negotiating strength that can be exercised by an individual buyer who does not have the relationships or asset size to influence a large corporate.

This is not the case in the institutional context where funds and consultants routinely engage and negotiate fees and rates downwards in the interests of their members due to the negotiating strength that comes from controlling a large pool of assets and networks with key decision makers that have been developed over time.

The lines are blurring and the opportunity to influence individual planning by leveraging the benefits of institutional investments has never been greater.