Compliance cost blind-spot in pension reform plan – Absa

There’s a potential blind-spot in current plans for pension reform, according to Absa Consultants & Actuaries (ACA), a Johannesburg-based member of the Absa Group with strong focus on the statutory savings industry.

National Treasury is to be congratulated on suggesting many new approaches to reduce cost impacts on the final benefits received by retirees, says ACA head Cobus Strydom. But one cost impact has been largely overlooked – the cost of regulatory compliance.

He notes: “Treasury’s concern with a fund member’s net position after deductions is laudable, but supervision and regulation also carry a cost and this issue receives little attention in Treasury’s latest technical discussion paper.

“In contrast, we see strong focus on the recurring cost of intermediation – the charges paid to financial advisers by a pension or provident fund.

“Treasury makes a valuable contribution to the reform process by drawing attention to cost impacts and outlining possible methods of cost containment. However, official recognition of the implicit cost impact of new layers of regulation would also be welcome.”

The new Treasury paper includes a tabulation showing the value-depleting effects of on-going fees. After 40 years, a retirement benefit is reduced by 60% as a result of a 5% recurring fee.

Strydom adds: “Regulatory compliance also carries a cost and service providers in the retirement industry will clearly have to recover this cost in some way.

“The irony is that the cost of compliance may well increase as a result of some of the reform proposals now under discussion. Over time, supervision and regulation costs – just like recurring fees – have an impact on benefit values.”

In his view, initiatives to address the challenge of cost containment would be fostered by a holistic appraisal of all factors with the potential to erode the value of a retiree’s final benefit.

“Regulation is vital and periodic overhaul of the regulatory framework is essential,” says Strydrom. “But reform should also look to simplify and streamline structures. The overriding focus of supervision and regulation has to be long-term sustainability and value creation for members.

“Any regulation that does not contribute to this outcome should be scrapped.”

He cautions that a focus on costs without regard for quality and long-term sustainability “might create a race to the bottom”, with funds doing everything to shave costs. This would be highly detrimental to member interests in the event of fund failure or other problems created by under-investment in proper systems and safeguards.

He says the Treasury paper acknowledges that financial advisers have an important role in the employee benefit field.

People save more when intermediaries are involved, says Strydom, and sometimes may not have saved at all without an intermediary’s intervention.

Therefore, the authorities should “be mindful of the danger of creating an environment where intermediaries cannot operate effectively. Correct advice on retirement is crucial”.

Strydom believes many Treasury proposals have merit, including a call to unlock economies of scale by moving toward umbrella funds. However, “the devil is in the detail.”

There’s a potential blind-spot in current plans for pension reform, according to Absa Consultants & Actuaries (ACA), a Johannesburg-based member of the Absa Group with strong focus on the statutory savings industry.

National Treasury is to be congratulated on suggesting many new approaches to reduce cost impacts on the final benefits received by retirees, says ACA head Cobus Strydom. But one cost impact has been largely overlooked – the cost of regulatory compliance.

He notes: “Treasury’s concern with a fund member’s net position after deductions is laudable, but supervision and regulation also carry a cost and this issue receives little attention in Treasury’s latest technical discussion paper.

“In contrast, we see strong focus on the recurring cost of intermediation – the charges paid to financial advisers by a pension or provident fund.

“Treasury makes a valuable contribution to the reform process by drawing attention to cost impacts and outlining possible methods of cost containment. However, official recognition of the implicit cost impact of new layers of regulation would also be welcome.”

The new Treasury paper includes a tabulation showing the value-depleting effects of on-going fees. After 40 years, a retirement benefit is reduced by 60% as a result of a 5% recurring fee.

Strydom adds: “Regulatory compliance also carries a cost and service providers in the retirement industry will clearly have to recover this cost in some way.

“The irony is that the cost of compliance may well increase as a result of some of the reform proposals now under discussion. Over time, supervision and regulation costs – just like recurring fees – have an impact on benefit values.”

In his view, initiatives to address the challenge of cost containment would be fostered by a holistic appraisal of all factors with the potential to erode the value of a retiree’s final benefit.

“Regulation is vital and periodic overhaul of the regulatory framework is essential,” says Strydrom. “But reform should also look to simplify and streamline structures. The overriding focus of supervision and regulation has to be long-term sustainability and value creation for members.

“Any regulation that does not contribute to this outcome should be scrapped.”

He cautions that a focus on costs without regard for quality and long-term sustainability “might create a race to the bottom”, with funds doing everything to shave costs. This would be highly detrimental to member interests in the event of fund failure or other problems created by under-investment in proper systems and safeguards.

He says the Treasury paper acknowledges that financial advisers have an important role in the employee benefit field.

People save more when intermediaries are involved, says Strydom, and sometimes may not have saved at all without an intermediary’s intervention.

Therefore, the authorities should “be mindful of the danger of creating an environment where intermediaries cannot operate effectively. Correct advice on retirement is crucial”.

Strydom believes many Treasury proposals have merit, including a call to unlock economies of scale by moving toward umbrella funds. However, “the devil is in the detail.”