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Are we any closer to realistic retirement reform?

02 June 2014 Jonathan Faurie

It is frightening to think that we are already almost six months into the year. With the blink of an eye, the much anticipated presidential elections have come and gone and President Jacob Zuma has named a new Finance Minister in Nhlanhla Nene. It will be interesting to see if he has the same outlook, and capabilities, that Pravin Gordhan had when he was in charge of the country’s purse strings.

Hopefully we are also six months closer to government giving the industry more clarity on its retirement reform programme and the enactment of the infamous Protection of Private Information (POPI) Act which will no doubt have a significant impact on the financial services industry, especially in the retirement sector.

Retirement cost worries

When one looks at government's current approach to retirement reform, one can see that government has chosen to tackle a very complex beast. The objectives of the programme are noble in that government wants a greater portion of the country's population to retire comfortably. They hope to achieve this through issues such as auto enrolment, forced participation and increased preservation. The remodelling of retirement tax incentives also serve as a significant lifeline for retirees.

But all of this needs to be done while costs in the industry are contained. When looking at the poor rate of people who are able to retire comfortably, apart from poor investment decisions, costs was earmarked as the second biggest contributing factor to the country's poor retirement rate. But are government's current efforts reducing, or increasing costs?

While auto enrolment is a much needed introduction into the industry, Old Mutual reports that it needs to be part of a pre-determined process, otherwise the mandatory savings system may actually increase costs to employers and members.

Craig Aitchison, Corporate General Manager of Customer Solutions at Old Mutual Corporate, says that the issue of auto enrolment must be handled in a well-planned, strategic manner. This is perhaps most pertinent in smaller businesses. If this does not occur, rampant increased costs are the only thing that the public can look forward to.

"Smaller businesses may have fewer resources to devote to auto-enrolment requirements and the costs are likely to have a greater impact on them,” explains Aitchison. In order to negate this, small businesses will need to look at consolidating resources to gear up for the change.

One of the ways in which to overcome this is to create a retirement savings vehicle which has a strong focus on creating economies of scale. This saw the rise in popularity of umbrella funds, so much so that larger companies are also moving away from stand-alone funds towards umbrella funds. Aitchison points out that a well-managed umbrella fund, which is a highly cost-efficient retirement savings solution for employees, can positively address the challenges they may face.

"Umbrella funds enable employers to auto-enrol their employees in a simple, pre-determined way, with changes managed via the monthly payroll submissions. This allows employers to keep their eye on their core business. It's a good solution for small businesses as well as large corporates.”

Aitchison explains that in an umbrella fund the administrative burden and other governance costs are shared by the participating employers in the fund. This pooling of assets and sharing of costs gives rise to economies of scale and lower charges to members. Retirement fund members therefore benefit because a larger proportion of their contributions will go towards their retirement savings. He explains that latest industry statistics from the Financial Services Board (FSB) shows that funds with fewer than 20 members pay on average ten times more administration fees as a total percentage of contributions, compared to large funds with over 10 000 members.

The role of POPI in the industry

While many may accuse government of flooding the industry with a wave of new regulation, which can be comparable to a tsunami, we must remember that South Africa was behind the regulatory curve when it came to international legislative trends. The legislation that government, and the FSB are introducing is a deliberate attempt to bring South Africa on a level playing field with international markets.

One of the more necessary pieces of legislation which is being introduced is POPI. The Act hopes to protect the privacy of the individual when it comes to information storage, sharing, and processing.

There has been a lot of people who have looked at the proposed POPI regulations with a very critical eye, but Desiree Reddy, Associate at Norton Rose Fulbright, says that one needs to look at POPI in context.

"The retirement industry has always had significant regulations which regulate the protection of information in the industry. So there will be nothing new that will be added to the industry, POPI is just introducing additional requirements into the industry. Fund management companies need to look at what they are already doing, and then adjust accordingly,” says Reddy.

While many thinks that this will only apply to any new information gathered by fund management companies, Reddy points out that POPI actually creates a wide blanket and there is a broad definition of information processing which includes new and existing information.

Battling a perpetual enemy

The battle against costs will always be a perpetual battle which may not have a definitive resolution. Government's aims should really look towards decreasing costs to a realistic level, and then implementing systems and processes which contain these costs without becoming too onerous on the industry.

The move towards umbrella funds is a good move for the industry, provided that government can resolve other issues such as the age at which the public starts saving for retirement, as well as preservation when workers move from one company to another.

POPI should also not be too much of a cost burden on companies as there is already an existing culture of information protection within the industry. It is now merely a case of implementing systems and processes which monitor compliance.

Editor's Thoughts:
There needs to be buy-in to this process from all levels of industry. Is there a way that product providers themselves can design products and systems which can decrease costs in the industry? What role can advisers play in cost containment? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Simple Simon, 02 Jun 2014
Auto Enrollment.What a laugh.
Does anybody in his or her right mind really expect this pipe dream fantasy to benefit anybody but the Government?If the Leader of the free world,the U.S.A. with all it's resources and know-how failed to contain costs with their national health plan,how will a third world government fare better with this retirement plan.Mark my words:If this reform is implemented ,it will destroy the industry and it will demolish the industry as we know it. .Dont buy into it.!!
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