Cutting costs sparks a new debate in retirement reform
The South African financial services industry is going through some significant changes with the Financial Services Board (FSB) and government implementing laws which they hope will bring South Africa on par with international market. These changes will a
And it seems as if the retirement sector will be the sector which will be the biggest benefactor of this change. There are on-going discussions between government, the FSB and industry stakeholders on the best way to reform the industry. While there are many challenges which need to be addressed, a major driver of this change will be costs and the fact that government wants to decrease these costs in order to offer the best retirement cover to the greatest portion of the population.
However, David Gluckman, Head of Future Positioning and Research at Sanlam Employee Benefits says that this needs to be managed properly and it should not be treasury’s sole focus as it is not the only factor which will influence industry change.
Costs are a major consideration
It seems as if the cost issue is seen as a burning one with National Treasury. It released five discussion papers over the past two years in which it pointed out that change needs to occur. One of the main concerns is that the costs levied by financial institutions are out of line with international counterparts.
“The country cost comparison that Treasury makes is not a fair comparison,” says Gluckman. “We agree that charges in the sector can reduce from current levels, but changes must be made incrementally in a constructive and sustainable manner.”
Product suppliers are defending their practices arguing that charges are a function of the costs incurred when providing fund management and administration services. They add that high costs are in part due to structural inefficiencies in the local market.
“We can show clear examples where the industry has tried to improve things over the past decade,” says Gluckman. “The number of retirement funds is down from around 13 000 to just 3 000 today and there have been significant improvements in savings product design.” He says the growth of umbrella funds and the growing popularity of passive investment strategies must logically bring down charges over time.
Is the public getting full value?
Despite these ongoing discussions, regulators are still worried that the public is not getting value for its retirement savings inputs. “Our proposed reforms are heavily based on individuals,” says David McCarthy, Retirement Policy Specialist: Tax and Financial Sector Policy at Treasury. He adds that individuals are at the heart of the industry and he is concerned that the maxim of putting customers first is not always applied in practice.
However, product suppliers feel that the goals of retirement reform are best achieved under competitive forces in a free market. McCarthy disagrees with this. “Regulation is needed to ensure that there are limits to the extent to which complex products can be designed, it is a fundamental ingredient in a free market.”
Financial journalist and editor Bruce Cameron has been outspoken against high and unfair charges in the financial services sector and has reaffirmed the need to resolve this issue. He is worried that product suppliers will react to reforms by hiding costs in other ways.
Future outlook
Gluckman says that while the focus on costs is important, attention needs to be paid to other pressing matters.
“The focus should be on increasing South Africans' very low savings levels, on encouraging increased preservation and on eliminating structural inefficiencies. A key structural inefficiency highlighted in the National Treasury papers is the very low levels of preservation upon exit from pension and provident funds. New preservation rules, in whatever form, will have a huge impact in decreasing charges over time.”
Editor’s Thoughts:
Cutting costs is a major consideration which National Treasury needs to take seriously if it wants to reform the industry. But it needs to be clever in the way it goes about this. There is a definite need to bring South Africa in line with international markets, provided that local challenges are overcome and contained before this alignment happens.
There also needs to be engagement with product providers where Treasury can give them assurances that any reform will not negatively affect them. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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