Charges in South African Retirement Funds Marilyn Kamp 19 August 2013

Charges in South African Retirement Funds

Marilyn Kamp19 August 2013

Charges in SA Retirement Funds

Purpose of the paper 5th (and last) technical discussion paper promoting

household savings and reforming retirement industry before retirement

Attempts to benchmark charges / costs in SA Proposes various policy interventions to remedy

identified shortcomings Highlights the importance of retirement savings Assist members in getting best value for retirement

savingsKey stakeholders to comment by 30 September 2013

Intended to facilitate rather than propose!

Charges in SA Retirement Funds

Costs versus charges

Some employers contribute directly / indirectly by performing some of the services on behalf of fund

Costs – usually paid from the fund and ultimately the member

Charges – usually billed to the member

Distributing fund to members Charges levied in different ways i.e. Rand per member, percentage of asset value, contribution or fund salary Example:Commercial umbrella funds may charge for: administration, consulting, financial advisory services, manager selection, performance fees, platform fees, switching fees, etc.

Administration of the fund / benefits

Financial advice to members

Providing insured benefits

Managing / administering fund investments

Communicating to members

Maintaining fund governance


Different charging methods Percentage of fund salary / contributions Percentage of returns (and performance based fees) Guarantee on investment returns Fixed cost per member Fixed conditional charges

switching, terminating, advising fees

Do you know and understand your funds charging method


Factors influencing a charging basis Quality level of service / governance / compliance / administration Product diversity / complexity (difficult to compare) Fund size influences fixed costs / economies of scale Level of regulation limiting or standardising charges Level of sensitivity of members to charges (small recurring charges) Intermediation efficiencies Redistribution of costs Subsidisation of costs i.e. employer assistance Levels of disclosure of full charges and T’s & C’s

Section 7D, PF86 & 90 – no direct reference to charges PF130 – recommends some fee disclosure FAIS - financial advisors to disclose charges when advising

Preservation rates (preservation in SA is low) Level of compulsory fund membership (individual type arrangements)

Cost model affects charging effects on members


Measuring and comparing charges Current measurements:

Reduction in Yield (RiY); or Reduction in Maturity Value (RiMV) Accounting Cost per fund assets (ACA) Accounting Cost per member (ACM)

There is a need to develop a simple and comprehensive measurement for fees

Over lifetime of product

Annual charges in retirement funds


Research findings Higher preservation rates, less funds, less complexity and

compulsory membership could lower costs Higher levels of cost disclosures would sensitise members to

charges Initial charges seem to be lower than recurring charges

Active rather than passive asset management seems more expensive

Intermediation may have unintended consequence of raising complexity and cost

Investment platforms introduce high levels of layered charges (encourages rebate payments)

World research shows SA retirement market is complex and possibly expensive


Draft proposals “Encourage” fund consolidation to achieve economies of scale Improved fund governance

Independent / expert / member & employer trustees Formalise roles, rights and obligations of committees

Strengthen fund regulation Power to monitor entire retirement system Standardise documents e.g. rules, investment mandates

Workplace distribution of retirement products more cost-effective

Simplify plan design (close look at performance fees) Promote “effective” intermediation relative to remuneration Mandate fund membership at employer level Offer employers comparison of different plans

Introduction of an “exchange” with a default option (KiwiSaver New Zealand model)


Trustee consideration Carefully consider fund structure before moving “blindly”

Understand full cost disclosure Understand charging model Understand level of service Understand services offered / functions provided

Cost should be related to service provision and services / functions provided

Establish a “table of fees” that will require full disclosure from all stakeholders / service providers

Maintain a fund budget


Ruskin quote (1819 – 1900)

There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person

who buys on price alone is this man’s lawful prey

Thank you

Documents

Charges in South African Retirement Funds Marilyn Kamp 19 August 2013