When researching the now famous Rusconi report, actuary Rob Rusconi had no idea what his findings would show — and he certainly never envisaged the furore that would follow. In 2003, he spent six months conducting detailed analyses of the life and pension industries in South Africa, and his findings shocked industry and the government.
“I had collected information on 40 different countries and wanted to compare the efficiencies of the South African retirement industry against international norms,” said Rusconi. While he expected there to be some inefficiencies and a marginally higher cost associated with local retirement products, he was shocked by how high costs of insurer-offered retirement annuities were.
Rusconi’s results showed that some individual retirement policies had a total charge ratio of more than 40% over a 40-year period. Basically, 40% of the investment went to costs. The international average is 25%.
His findings sparked public debate and parliamentary investigations, followed by the findings of the pension fund adjudicator (PFA) and the recent agreement between the government and the life industry. This will see about R3billion paid back to members of retirement annuities and endowment policy-holders. The agreement also set minimum standards on the level of costs that can be deducted by life companies for early termination.
But Rusconi is not taking credit for these developments. “My findings may have given [PFA] Vuyani Ngalwana food for thought, but he already had a very good understanding of the life industry and I don’t think he needed an excuse. We also looked at different issues. I looked at the inefficiencies in the system and he looked at early termination.”
Nevertheless, Rusconi is satisfied that his document is playing an important role in the pension reform process that is currently under way.
In November last year, he wanted to release his latest paper on guaranteed annuities (pension payments). His then employer, SEI Investments, which is American owned, requested that he did not make his presentation to the Actuarial Society of South Africa (Assa). This, and the realisation that he wanted to be more involved in research that would drive public policy, led to his resignation and decision to go it alone. “There is so much more we need to know. Such as, what are the current levels of retirement savings? No one really knows this figure and it is something we need to know to form policy.”
Rusconi is passionate about increasing the local savings rate and is concerned about the impact his findings may have. With some media recommending clients cash in their policies, and the general negative perception around pension and retirement products, he is worried he has contributed to an even lower savings rate.
“I was disappointed with some of the reactions. I would not have suggested surrendering, even if the policy was expensive.”
Interestingly, in his original paper, he found that agents’ commission did not make up a high percentage of overall costs on long-term savings. This got lost in the early surrender debate, where commissions have a greater impact, and the life companies have used the opportunity to pass the buck of high costs to intermediaries.
Speaking on the recent agreement with the life industry to reimburse customers, and have minimum standards on future early surrenders, Rusconi says the fact that shareholders are taking some of the pain is positive. “It introduces risk sharing rather than the policyholder taking all the risk. This will shake up the model.”
Rusconi is hoping that the agreement will lead to the introduction of league tables, as used in the United Kingdom, which is a direct comparison of costs across products. The life industry in South Africa has introduced the reduction-in-yield comparison to illustrate costs. Rusconi believes it is a step in the right direction, but it is still not transparent enough.
The Rusconi report highlighted the massive inefficiencies and high costs associated with retirement products, but he is sympathetic toward the life industry. “I think they were as shocked and surprised as I was with the findings.”
He believes that the high costs are a matter of inefficiencies in the system because of the complexity of the products. Most life companies have about 300 products on their books and new products are launched every year to compete with other companies. This has tremendous administrative and IT costs.
He believes another issue that has driven costs is the relatively small size of individual premiums. “High net worth individuals tend not to invest through life companies, so they are picking up the smaller clients, who are more expensive to administer.”
Although he cannot comment freely on his latest paper, which is still to be heard by his colleagues at Assa, he says guaranteed annuities have a far higher level of transparency and cost efficiency and, generally, the products are efficient.
The next challenge for the life industry will be to offer value for money to poorer customers. “Research shows us that lower-income earners tend to have a lower life expectancy, so their annuity rates should be higher. But it will be a challenge for the industry to calculate a new model as they will not want higher income earners to now be charged more.”
Rusconi has several clients commissioning research. Although he is cagey about who the clients are, he admitted the public sector is one of them.
“I am passionate about using my skills to assist the country in improving the efficiency of the system and the savings rate.” When pressed, he said “my research would also be useful in creating products. Companies would want to fully understand the implications of possible policy changes.”
It would be a sensible life company that kept Rusconi close as the challenge to meet customer needs heats up. Consumers are also better off knowing there are people such as Rusconi dedicated to improving the retirement industry and the country’s abysmal savings rate.