/ 11 July 2013

Treasury: Fees are eating half of South Africans’ retirement funds

Treasury: Fees Are Eating Half Of South Africans' Retirement Funds
Short-term financial decisions fuelled by fear and greed run contrary to long-term investment goals

A discussion paper released by the national treasury on Thursday is the last in a series of five released by the treasury and aims to promote discussion around its plans to reform the retirement industry.

High fees were among several factors contributing to unacceptably low levels of retirement savings in the country, said treasury's deputy director general Ismail Momoniat. 

"The most important component of household savings is what people put away for retirement – it makes up 55% or 60% of all household savings," he said.

The paper puts forward that if retirement fund charges were reduced from 3.5% per annum to 0.5% per annum, a person would be able to derive the same financial benefit with about half the amount of contributions. 

A snapshot comparison of the cost of various funds in the country with those of other nations placed South Africa's cheapest non-commercial umbrella fund as comparatively low, while another of its funds was the most expensive of all the funds researched, including funds from Turkey, Hong Kong, Argentia, Mexico and Chile.   

Overall, the "South African retirement system appears expensive, especially given its relative maturity," said treasury's David McCarthy, an actuary who was integrally involved in drafting the discussion papers.

Compare markets
Nevertheless, he said, it was difficult to compare markets for a number of reasons. South Africa is party to a number of unique structural difficulties that have given rise to high retirement fund costs.

"We try to emphasise that the flow from structural factors lead to high costs which lead to high charges," said McCarthy.

"The underlying context here is structural."

The fact that South Africa follows a "voluntary" system where citizens are not legally compelled to save for retirement helped to create this problematic framework, he said.

Insurance companies had to invest significant amounts of money to sell products and did not benefit from the economies of scale that exist in countries where retirement savings are required. "In a voluntary system [like South Africa], the cost of distributing the fund is very, very high," said McCarthy. 

A second aggravator, argues the paper, is that the market is flooded with funds. "We almost have the worst type of system. Too many funds!" said Momoniat, who said that the South African market should ideally have a few hundred funds to choose from, rather than the several thousand that are currently available. 

A third contributor is the country's low rate of preservation. The level at which South Africans invest and then leave their investment to grow untouched, said Momoniat, are "disturbingly low". About 95% of those who stop their retirement investments receive their cash back. 

Outstanding debts
It is believed that many do this to pay back outstanding debts, while others use the cash to rack up new debt, said Momoniat. 

The last factor, said McCarthy, is that of poor scheme governance, where the good of the member is not the ultimate consideration. 

Research conducted for the paper showed that initial charges to members were far less significant than recurring charges, a phenomenon known as charge shifting. "Initial charges are often understated and recurring charges are often overstated," said McCarthy. 

The treasury hoped for the paper to act as a point of engagement with stakeholders, including those from the long-term insurance industry and union representatives. 

The structural problems in the industry are "not [only] the fault of the industry, it is the fault of everyone," said Momoniat. Nevertheless, he said he thought industry "could do more" to address the issues. 

When asked for their reaction to the paper, the long-term insurance industry body Association for Savings and Investment South Africa said it could not yet comment. 

Chief executive of the association Leon Campher told the Mail & Guardian that a task team consisting of member representatives and senior policy advisers would review the paper and then engage with the national treasury task team with its findings. The same process was followed with treasury's previous four discussion papers. 

Treasury is receiving public comment on the paper until the end of September, whereupon public input will be reviewed.