Collaboration necessary to resolve South African savings crisis

IRFA vice president Geraldine Fowler

IRFA vice president Geraldine Fowler

The Institute of Retirement Funds Africa (IRFA) has made a point of working with other stakeholders for the benefit of members of retirement funds and the industry as a whole, according to Geraldine Fowler, IRFA vice president.

One of the main areas of collaboration is trying to overcome the problem of 90% of people retiring in near poverty, a problem not unique to South Africa that stretches across Africa and the world.

Fowler points out that research suggests as little as 6% of South Africans are able to retire comfortably.

Furthermore, a lack of savings and adequate retirement provision by working South Africans will continue the burden the state’s budget, due to citizens’ dependence on the state to fund their old age, which is a drain on the country’s economic development.

In contrast, a culture of saving has been a significant contributor to economic success in countries such as India and China, whose gross savings rates are 39% and nearly 50% of GDP respectively, enabling further investment in businesses and infrastructure.

Fowler points out that India’s successful national culture of savings has been one of the cornerstones of the country’s economy and has helped boost economic development. Global investment bank Goldman Sachs predicts India will soon not require foreign investment to fund its infrastructure development.

In comparison, South Africa’s household savings rate is only 16% of GDP and foreign investment is crucial for successful economic development.

Fowler says in order to start addressing this problem that affects the sustainability of the economy, IRFA believes it is important to collaborate with like-minded industry organisations for effective lobbying of government and engaging with the entire industry, and reverting back to fundamentals such as education and the dissemination of information that can be applied practically to improve personal savings, sustainable investment returns and a secure retirement.

“All retirement industry stakeholders need to co-operate and collaborate to strengthen both the savings culture in the country and knowledge in the industry to ensure that South Africans are able to retire enjoying the same living conditions they experienced during their working lives.

“For this reason IRFA has embarked on a more aggressive collaboration process.” Fowler says some of IRFA’s key collaborative partners are: the regulator, which includes the Financial Sector Conduct Authority (FSCA), previously known as the Financial Services Board (FSB) and South African Revenue Services; Batseta — Council of Retirement Funds for South Africa; the Pension Lawyers Association of South Africa (PLA); trustees; and members of retirement funds.

In recent times IRFA has added to these collaborative partners by co-operating with the Chartered Financial Analysts Society South Africa (CFA), the Association for Black Securities and Investment Professionals (Absip) and auditing firms, through its newly founded auditing committee.

One of the areas in which collaboration has been successful is the generation of research material and extension of knowledge from the IRFA’s bank of intellectual capital through the publication of findings, which are distributed to retirement fund members and the general public.

Moving towards transparency

There are a number of factors that need to be taken into account when selecting an umbrella fund, from governance to preservation options; but few of these are more complex than costs. Comparing costs of umbrella funds, however, is set to become significantly easier from March 1 2019, when the new Association for Savings and Investment South Africa (Asisa) Retirement Savings Cost (RSC) Disclosure Standard comes into effect.

Michelle Acton, principal consultant at Old Mutual Corporate Consultants, says that this new disclosure standard will lead to a greater level of transparency across the industry, making it far easier for employers to select the most cost-effective umbrella retirement fund solution for their employees.

“As part of the engagement with the regulator, national treasury and stakeholders for greater consolidation within the retirement fund industry, there is a growing need to find easier ways to ‘compare’ umbrella funds. Comparing costs of umbrella funds has always been particularly challenging, because the fees and charges of a particular scheme will be dependent on the number of members, salary profiles and value of assets to be transferred.

“By ensuring standardisation across the presentation of these costs, employers will be able to compare like-with-like when considering quotations from different Asisa members. This will also make it easier for the Board of Trustees of umbrella funds to consider costs as part of their fiduciary duties,” says Acton.

She explains how this standardisation of cost disclosure will be achieved. “All employers and trustees will be provided with a template that indicates all costs that will be incurred at a scheme level. As there are a number of different types of costs involved in any umbrella fund, the template will reflect four separate components, into which these various charges are allocated over various investment periods.

“The four components are investment management charges; advice charges; administration charges; and other charges including regulatory, compliance and governance costs. Asisa members will have projected these costs over 10 years, based on a standardised set of assumptions, in order to derive the RSC for the umbrella fund as a whole.

“The value for each of the four components, as well as the total RSC, will then be displayed as a percentage in a table at four mandatory disclosure periods — one year, three years, five years and 10 years — and any costs not able to be included must be disclosed in free text notes,” she explains.

When turning theory into practice, there are always other facts to consider. Acton points out that there are often a number of costs that are currently not necessary for the umbrella fund provider to include, such as consulting or advisor costs. “As such, the new templates will need to be developed to ensure all information is made available, and all investment providers will need to provide their TER (total expense ratio) for inclusion.”

Overall, Acton says that the new Asisa disclosure standard signifies a great step forward for the retirement fund industry.

“No two umbrella funds are the same, and while there will always be some element of cross-subsidisation, this new disclosure standard will definitely make it less complicated for an employer or board of trustees to select the umbrella fund that best meets the needs of their membership and the service for which they are paying for.”