National Treasury released its fifth and final discussion paper on retirement reform in July 2013. This paper deals with costs and their effect on saving towards retirement. Whilst charges may seem relatively low when entering into a retirement plan, they can have a severe impact on the amount that one is able to save, given the long time frame of saving for retirement (generally 30 to 40 years).
In a presentation released by Treasury, it was pointed out that if charges were reduced from 3.5% per annum to 0.5%, then, over a period of about 40 years, fund members could contribute approximately half of their monthly contributions and still accumulate the same benefit at retirement. Treasury is of the view that South Africa’s retirement system is too expensive and they have put forward four broad proposals to tackle this.
Proposal one: Consolidation, governance and regulation
There are many “small” retirement funds out there who are not able to achieve sufficient economies of scale. This generally results in higher costs for fund members and reduced benefits. Consolidating these various funds would result in lower costs and Treasury believes multi-employer arrangements may be the solution.
Governance is another area that Treasury is looking at. Funds will need to ensure they have expert and/or independent trustees. The proposal requires multiple-employer funds to have employer and member-appointed trustees on all boards as well as to formalise the role, rights and obligations of employer-level committees. The paper also proposes a strong regulator that will monitor all aspects of the retirement system, including costs, and that will have the power to intervene in order to protect fund members. The regulator may issue standardised fund rules and other documents relating to issues like service level agreements, investment manager mandates, pension increase policies, etc.
Proposal two: Simplification of retirement savings products
Treasury’s view is that current retirement products are incredibly complex. They would like to see greater competition in terms of costs and believe that the simplification of retirement product designs will promote this. Treasury is proposing that the permitted charge structures of all tax-qualified products be standardised.
Providers could be allowed to levy charges based on contributions as well as assets under management which may allow volume discounts. Loyalty bonuses, early cancellation penalties, fixed charges, performance fees and other conditional charges will be disallowed if these proposals are accepted. Investment options in compulsory membership funds are also being considered.
Proposal three: Greater disclosure
This is a trend throughout the financial planning industry. Charges are seen to be complex and therefore Treasury proposes that a measure of retirement fund charges common to all types of retirement funds be developed. These charges should be standardised and comprehensive, including all charges in the various structures. Some allowance for permissible conditional charges may be allowed. This measure will be reported to the Regulator and must be included prominently in umbrella fund quotes.
Proposal four: Implementation of auto-enrolment
This refers to employees being automatically enrolled with their employer’s retirement funds. A big factor in reducing costs is increasing the distribution of retirement funds to individuals. Treasury’s proposal at this stage is that employers be required to enrol employees into retirement funds automatically. A retirement fund exchange or clearing house will allow smaller employers and employees to easily compare and select retirement plans.
SARS may introduce a system whereby they collect contributions via a tax collection system and distribute to the selected plan. Private providers can be listed on the exchange, provided they meet certain conditions related to costs, simplicity etc. Costs could be further reduced by allowing the exchange to standardise certain administration processes such as transfers and the collection of premiums. A default fund option will provide a solution for those employers and employees who have not made a fund selection.
It is important to note that whilst Treasury is serious about reducing costs in the retirement industry, they have not formalised any of the abovementioned proposals.