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Charges in South African Retirement Funds Marilyn Kamp

Charges in South African Retirement Funds Marilyn Kamp. 19 August 2013. Charges in SA Retirement Funds. Purpose of the paper 5 th (and last) technical discussion paper promoting household savings and reforming retirement industry before retirement

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Charges in South African Retirement Funds Marilyn Kamp

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  1. Charges in South African Retirement Funds Marilyn Kamp 19 August 2013

  2. 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 savings • Key stakeholders to comment by 30 September 2013 • Intended to facilitate rather than propose!

  3. Charges in SA Retirement Funds • Costs versus charges • Some employers contribute directly / indirectly by performing some of the services on behalf of fund

  4. Charges in South African Retirement Funds • 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

  5. Charges in South African Retirement Funds • 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

  6. Charges in South African Retirement Funds Over lifetime of product • 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 Annual charges in retirement funds

  7. Charges in South African 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

  8. Charges in South African Retirement Funds • 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)

  9. Charges in South African Retirement Funds • 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

  10. Charges in South African Retirement Funds • 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

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