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  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!

Charges in SA Retirement Funds  Costs versus charges Some employers contribute directly / indirectly by performing some of the services on behalf of fund Costs – usually paid from the fund and ultimately the member Charges – usually billed to the member Distributing fund to membersCharges levied in different ways i.e. Rand per member, percentage of asset value, contribution or fund salary Example: Commercial umbrella funds may charge for: administration, consulting, financial advisory services, manager selection, performance fees, platform fees, switching fees, etc. Administration of the fund / benefits Financial advice to members Providing insured benefits Managing / administering fund investments Communicating to members Maintaining fund governance

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

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

Charges in South African Retirement Funds  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 Over lifetime of product Annual charges in retirement funds

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

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)

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

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