Issue: September/October 2005
INDIVIDUAL MEMBER CHOICE MADE EASY - 'True Lifestage' is the innovative, cost-efficient solution
As trustees, how do you cater for the needs of different
members? How can you avoid being blamed – even sued
– for offering costly Individual Member Choice (IMC)?
Or for offering an incorrect strategy on the trustee-default
To offer IMC does alleviate trustee liability if a full range of
cost-efficient choices are provided. But IMC does not protect
trustees when most fund members, placed in the trustee-default
portfolio, don’t select it (see table).
Given that investment strategy accounts for 80% to 90%
of a fund’s performance (and manager selection only 5%
to 18%), of particular concern is the lifestage strategy your
fund uses for its trustee-default portfolio. This is where most
of your fund and member risk is concentrated.
ASSET MANAGERS AND ASSET CONSULTANTS
TEND TO CATER FOR DIFFERENT MEMBER
NEEDS BY USING:
IMC portfolios, with the extra personal adviser costs (up
to 3% initial and 1% per year thereafter), plus the extra
administration costs (IMC access and switching costs),
with no guarantee of investment success, and
- with potentially lower investment returns, especially
since members and their advisers do not have the
skills and resources of a full-time asset manager;
- Common ‘lifestage’ solutions that divide the trustee-
default portfolio into smaller portfolios (with higher fees)
and multiple switching over the lifetime of each member
(with higher costs). For a 1 000 member fund, over
8 000 financial switch transactions might be required.
An error in any one can cost a few hundred thousand
rand in administration liability.
- "Common Lifestage" is not recommended, due to
the extra overall costs that can easily be up to 2%
per year, effectively reducing investment returns by
2% per year, and thereby
- increasing the average contribution from around
14% to 22% of salary, for a young member, to
maintain the same pension (70% of final salary, with
Instead, ‘True Lifestage’ caters for members’ individual needs
within a single trustee-default fund – without the higher
costs of smaller portfolios, massive switching transactions,
and potential administration liabilities. It is substantially
better for your fund because it can:
- Reduce asset management charges by up to 20 basis
points per year;
- Avoid high administration charges and liabilities (up to
2% per year on fund value), so avoiding a potential
contribution increase of up to 50% (eg, from 14% to
- Provide comfort to trustees, by demonstrating they have
applied their minds;
- Enhance long-term returns relative to the risk for each
member (using a risk-optimiser);
- Offer a flexible retirement age (unlike common lifestage
whose final portfolio is usually tied to a guaranteed or
insured product with inflexible terms and large
- Provide monthly updates on the critical strategic asset
allocation which constantly changes with membership
movements (thus requiring monthly active governance).
At present, KPMG is the only organisation to provide True
Lifestage, offered via Stamina within its Governance Advisory
Service. It provides true independence, and is not linked to
any asset manager, or multi-manager, via cross-shareholding
Members who select IMC.
10% to 40% of a fund
Members in the trustee-default portfolio.
60% to 90% of a fund
|Trustee liability is only reduced for members who choose IMC,
but liability remains for the majority of members.
||Liability stays with the trustees. However, for the trustee-default,
most funds use a "Common Lifestage" investment
strategy which is much less beneficial than "True Lifestage".
IN ADDITION, KPMG’S GOVERNANCE SERVICE INCLUDES:
- Trustee Training. KPMG has spent over R1.8 million on
production of a comprehensive Trustee Toolkit;
- Service Level Agreement reviews. Contract management
and fair value tender assessments on administrators,
asset managers, asset and benefit consultants, insurers
etc. In KPMG’s experience, clients have saved up to 30%
on service provider fees;
- Investment performance reviews on portfolios supervised
by asset managers and consultants;
- Specific cost reviews (for example: on existing
guaranteed funds and insurance products).
- Regulation 28 reviews on current and proposed
KPMG is not owned or influenced by a service provider. Not
only does this make for best governance, but ethically and
legally KPMG is required to break conflicts of interest. Trust
Law requires that the best interests of the fund are put first,
in order to bring enhanced value to your fund, its members
Where a lifestage strategy is provided by a multi-manager,
there’s a conflict when this manager needs to be changed
due to underperformance. It means that the long-term
lifestage strategy will automatically be changed to that
of the new multi-manager (each having different
lifestage views and products). Thus, you get a lifestage
strategy that is neither consistent nor long-term and is
- It is therefore critical that your fund uses a governance
consultant, independent of the multi-manager, to provide
KPMG’s governance advisory service works with your
existing service providers, who continue to select
investments, provide administration etc, but where KPMG
provides an added protection layer, and cost saving, for your
fund and trustees.
For further information, kindly contact KPMG at (011) 647 5043, and ask for
Jannon Solomon email@example.com, or
Peter Tshabalala firstname.lastname@example.org.