Issue: September/October 2006
Fortuitously or otherwise, significant developments converge to change the face of the retirement-fund industry: application of the Financial Sector Charter, the spate of rulings by the Pension Funds Adjudicator, imminent publication of National Treasury’s second discussion paper on fund reform and rewrite of the Pension Funds Act.
One of several threads that binds them is consumer-centricity, or the need to put the consumer first. Without improved consumer education, the best intentions for better savings and better consumer protection will have the bite of a poodle.
From the parapets of the Financial Planning Institute to the trenches of the Institute of Retirement Funds and associated plethora of industry constituents is the sound of homage to the virtues of “communication” and “disclosure”. Like motherhood and apple pie, everybody believes in them. But just as there are bad mothers and bad apples, there are communications and disclosures that defy intelligibility.
This, sad to say, has been the industry norm when judged by a consistent theme of complaints to the Adjudicator. It’s not so much that products are inherently bad as that people don’t understand the contracts they sign and the documents that follow them. When they’re unpleasantly surprised by lower payouts than they thought they’d been led to expect, they run to the Adjudicator. He’s usually ruled against the service provider for communications that were, to be kind, less than adequate.Communications and disclosures can be made in abundance. But, unless they properly inform the target audience, they’re useless. Merely as tools to support legal compliance, they enable exploitation of the blind and invoke similar outrage. At its most basic, buyers of savings products should know what they’re letting themselves in for and members of retirement funds should know how trustee decisions have let them in for it.
Sounds simple. Were it only so. South Africa is the more complex because it has 11 official languages. As the drive gathers momentum for financial services to be extended into the broadest of mass markets, among lower-income groups who previously couldn’t access them, communications are largely confined to English and supplemented with Afrikaans.
To perpetuate this practice is to perpetuate disadvantage. To communicate not only in language that can be understood, devoid of technical jargon, but in languages that can be understood, will be expensive. Yet it is a small price to pay for investors and would-be investors to feel embraced by, not excluded from, the formal-sector savings culture that’s supposed to be fostered.
The challenge to get it right must be met. Financial literacy profoundly affects not only consumers but also the future health of life offices, in their endeavour to sell products that consumers will actually want to buy, as well as the whole environment of national savings and capital allocation.
Life offices compete directly for policyholders’ investments, Paul Myners pointed out in his seminal UK analysis. Competition to attract investors by achieving superior investment performance should drive rational investment decision-making. A factor militating against it – and hence against efficient capital allocation – is that “retail investors, the end customers of life companies, tend to have a poor understanding of investment and savings issues, which in itself makes effective competition on the basis of investment performance difficult”.
What holds for a developed market must be at least equally true for a developing one. Consumers entrust their savings to institutional managers because of the performance they expect.
On the wholesale side, South Africa has a preponderance of defined-contribution retirement funds. Members carry the investment risk and are allowed individual choice, presupposing that they have the foggiest notion of the former and can reasonably assess the latter. Trustees are empowered to direct the investment policies of their funds, and are obligated to keep members regularly updated on costs and benefits, presupposing that they have sufficient knowledge to do either.
It all takes place in a world of make-believe where selling is too often confused with educating, and where reliance (sometimes over-reliance) on consultants becomes inevitable. Trustee training and consumer education go hand-in-glove.
That much is recognised by the Financial Sector Charter. It says that initiatives must be developed to enhance trustees’ understanding of investments and to contribute materially to shareholder activism. Its scorecard gives a considerable weighting for providing low-income individuals with access to financial services.
It further stipulates that, by 2008, a minimum 0,2 percent of financial institutions’ post-tax operating profits be spent annually on consumer education.
The inducements are there. The commitments are there. Needed now are the will and creativity to make the caboodle work.
Allan Greenblo, Editorial Director