Issue: March 2013 / May 2013
Smaller guys have their say
What could be the likely industry impacts of Old Mutual’s decision to discontinue the administration of standalone retirement funds? Could it represent an opportunity for smaller firms, or would it require too much investment to achieve scale? And what are the profitability implications for the administration business?
Outside the big institutions and administrators, a cross-section of others has strong views on possible effects. TT conducted a straw poll.
Chris Brits of NMG Retirement Funds: As one of the larger providers, Mutual’s strategic decision is certainly significant. Others may be in a similar situation and expected to follow, once they have examined their own efficiencies and resulting profitability. However, there are administrators that operate standalone funds cost effectively and who’ll continue doing so.
Most certainly, Mutual’s decision does create opportunity for some of the smaller administrators and perhaps not with much additional investment. Administrative efficiency is more a function of a good admin system and experienced people who understand it, able to create workflows and procedural protocols that minimise manual interventions.
A telling clue is in the administrator-to-member ratio i.e. how many fund members one administrator can handle daily. For example, a low ratio of say 1:500 means that one administrator can handle only 500 members so it would need 10 administrators to manage a fund of 5 000 members. Conversely, a higher ratio requires fewer administrators.
As in any business, a major expense is staff costs. Fees charged should be sufficient to cover them. Profitability is a consequence of a good system and staff to manage it, thereby lessening the manual work and requiring fewer people. For those few administrators already running their admin operations profitably, there should be no need to increase fees for standalones.
Ian Haigh of Mvunonala Holdings: Many administrators bought overseas systems that were expensive to adapt and update. Their ability to recoup these costs has been problematic as the admin market has been highly competitive, keeping fees low.
Different administrators have different pricing models for their clients. For example, with some there is a base cost and additional services are invoiced. With others, all-inclusive prices have resulted in losses.
There are some 2 400 registered retirement funds requiring an administrator, and there is a large number of administrators. But many are small firms attempting mergers to gain critical mass. Administrators need a certain number of funds and members to be profitable. Several are having service-delivery problems and aren’t profitable. They’re at risk of losing clients or merging.
Standalone funds need to be of a minimum size to benefit from economies of scale on fees. There’s debate on the point where these economies kick in, but it could easily be for funds of over 10 000 members. At present there are about 136 such funds, and another 250 or so funds with more than 5 000 members. Not all are suitable for umbrella arrangements, and there’ll always be a market for administering them.
Mutual’s decision is unfortunate as its administration was one of the better systems available for standalones.
Stephen Greybe of Borwa Financial Services: Generally, small funds were never really profitable except where they were underwritten and the insurer provided all the services including investments and risk-benefit cover. Since the legislation changed – where underwritten funds require their own bank accounts, must have audits, could place their investments and risk cover with other insurers, and had to have 50/50 employer/member representation on their boards – it was no longer profitable to administer underwritten funds.
Also, minimum transparency and disclosure standards were introduced. These required additional communication with members and trustees.
Then, the admin systems developed by the insurers were based on the assets of the fund belonging to the insurer. When it came to members’ exit benefits, the insurer calculated them on the basis of total contributions paid by the member including an equitable proportion of total assets that matched the total contributions. Interest was based on the interim rate declared in advance by the insurer and costs were deducted out of the assets. No transparency here!
New systems, designed to cope with new legislation, are not ideal. Although there are systems that integrate the accounting and administration functions, reducing the staff costs, there are additional fees for audits, fidelity cover, trustee meetings, member communication and so on. Independent administrators have struggled to make profits on smaller funds.
Insurers now vigorously market umbrella products. But the funds they set up are administered in such a way that it’s tantamount to having many small funds under one umbrella. Each employer group has its own benefits, special rules and cost structures. Apart from not really saving on costs, there is a danger when assets are valued at fund level including the use of member investment choice. Generally these assets end up in the default portfolio, raising questions around the ultimate responsibility if things go wrong.
Finally, government has introduced so much more compliance and reporting that the industry has become over-regulated and hence far more costly to administer. Think of Reg 28, s14 transfers, FAIS, SARS additional returns and tax numbers.
Think also of sweeping powers for the FSB (including much more onerous liquidity requirements on administrators) and the Pension Funds Adjudicator (requiring administrators to investigate the most outlandish queries, maintain complaints registers and so on). More regulation, expected from National Treasury, creates more costs and makes it more difficult for the industry to keep costs down.
There’s much argument about charging a rand amount per member per month against a percentage of salary. On the basis of a rand amount, it will be almost impossible to administer a fund profitably.