Edition: Sept - Nov 2013
RETIREMENT FUND COSTS
Paradise nearly found
The latest National Treasury reform proposals, focused on charges, were preceded by laborious consultation and still more consultation lies ahead. The final version should be ready to enter the parliamentary process next year.
When the discussion paper Charges in SA Retirement Funds was released by National Treasury in July, it was greeted with such headlines as “Fund costs to be halved”. They invite the implication that, if costs are to be so drastically pruned, there’d be a commensurate pruning of service providers’ profits.
But the stock market got less carried away than the headline writers. Amongst the few listed financial-sector shares potentially affected, none budged in any way that might be attributed to the paper. Neither were there exclamations of shock and horror. That’s probably for three reasons.
First, for all the revolutionary drama that had once been anticipated, there were no surprises. Everything in the paper was foreshadowed by Treasury’s foundation policy document A safer financial sector to serve SA better published over two years ago. Its thread was consistently followed in the four discussion papers, on pensions preservation and other matters,
Second, this document was itself the product of exhaustive discussion between stakeholders including the industry and trade unions. They pretty much knew what was coming.
Third, not only have financial institutions had plenty of time to prepare but they’ve done so with product innovation to reduce charges and improve their transparency. They’ve had to respond, amongst other things, to the ‘Treating Customers Fairly’ campaign launched by the Financial Services Board and to the arithmetically-indisputable impacts of costs on long-term returns.
Additionally, this fifth and last paper in Treasury’s reform series will still be vigorously debated before detail is finessed. Treasury officials seem never to tire of roadshows, as much to explain the proposals as to solicit inputs. The paper smacks less of a fait accompli than a basis for building consensus; less a ripping of links along the supply chain than a cutting of fat from overweight business models.
For all the sweet talk in the consultation process, however, immutable principles also seem apparent: to reduce costs by the consolidation of smaller funds into larger for economies of scale, to encourage less-costly passive investment against more-costly active, to facilitate product comparisons and a myriad others on the general theme of enhanced consumer benefits.
Each requires informed debate, much of it longstanding. Some particulars are dissected by actuary Rob Rusconi elsewhere in this TT edition. None should be evaluated outside the context of the paper as a whole, so lucidly argued that any reader could only come away better informed.
Make no mistake, however, that Treasury’s velvet glove couches an iron fist. If for no other reason, cooperation of the private sector is assured by suspicions of the alternative that the bottom can be snatched from under the industry by introduction of a state-sponsored fund.
This would be an option of last resort, because it would be in the interests of neither the state nor the private sector that the infrastructure of well-functioning institutions be replicated by a well-meaning government enterprise. Already there’s a proposal on the table for smaller employers to pay contributions through the SA Revenue Service to a clearing-house list of approved and controlled private-sector retirement funds, or to a default government fund, “to ensure that auto-enrolment (of employees into pension funds) is effectively implemented”.
What’s happening is the stimulation of competition, the elixir of capitalism, paradoxically promoted by state intervention. It cannot happen without reasonably intelligent consumers being able to understand the costs being levied against their savings, to compare products most suitable for their needs, and to choose accordingly (where possible, without paying commission to intermediaries). To date, hidden fees and the vast array of complex offerings have made this well-nigh impossible.
By the same token, the state itself must take a responsibility for product costs. The more regulations there are, the higher the costs of compliance with them. Ultimately, these are also hidden costs that consumers carry.
It isn’t unreasonable to suggest that, once the reforms take hold, the regulations themselves be reviewed for their relevant expense against the value of respective compliance. That alone is worth a sixth discussion paper, or fed into the fifth as an industry retort. The better that the reforms work, the less should be the proliferation of bureaucratic overlays.
There’s another reason that paradise is “nearly” found. Take the envisaged reduction in the role of intermediaries. Call them what you will – financial advisors or sales people – but their marketing abilities are essential to institutional distribution. It might be fanciful to contend that the stage has been reached where products are bought without persuasion.
Equally fanciful, by way of another illustration, is perhaps in the extended duties of trustees. While it’s all well and good to require that they have “fit and proper” qualifications, there’s an assumption of an industry spoiled for choice in the selection of competent trustees. The reality is the opposite.
It’s self-evident that fund governance be improved. It’s agreed that a directive to “make explicit the duties of trustees in regard to the fund and the members, and that funds fulfil their objectives cost-effectively” be considered.
But even if the number of funds contracts from the present 3 000 or so into say 500 – those which enter multi-employer or umbrella arrangements, and those which elect to remain standalone – four trustees per fund (the minimum required by the Pension Funds Act) still creates demand for over 2 000 trustees. From where, oh where, are all these appropriately-skilled individuals to come?
This is a matter not to be left in the ether. For trustees are the backbone of the retirement-fund structure, unlikely to be drawn in droves until payment of them is addressed. At present, many provide their services without charge and too often without value. Others receive paltry stipends for the fiduciary role they’re supposed to master, the personal liability to which they’re exposed, and the allocation of time for the performance of duties as testing as those of large corporates’ directors.
Even the umbrellas are scratching for professionals, let alone those who can bring the much-vaunted characteristic of “independence”. To encourage the desired quality of trustees will come at a cost to retirement funds.
It’s another cost, hitherto largely unbudgeted and blissfully ignored, no less significant for a successful roll-out of the new dispensation.
Tucked towards the back of Treasury’s paper are draft policy proposals. One is to improve fund governance.
An “option”, it says, “may be to require all boards, in line with King III governance proposals, to have some independent and/or expert trustees, to require employer and member-elected trustees on the boards of all multi-employer funds, and to formalise the role, rights and obligations of employer-level committees in such funds”.
Right on! An “employer-level committee” can only mean a management committee (manco), comprising representatives of employers and fund members (employees) to sit immediately below the boards of umbrella funds’ trustees. There are solid arguments for them (TT March-May and June-Aug).
Variously described in industry parlance as management committees, member committees and joint forums, their formation has been voluntary. Treasury has now dropped the hint that they become statutory.
Not being trustees, members of mancos won’t have the fiduciary duties of trustees. But they would have functions as important: to perpetuate employer-employee liaison at the workplace, facilitating both top-down and bottom-up communications; and to monitor the trustee boards for possible deviations from an arms’ length relationship with their institutional sponsors, for instance on the transparency of charges and the appointment of service providers.
There’s also the maintenance of a principle introduced by the 1996 amendment to the Pension Funds Act. This was for members to enjoy equal representation on funds’ boards, a purpose being to allow member participation in the way that their funds are run.
It has numerous implications. Not least amongst them is adherence to the stakeholder activism enshrined in the Code for Responsible Investing, to which most institutions subscribe, as well as similar provisions in Regulation 28 and the FSB’s circular PF 130 on social, environmental and governance investment criteria. Mancos can be instrumental in their operation and oversight.
If employers think that dumping their occupational funds into umbrellas will absolve them of further responsibilities to employees, they’ll have another think coming. At the same time, employers not wanting to abdicate might find in mancos the desired solution.
Let’s get on with the detail, like whether every constituent of an umbrella will be a required have a manco. There’s no obvious reason that they shouldn’t, and lots that they should.