Edition: Sept - Nov 2013
RETIREMENT FUND REFORM
National Treasury has hit nails on the head. Rob Rusconi, long a proponent of the changes now envisaged, looks at the intended effects.
The fifth and final paper in the National Treasury series of discussion documents on retirement reform, published in July, covers the tricky topic of costs. It’s a difficult subject because charges to the customer have a bearing on profits of the provider.
This article limits attention to the formal pension or provident space, setting aside umbrella funds and retirement annuities for now. Treasury refers to these arrangements as non-commercial funds. That is accurate from the perspective of the retirement fund, but not for those who provide services to the fund; investment managers, underwriters, administrators, consultants and all of those who provide services to the service providers, where relationships are most certainly commercial in nature.
It’s worthwhile reminding ourselves of the context of Treasury’s document. Consider the policy objectives: goals such as a stronger social security system, better saving for retirement, a more effective marketplace, empowered customers and providers who put customer interests higher in their priorities.
Government has the right and strong interest in these aims. It would like to see appropriate behaviour, more prosperous pensioners and lower inequality. And it would like to spend more effectively, putting tax incentives for retirement saving to good use. This implies less for the pockets of providers.
So this paper is written with the primary objective of improving the effectiveness of the marketplace, empowering customers to do a better job of holding providers to account. The ultimate goal is competition on customer-focused criteria, leading to lower costs and better outcomes.
Treasury has proposed a series of policy options. While these are set out in the part of the report discussing non-commercial funds, they are all recommended for umbrella funds also, so their rationale bears serious consideration.
Rusconi . . . welcome proposals
The fees that funds pay for services make a material difference to their members. There are many ways to express it. Treasury does a good job of this by showing the impacts on retirement saving of reducing charges. If recurring charges are reduced from 2,5% to 0,5% of assets, then ( all else being equal ) a participant saving for 40 years would receive a pension benefit 60% higher.
It is surely sufficient to focus on the facts that (1) charges matter, and (2) they can have a permanent impact on retirement saving. We are not trying to save 10 bps for a saver. We are seeking to address market inefficiency or inequity that can have a lasting and meaningful impact on the prosperity of participants in their old age.
This is a good paper. Implementation is not easy and recommendations need to be fully discussed, but the goal of enabling a better marketplace is where we should all be focusing our attention.