Edition: Sept - Nov 2013
Editorials

RETIREMENT FUND REFORM

Three cheers

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.

  • Statutory duties for trustees. The paper suggestsexplicit duties, set out in law, and the possibility of independent or expert trustees in line with the governance principles under the King III code. It also recommends establishing explicit reporting to the regulator of all charges imposed on the fund. The rationale is simple: focus the minds of trustees, raise the minimum standards required of oversight structures and develop a standardised system of reporting. Managing the change is another issue.
  • Disclosure to fund members. The paper recommends developing a standard metric of charges. It suggests mandatory annual disclosure of this metric to fund members benchmarked against industry peers. Gaming is possible, of course, and there are many good reasons for one fund’s charges to exceed another’s, but any marketplace depends for its effectiveness on informed participants. This sounds like a promising way of improving member participation and holding trustees accountable.
  • Limited investment choice. Funds may be required to have a default fund choice and could also be required to limit the investment choices that they make available to members. The arguments here are that members are not well-equipped to make investment decisions and that the complexity which these alternatives introduce gives profitable opportunities for providers to shift fees to less visible categories.
  • Intermediary limitations. Charges levied by employee-benefit consultants are recommended to be subject to close scrutiny, to ensure that the incentives of intermediaries are aligned with those of their customers and not the service providers. This is not easily achieved, but focused attention on the issue should help trustees to identify and deal with conflicts of interest. Similarly, investment managers may be forbidden from paying rebates to distributors.
  • Standardised investment mandates. Model investment agreements would greatly help to improve market competitiveness by facilitating like-for-like comparison. Publishing the prices at which products and services are made available would help as well. Imagine a R5bn fund understanding whether a sensible price for their asset management should be 35 basis points or 55 basis points, an annual R10m difference. Squeezes margins at the asset managers? Of course it does. But as these managers have always known the cost of providing the service and the fees charged to all clients on their portfolio, it goes some way to balancing the competitive playing field.
  • Standard operational templates. The regulator could develop standard documents covering regular needs such as pension-increase policies and model agreements with service providers. This is an excellent idea that would surely standardise arrangements and serve to improve price competition.


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.

  • Rob Rusconi, general manager of Lombard Life, authored “Institutional Investors:
    Whose Money is it Anyway?”. This paper remains available for download at www.tresconsulting.co.za.