Issue: June 2012 / August 2012
Inputs for ASISA
The Association of Savings & Investment SA has asked “a number of key stakeholders and industry leaders” to share their views on some issues high on the agenda of the industry, its stakeholders and the country as a whole. TT was amongst those invited.
Specific questions were:
Were it only possible to answer the four piquant questions in the blob-by-blob sequence that you’ve asked them. Unfortunately, it isn’t. Neither does use of the term “transform”, which has connotations peculiar to SA, make the task any easier.
- In your view, how should our savings and investment offering transform in order to attract more local as well as foreign savings and investments?
- Do you think the savings and investment industry is failing investors? If yes, please point out our shortcomings.
- What role has our industry played in transforming the savings and investment landscape in SA? Please highlight some of our strengths.
- What role would you like to see the savings and investment industry play in the national development agenda and the growth path?
The savings and investment industry is not an island unto itself. Because it must operate within a legislative and regulatory framework that has government at its apex, there should be a differentiation between factors that the industry can and cannot control.
Sometimes they limit and sometimes they stimulate the industry. It’s important to identify which are which.
A high degree of collaboration between government and the industry is known to exist; for example, in the planning of retirement-fund reform. But there are also omens of imminent confrontation; for example, an ideological bent hostile to the private sector (and particularly the financial sector) that will be put to the ANC national policy conference in June. Adding to this complexity is the adversarial climate recently evidenced in responses by spokesmen of the ruling party to a statement by Nedbank chairman Reuel Khoza.
There’ll come a time, if it hasn’t already, that the industry will need to take a firmer stand on behalf of those who save and invest with it. The present environment, that the industry cannot control, is less than sanguine. For example:
- Mooted introduction of prescribed assets. While it might assist one policy objective to succeed (maximisation of infrastructure funding), it can cause another to fail (maximisation of retirement savings);
- Government as a role model. It sets the tone and provides the leadership. These are bleak in terms of waste and extravagance, from the corruption-riddled arms deal to the building of underutilised sports stadia. A more individualistic point of reference is the lifestyles of high-profile cabinet ministers, including the president, whose taste for luxury is indulged. If they exhorted the public to save, which they don’t, the exhortations would ring hollow;
- The ‘entitlement culture’. It’s a reaction to the apartheid years of deprivation. There’s an overall sense, politically exploited, that the state has a duty and responsibility to provide social services. There’s little countervailing emphasis on the scarcity of resources to provide these services or on the duty and responsibility of people to care for themselves. The gap between popular expectation and practical delivery festers interminably. So long as the ruling party panders to reliance by people on the state, an entitlement culture will trump a savings culture;
- Economic conditions. They’re such that disposable incomes are squeezed, limiting the propensity to save. Rising food and fuel prices, amongst others, hit hard. It’s more urgent to pay for daily living expenses than to save for the future. Into the category of ‘daily living expenses’ also falls, unfortunately but realistically, the ubiquitous cult of consumerism. This afflicts all income classes. Reflected in excessively high household debt levels, their servicing further reduces the propensity to save;
- Low real interest rates. Off the base set by the SA Reserve Bank, they’re an ongoing policy feature. They encourage consumption and discourage saving;
- Minimal tax incentives. In many ways, the existing tax regime is punitive on savers. For instance, capital gains are taxable. So too is interest accrued on savings, reducing after-tax interest receipts to lower than inflation. Only in his most recent budget did the Minister of Finance propose relief – for capital gains, interest, dividends and withdrawals from investment vehicles to be tax-exempt – but capped at a relatively modest R30 000 per individual annually;
- Mistrust of financial institutions in that their role is perceived to be conflicted between profits for shareholders and returns for savers/investors. Justified or not, it’s exacerbated by media treatment that frequently highlights rip-offs. Even the ‘Treating Customers Fairly’ campaign implicitly enforces the belief that it’s needed in reaction to customers being treated unfairly. This seems to be tacitly admitted by the institutions themselves in their muted and reactive responses, rather than head-on challenges to the implication by showing with equal vigour how and where customers are treated fairly (if indeed they are). Although it would have been better if the TCF campaign were initiated by the industry rather than the regulator, it’s now for the industry to make the running.
Within the industry’s control is its own operational effectiveness and reputational stature:
- To show how and where it does indeed treat customers fairly. This would stand to be enhanced by improvements in financial literacy (which the industry must promote far more robustly than it has hitherto tended), documentation that is clear, simple and easily understood (not obfuscated in legalistic and technical jargon), enabling consumers themselves to compare products (not forever telling them to rely on financial advisors) and essentially to prove that they’re providing value for money (if indeed they are);
- The latter is the ultimate test. But how is ‘value for money measured’, and in comparison with what? It’s all very well to propound perpetually the merits in starting to save early, the workings of compound interest and so on. From generalities must flow specifics i.e. whether the best value is being derived by the particular consumer by the particular product for his particular needs. Every and any product can be made to look good when it’s being sold. The question is whether the sellers have skill and integrity (notwithstanding FAIS) to perform in buyers’ best interests. The problem is that the sellers, and the institutions for whom they’re selling, are motivated and remunerated in terms of sales volumes. It’s a systemic flaw, only to be resolved by the industry’s own quality controls and by more knowledgeable consumers that the industry can hopefully generate;
- An extended chain of service providers which feeds on fees. The more complex and numerous the products being created, and the more onerous that regulation becomes, the more layers of services are taken up. Costs increase commensurately. Necessary though regulation obviously is, notably in the sphere of retirement funds, fear of contravention drives the use of services that would be less excessive were trustees generally better equipped for independent decision-making;
- Like any other private-sector organisation, the constituents of this industry are driven by profit opportunity. But the savings industry must be considered different in an important respect. It’s the custodian of other people’s money. The more that these ‘other people’ observe the burgeoning profits of the savings and investment institutions, the more they’ll suspect it’s happening at their expense. This in turn impacts on the ‘value for money’ conundrum. The correlation between distributions to shareholders, managers and salespeople on the one hand, and to savers on the other, is a complex matter of balance between having one’s cake and eating it. Public (mis)perceptions are critical for the industry to address;
- The industry has ridden the wave of a protracted bull market in equities. Were it to quieten, or reverse, pressures will mount for fees reductions to compensate so far as possible for lower investment returns. The industry is highly fragmented, perhaps even overtraded from the investors’ perspective, because it offers good livings to the various fragments. One might have thought that fees levels would be an area for competitive advantage, but instead competition appears mainly confined to service levels. Fees must come under scrutiny, not only in anticipation of lower investment returns but also for the industry to be seen as more customer-friendly than shareholder-orientated. Perhaps to be considered is a business model of tighter margins on the assumption that they’ll be offset by higher savings, or at least higher than what might transpire if real returns can’t be shown for any extended period.
What are the strengths of the industry? It works as an efficient allocator of capital. It’s innovative in its product offerings. It commands a wealth of specialist talent, which comes at great cost, not least in investment expertise. It’s socially receptive in, for instance, its commitment to the Code for Responsible Investing and the Financial Sector Charter. Its balance sheets are strong, supporting domestic confidence, and its record is enviable, encouraging inward investment as well as offshore expansion.
As a primary bastion of the free market, it’s expected to advance private-sector principles. Its responsibilities to society fundamentally include responsibilities to its investors. At the same time, a ‘developmental state’ such as SA requires the closest cooperation between the private and public sectors, each with respective needs and functions that are utterly interdependent.
Undoubtedly, by the sheer size of assets under management, the industry has a huge role to play in the ‘national development agenda’. But this must be supportive, not sycophantic. Where public-sector bodies call for particular types of investment (say, in bond issues or public-private partnerships), it’s for the private-sector industry to comply only in so far as real risk-adjusted returns are offered. Otherwise the reason for the industry’s existence – to promote savings and investment – is impaired.
It’s not for the industry to compromise other people’s money for the dubious advantage of glossing the image of its corporate constituents, ultimately be to the detriment of savers and hence of society, in the eyes of a government unrenowned for policy consistency or implementation efficiency.
The industry has the proven resilience and influence to meet any challenges thrown its way. It also has the wherewithal to create new ones, of its own choice, to impact positively on the national agenda.