Charges in South African
Retirement Funds
Marilyn Kamp
19 August 2013
Charges in SA Retirement Funds
 Purpose of the paper

5th (and last) technical discussion paper promoting
household savings and reforming retirement industry
before retirement
 Attempts to benchmark charges / costs in SA
 Proposes various policy interventions to remedy
identified shortcomings
 Highlights the importance of retirement savings
 Assist members in getting best value for retirement
savings
Key stakeholders to comment by 30 September 2013
Intended to facilitate rather than propose!
Charges in SA Retirement Funds
 Costs versus charges
Costs – usually paid from the fund
and ultimately the member
Distributing fund to members
Administration of the fund / benefits
Financial advice to members
Providing insured benefits
Managing / administering fund
investments
Communicating to members
Maintaining fund governance
Charges – usually billed to the
member
Charges levied in different ways
i.e. Rand per member,
percentage of asset value,
contribution or fund salary
Example:
Commercial umbrella funds may
charge for: administration,
consulting, financial advisory
services, manager selection,
performance fees, platform fees,
switching fees, etc.
Some employers contribute directly / indirectly by
performing some of the services on behalf of fund
Charges in South African
Retirement Funds
 Different charging methods
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Percentage of fund salary / contributions
Percentage of returns (and performance based fees)
Guarantee on investment returns
Fixed cost per member
Fixed conditional charges
 switching, terminating, advising fees
Do you know and understand your
funds charging method
Charges in South African
Retirement Funds
 Factors influencing a charging basis
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Quality level of service / governance / compliance / administration
Product diversity / complexity (difficult to compare)
Fund size influences fixed costs / economies of scale
Level of regulation limiting or standardising charges
Level of sensitivity of members to charges (small recurring charges)
Intermediation efficiencies
Redistribution of costs
Subsidisation of costs i.e. employer assistance
Levels of disclosure of full charges and T’s & C’s
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Section 7D, PF86 & 90 – no direct reference to charges
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PF130 – recommends some fee disclosure
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FAIS - financial advisors to disclose charges when advising
Preservation rates (preservation in SA is low)
Level of compulsory fund membership (individual type arrangements)
Cost model affects charging effects on members
Charges in South African
Retirement Funds
 Measuring and comparing charges
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Current measurements:
 Reduction in Yield (RiY); or
Over lifetime of product
 Reduction in Maturity Value (RiMV)
 Accounting Cost per fund assets (ACA)
Annual charges in
retirement funds
 Accounting Cost per member (ACM)
There is a need to develop a simple and
comprehensive measurement for fees
Charges in South African
Retirement Funds
 Research findings
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Higher preservation rates, less funds, less complexity and
compulsory membership could lower costs
Higher levels of cost disclosures would sensitise members to
charges
 Initial charges seem to be lower than recurring charges
Active rather than passive asset management seems more
expensive
Intermediation may have unintended consequence of raising
complexity and cost
Investment platforms introduce high levels of layered charges
(encourages rebate payments)
World research shows SA retirement market is complex
and possibly expensive
Charges in South African
Retirement Funds
 Draft proposals
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“Encourage” fund consolidation to achieve economies of scale
Improved fund governance
 Independent / expert / member & employer trustees
 Formalise roles, rights and obligations of committees
Strengthen fund regulation
 Power to monitor entire retirement system
 Standardise documents e.g. rules, investment mandates
Workplace distribution of retirement products more cost-effective
Simplify plan design (close look at performance fees)
Promote “effective” intermediation relative to remuneration
Mandate fund membership at employer level
Offer employers comparison of different plans
 Introduction of an “exchange” with a default option
(KiwiSaver New Zealand model)
Charges in South African
Retirement Funds
 Trustee consideration
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Carefully consider fund structure before moving “blindly”
 Understand full cost disclosure
 Understand charging model
 Understand level of service
 Understand services offered / functions provided
Cost should be related to service provision and
services / functions provided
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Establish a “table of fees” that will require full disclosure from all
stakeholders / service providers
Maintain a fund budget
Charges in South African
Retirement Funds
Ruskin quote (1819 – 1900)
There is scarcely anything in the world
that some man cannot make a little worse,
and sell a little more cheaply. The person
who buys on price alone is this man’s
lawful prey
Thank you