Johannesburg - With proposed reforms in the retirement sector shaping up, the industry and the National Treasury are at odds about the necessity for new regulations and the cost implications thereof.
At the Sanlam African Cup of Investment Management conference yesterday, the retirement industry acknowledged that its costs were high and that it could cut them by a fraction through efficiencies.
David Gluckman, the head of future positioning and research at Sanlam Investment Management, said the industry had made progress in solving cost issues in the past 10 years but could make more progress on its own. Regulation, on the other hand, would hold it back.
“Progress may not be at the level we’d want but this is long-term savings. If we make slow progress year in, year out, we’ll get there quicker than via disruptive, major changes to the system that possibly involves significant risk,” he said.
Last month the Treasury released the last in a series of five technical discussion papers on reforming the retirement industry. Entitled Charges in South African Retirement Funds, the paper benchmarked charges and costs in the retirement sector to those of other countries. It found that, in an international context, the system was expensive.
Among many reasons for this was that most existing retirement funds were not big enough to achieve sufficient economies of scale. The paper proposed that higher rates of preservation, a smaller number of funds, and greater participation in the system, if well managed and regulated, could lower costs.
But the industry has been warning about the cost of complying with additional regulation, saying it could defeat the purpose and push costs much higher instead.
Gluckman said the industry realised the importance of controls and no one was against them, but South Africa should be careful not to put in place regulation that would cost more than the benefits it realised.
Risto Ketola, an insurance analyst at SBG Securities, said that across the industry there was acknowledgement that costs were too high and every portfolio manager he had spoken to had not defended them.
Because the issue needed attention, he said the proposals by Treasury were well designed because they required everyone in the value chain, including intermediaries, asset managers and fund managers, to play a part in improving the experience of the end-user.
The Treasury has been talking about costs in the industry for about 10 years.
David McCarthy, the retirement policy specialist at the National Treasury, said regulation would create a free market because it sought to limit the extent to which complex products were designed. Ordinary people would be able to compare one retirement product with another. He said asking questions about costs should not be seen as a controversial issue.
“As a country we are purchasing the retirement industry in a number of ways. We are paying huge tax incentives into this industry, and we are paying [for] administration.
“Any responsible minister of finance… and ministers of finance in other countries are asking the question of how are we getting value for the amount we spend as a country,” said McCarthy.
Bruce Cameron, the former editor of Business Report’s sister publication, Personal Finance, said the way the industry structured its products created opportunity costs, which needed to be addressed.
“Someone has yet to explain to me why the industry gets away with double-charging on asset management fees, where they charge a percentage for the year as well as performance fees. That’s double-charging…
“The industry doesn’t seem to be interested in addressing these problems,” he said.
Cameron said that while the sector had been warning that regulation would push up costs, it was still not addressing such problems. - Business Report