One of the very positive elements of the Budget speech by Finance Minister Pravin Gordhan this week was that government has reached agreement with the financial services industry about the need to reduce the costs of saving for retirement.
The final details are currently being thrashed out, and draft regulatory reforms will be published shortly.
The regulatory changes will also include elements from what is called the Retail Distribution Review (RDR) when it is completed.
The RDR is a Financial Services Board (FSB) initiative supported by National Treasury aimed at levelling the playing field between the different sectors of the financial services industry, particularly the collective investment scheme and life assurance industries.
The RDR will also provide a new structure for the way financial advisers are remunerated.
On this score, the best news that is likely to come out of the RDR is that the dreadful confiscatory penalties that are applied when you cannot maintain payments on life assurance endowment policies or retirement annuities (RAs) will hopefully become part of history.
These penalties have resulted in many thousands of people being far worse off in retirement than they otherwise would have been.
A major reason for these penalties has been that life assurance companies perversely pay commissions on future potential contributions by policyholders and RA fund members upfront.
These commissions, which were previously 100 percent upfront, were reduced to 50 percent upfront on new sales from January 2009. Also on that date, the maximum penalties were reduced to 15 percent on RAs and 20 percent on endowment policies.
However, on policies sold before that date, a penalty of 30 percent can be (and is) applied when you reduce or stop contributing to an RA and a penalty of 40 percent can be applied on an endowment policy.
What is of concern is that change for the better had to be forced on the life assurance industry. The life industry itself has resisted initiating change.
It has also shown that it simply finds new ways of undermining savings. Many companies have simply introduced maturity loyalty bonuses, which you lose if you make alterations to your contributions before maturity date.
The cynic in me makes me wonder why the industry is now prepared to reach an agreement with government on lowering the costs of retirement savings. If it was really concerned about us as customers, it would have jettisoned the confiscatory penalties years ago, voluntarily.
So the question must be asked: is this industry commitment to government because it has had a Damascus experience and wants to start treating customers fairly, or is it because it is under increasing pressure from government and the public? This applies particularly to the life assurance industry.
Charges on life assurance retirement savings products for individuals have been found by a number of researchers, including Treasury, to be higher than unit trust products and among the highest in the world.
The industry has indicated a number of structural issues that would have an impact on bringing down the costs of saving for retirement, namely: if membership of retirement funds is made compulsory, if those savings are preserved for retirement, and if the number of retirement funds is reduced.
The problem, as I said, is that is I am cynical. There is already about R1.6 trillion in retirement savings, so I do not see how mandatory membership and compulsory preservation will make things more cost-effective; and I would suggest that the closure of smaller funds and their move to umbrella funds could also result in more costs and lower retirement benefits for members.
All too often, when smaller occupational funds close and members are moved into umbrella funds, the costs for members increase.
Firstly, on a restricted stand-alone occupation fund sponsored by an employer, no commissions are paid to financial advisers flogging the products. Where commissions are paid they can be as high as seven percent of contributions, and may also include camouflaged backhanders to financial advisers.
Then costs are also neatly hidden, among other ways, in asset management charges. An example of the dangers was found in a current investigation being conducted by Personal Finance.
An umbrella fund administration company, iRetire Employee Benefits, was bought out of the now defunct Dynamic Group stable in 2013. The new owners found that its iRetire Pension & Provident Umbrella Fund had, under its former ownership, been paying asset management fees of 2.7 percent a year of assets under management plus a performance fee to Clarus Asset Management. Clarus Asset Management was also paying a percentage of assets under management as backhanders to financial advisers for steering employers into the iRetire fund (a conflict of interest).
The new trustees of the fund have switched the asset management to Sasfin, where the asset management charge is 0.8 percent of assets and no kickbacks are being paid to advisers, despite demands from some product floggers that they should be.
Government needs to be very cautious in believing an industry, particularly the life assurance sector, that has seen your retirement savings as an easy pocket to pick.
Making retirement fund membership mandatory (a good thing) and introducing compulsory preservation (a good thing) and reducing the number of smaller funds (a good thing) will not necessarily bring down costs. It just gives the industry more money to plunder.
I would suggest that the government negotiators see the movie The Wolf of Wall Street. Although the movie may be excessive in some parts, the excessive greed and retarded morality depicted is too often not far from the truth.