Both were designed to enable one to “compare apples with apples” regarding costs and are primarily useful at point of sale. However, because of the complex nature of retirement funds, there are important differences that you should know about.
Asisa’s Retirement Savings Cost Disclosure Standard (RSC) is binding on Asisa members that operate South Africa’s commercial umbrella funds (retirement funds that accommodate a variety of employers under one umbrella), but it is not binding on standalone employer funds, which do not belong to Asisa, and non-member smaller umbrella funds.
It is similar to Asisa’s Retail Effective Annual Cost Standard (EAC) for unit trust funds, retirement annuity funds, preservation funds and other retail investments in that it offers a standardised method of disclosing costs. However, while the EAC is relevant for individual investors, the RSC is aimed not at the individual umbrella fund member but at employers and fund trustees, enabling them to compare costs for the employer’s entire membership base across competing umbrella fund providers.
The providers have been given six months (until September 1) to implement the RSC, and will be expected to report annually to Asisa.
Last week, in a presentation to journalists, David Gluckman, the head of special projects at Sanlam Employee Benefits, outlined the challenges for providers in disclosing costs in accordance with the RSC, as well as pointing out why the RSC could potentially be confusing for individual fund members.
He said teething problems were to be expected, but that once it was fully operational, the RSC would benefit the retirement industry as a whole, and that while non-member funds were not bound by the standard, many would probably move in the same direction owing to competitive pressures.
He pointed out that costs is only one of the factors that affect outcomes for members and that trustees consider when comparing providers. In a survey conducted by Sanlam of 16 independent employee benefits consultants, costs came below administration delivery as a key consideration in recommending an umbrella fund. Other factors taken into consideration included the underlying investments, transparency, flexibility and communication.
Like the EAC, the RSC disclosure is in the form of a table (see below), giving different categories of costs over different time frames reflected as a percentage of assets under management (AUM). The difference, said Gluckman, was that one was for an individual investing in a retail investment product, while the other was for a company choosing an umbrella fund for its employees. And while the costs of a unit trust fund, for example, may be calculated (and projected) to a relatively high degree of accuracy, it was far more difficult in the case of a retirement fund, because of fundamental differences in structure.
Gluckman said it was often tricky to calculate investment costs in a retirement fund, because of the wide range of investments, including non-listed assets, in which it could invest. Where actual charges and costs were not available, they had to be given on a best-estimate basis, with an explanation in a free note. Various standard assumptions (such as rates of returns and inflation) were to be used.
Certain costs, such as those for investment management, are calculated as a percentage of AUM, and these would remain constant over time. However, others, such as administration costs, are often fixed rand costs or expressed as a percentage of salaries, and these would decrease when expressed as a percentage of AUM as the AUM increased over time.
Importantly, while the reflected percentages would be for the average member, they would differ from member to member, Gluckman said, according to both the member’s level of contributions, depending on his or her salary level, and retirement savings accumulated. Thus a member at a lower salary who had just started his job and had not accumulated any assets could pay more in costs as a percentage of AUM than a more senior employee at a higher salary level who had already accumulated significant assets.
For these reasons, Gluckman said, the RSC was only really meaningful when comparing providers, and therefore would become relevant only once providers across the board had implemented it.
But once fully implemented, he said, it would be a “game-changer” for the industry, and employers and fund trustees would certainly be influenced by the more comprehensive and transparent disclosure of costs across providers.