Blue Chip Journal - June 2019 edition

RETIREMENT FUNDS
Smoke and mirrors
Some tough questions for the
retirement fund industry
The power of compound interest is
a miraculous thing when it works
in your favour, but it is disastrous
when it works against you.
All manner of laws and regulations have
been passed in South Africa to better
protect investors from the predations
of retirement fund administrators and
managers who have developed some
ingenious ways of squeezing an extra
fraction of a percent, and in many cases
much more, out of your savings. Over the
long term, this adds up to a tidy sum.
While there is no doubt that some of
the more rapacious practices of the past
have been stymied by these laws and
regulations, from my experience, many
retirement fund administrators and
managers just got smarter at disguising
their parasitic behaviour. This behaviour
renders these laws and regulations
meaningless.
High fees are disguised
in a variety of ways
The average person is simply not equipped
to detect when they are being fleeced.
That’s because the fees are disguised in
a variety of ways. The retirement fund
industry has become a game of smoke and
mirrors. Company CEOs or chief financial
officers are bamboozled by retirement fund
investment rankings showing Fund X in the
upper quartile. What they are not seeing
is the slow but inexorable rape of their
employees’ savings.
A few years ago National Treasury
released a paper entitled “Charges in
South African retirement funds” which
should have shamed the industry but
apparently didn’t. South African fee
structures compare poorly with our
overseas peers; they lack transparency and
are not particularly comparable, especially
when it comes to umbrella funds. Nor are
they readily “portable” (easy to migrate
to a new fund). Pricing is so complex you
need a professional to explain the costs
and terms. Making matters worse is the
fact that intermediaries are incentivised
to sell the products of specific service
providers, creating an unnatural swing
towards high-cost funds.
The retirement industry is awash with
flexible funds and differentiated products
and services, creating such a complex and
layered landscape that no-one can make
sense of it. You might be tempted to think
that this is the magic of the free market
at work, but it has the pernicious effect
of embedding the incumbents, allowing
outrageous fees to pass unnoticed and
raising industry barriers to entry. The
actual effect is to stifle price competition.
An actual example
Let me illustrate by way of an example.
We recently did an exercise for a JSElisted
company with roughly R300-million
in retirement assets and more than 500
members. We did a cost comparison to see
what the fund would look like if different
default investment options had been
availed. What we found was a potential
saving of over R1- million a year. On a R300-
million fund that’s not much, you might say.
But it is when you compound it over 20, 30
or 40 years. One could question the role of
the independent trustees of the umbrella
fund in question in this instance in ensuring
value for money for the members.
The South African retirement
industry in a nutshell
The South African retirement industry is
worth in excess of R3-trillion in assets. That’s
a huge sum of money, with nearly twothirds
of that tied up in the Government
Employee Pension Fund (GEPF),
administered by the Public Investment
Corporation (PIC). Though most of these
assets are administered by the PIC, the
actual investment function, for the most
part, is farmed out to private-sector asset
managers. Judging by cost disclosures on
unit trusts, the average total cost runs at
between 2-3% of assets per year. If one adds
all the costs of running a retirement fund,
that amounts to in excess of R100-billion a
year in fees going to administrators, fund
managers and others in the retirement
fund ecosystem.
Up to 40% of your retirement
has been swallowed in fees
Put another way, these outlandish fees
could cost you 40% of your retirement.
The answer is not necessarily to opt
for the cheapest but rather ensure that
members are receiving value for money,
depending on the type of product or
solution. Much has been written about
passive investment but even there the
difference between the lowest and
highest cost provider is more than
double. However, the focus has to be on
the total cost across the full spectrum.
Paying the industry average of 2-3% of
total cost versus a more palatable cost of
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