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Johannesburg - Research is showing the retirement crisis facing South Africans is far from abating, says FedGroup Life CEO Walter van der Merwe.
According to a recent survey, many South Africans will, or are, experiencing poverty in retirement.
"Government is rightly concerned, and that concern should be shared by the industry, employers, and citizens alike," said Van der Merwe.
"There are key areas in which government and the financial services industry can boost household savings for retirement and encourage retirement industry reform."
An agreement between government and the financial services industry sets out how these objectives can be achieved.
Greater access
One key area pertains to ensuring greater access to employee-sponsored retirement savings, particularly through umbrella funds.
The administration and governance requirements, as well as associated costs are generally lower than stand-alone funds.
Additional areas driving retirement reform include proposed governance and regulatory changes in line with the Retail Distribution Review (RDR), which is supported by National Treasury.
The RDR aims to equalise the disparity in the industry in terms of affordability and product complexity, specifically regarding collective investment schemes and life insurance industries.
The RDR also provides for a new structure for financial advisor remuneration, which is where further cost reductions can be realised.
"Our view is that financial advisers fulfill an important role in an increasingly complex and cluttered market," said Van der Merwe.
"As such they should be correctly remunerated, but it should be structured in a manner that promotes continued engagement with clients in an advisory capacity, not just at point of sale."
Annuity-type remuneration fees (not lump sum commission payments) would be a better option, in his view, and may reduce initial costs for both the employee and employer in employee benefit schemes.
Further cost savings
Further cost savings can be realised in the way employee benefit funds pay for administration services.
FedGroup Life believes asset-based administration fees are not relevant as the assets bear no relation to the cost of administration and should therefore be presented differently to retirement savers.
"A fixed cost every month per member, regardless of how much they contribute or how much they've already saved, is a more equitable approach as it doesn't penalise those who adopted prudent retirement savings practices at an early stage," said Van der Merwe.
This is in line with National Treasury's aim to promote national savings.
The costs of managing assets in retirement funds should also be reviewed.
Some funds choose to invest in portfolios, which attract multi-manager fees.
"However, often only the top fees are disclosed, not the underlying asset manager fees," said Van der Merwe.
"If the same level of transparency required by collective investment schemes, through the Total Expense Ratio (TER) was applied to these portfolios we would allow retirement savers to compare apples with apples, based on performance and cost."
Cost reductions
However, cost reductions need to be balanced against providing the right cover for the insured, while also ensuring industry sustainability.
A number of providers in the industry have commoditised group risk cover to reduce costs.
"However, policy holders get what they paid for, often resulting in inadequate insurance and non-payment of claims," said Van der Merwer.
"As an industry we need to explain to end-users that this is not a commodity market."
"In terms of industry sustainability, greater transparency, lower costs and simplified products will attract more South Africans to save towards retirement."
If the industry is simultaneously able to remove the providers that aren't able to deliver the service expected of them then much of the inefficiency that often leads to increased costs will be removed, he said.
Lowering the barrier to entry by changing the current onerous capital and licence requirements could also drive further cost reductions through greater price competition and industry innovation.
"If the FSB worked more closely with the industry to root out providers that engage in malicious practices and bring in others that are able to deliver through innovation, then everyone would benefit," said Van der Merwe.
"It is also time for providers to reconsider value-added programmes, most notably wellness programmes. While they remain strong selling points, the touted benefits need to be paid for, but there is little evidence supporting the impact they are having in the claims experience."
- Fin24
According to a recent survey, many South Africans will, or are, experiencing poverty in retirement.
"Government is rightly concerned, and that concern should be shared by the industry, employers, and citizens alike," said Van der Merwe.
"There are key areas in which government and the financial services industry can boost household savings for retirement and encourage retirement industry reform."
An agreement between government and the financial services industry sets out how these objectives can be achieved.
Greater access
One key area pertains to ensuring greater access to employee-sponsored retirement savings, particularly through umbrella funds.
The administration and governance requirements, as well as associated costs are generally lower than stand-alone funds.
Additional areas driving retirement reform include proposed governance and regulatory changes in line with the Retail Distribution Review (RDR), which is supported by National Treasury.
The RDR aims to equalise the disparity in the industry in terms of affordability and product complexity, specifically regarding collective investment schemes and life insurance industries.
The RDR also provides for a new structure for financial advisor remuneration, which is where further cost reductions can be realised.
"Our view is that financial advisers fulfill an important role in an increasingly complex and cluttered market," said Van der Merwe.
"As such they should be correctly remunerated, but it should be structured in a manner that promotes continued engagement with clients in an advisory capacity, not just at point of sale."
Annuity-type remuneration fees (not lump sum commission payments) would be a better option, in his view, and may reduce initial costs for both the employee and employer in employee benefit schemes.
Further cost savings
Further cost savings can be realised in the way employee benefit funds pay for administration services.
FedGroup Life believes asset-based administration fees are not relevant as the assets bear no relation to the cost of administration and should therefore be presented differently to retirement savers.
"A fixed cost every month per member, regardless of how much they contribute or how much they've already saved, is a more equitable approach as it doesn't penalise those who adopted prudent retirement savings practices at an early stage," said Van der Merwe.
This is in line with National Treasury's aim to promote national savings.
The costs of managing assets in retirement funds should also be reviewed.
Some funds choose to invest in portfolios, which attract multi-manager fees.
"However, often only the top fees are disclosed, not the underlying asset manager fees," said Van der Merwe.
"If the same level of transparency required by collective investment schemes, through the Total Expense Ratio (TER) was applied to these portfolios we would allow retirement savers to compare apples with apples, based on performance and cost."
Cost reductions
However, cost reductions need to be balanced against providing the right cover for the insured, while also ensuring industry sustainability.
A number of providers in the industry have commoditised group risk cover to reduce costs.
"However, policy holders get what they paid for, often resulting in inadequate insurance and non-payment of claims," said Van der Merwer.
"As an industry we need to explain to end-users that this is not a commodity market."
"In terms of industry sustainability, greater transparency, lower costs and simplified products will attract more South Africans to save towards retirement."
If the industry is simultaneously able to remove the providers that aren't able to deliver the service expected of them then much of the inefficiency that often leads to increased costs will be removed, he said.
Lowering the barrier to entry by changing the current onerous capital and licence requirements could also drive further cost reductions through greater price competition and industry innovation.
"If the FSB worked more closely with the industry to root out providers that engage in malicious practices and bring in others that are able to deliver through innovation, then everyone would benefit," said Van der Merwe.
"It is also time for providers to reconsider value-added programmes, most notably wellness programmes. While they remain strong selling points, the touted benefits need to be paid for, but there is little evidence supporting the impact they are having in the claims experience."
- Fin24
