Coming to terms with the new regulation
The past two decades have seen a large migration of stand-alone employer retirement funds into umbrella funds.
According to the Financial Sector Conduct Authority (FSCA), the total number of stand-alone funds registered in terms of the Pension Funds Act in South Africa has declined from more than 15 000 in the 1990s to under 1 000 at the start of 2019. Given this growth in popularity of umbrella funds, it’s not surprising that there are many umbrella funds from which to choose.
“While this is good news for employers and members, it has added a layer of complexity to the decision-making process around which umbrella fund to choose. One of these complexities relates to doing effective cost comparisons. Given that each umbrella fund calculates and currently presents its costs differently, comparing these costs accurately has been challenging,” said John Kotze, Head of Group Retirement Solutions at Old Mutual.
Standardised cost disclosure
“Accurate retirement fund cost comparisons have been challenging. The way in which these fees and costs were calculated and shown to clients differed from fund to fund, making a simple cost comparison close to impossible without committing time to converting everything to a standardised base. For example, one quote can have a cost as a % of salary, and another can have the same cost applied as a Rand amount or a % of assets,” added Kotze.
“As of 1 September 2019, the process of comparing fund costs should become significantly easier and less complicated, thanks to the introduction of the new Retirement Savings Cost (RSC) disclosure standard by the Association for Savings and Investment South Africa (ASISA),” emphasised Kotze.
“The RSC is a cost comparison tool, developed by ASISA, for use in commercial umbrella fund quotes. In a nutshell, it is a standardised way of disclosing all retirement savings costs as a % of assets under four charge categories. This will help employers and intermediaries to compare umbrella fund costs more easily when considering quotations from different ASISA members. RSC effectively requires all commercial umbrella funds, that are sponsored by ASISA members to present all costs relating to their umbrella retirement fund solutions as a percentage of assets, using prescribed assumptions and disclosure tables,” continued Kotze.
Costs will need to be reflected under the following categories:
Investment management costs
Advice costs
Administration costs
Other costs
RSC disclosure components
“The investment management charge includes all costs for all underlying investments, including investment performance driven charges and trading costs. Capital charges, where applicable, are reflected under the heading of other costs, and are not included with investment management costs,” said Andrew Davison, Head of Advice for Old Mutual Corporate Consultants.
“The advice/consultant charge component includes all charges for the provision of advice by intermediaries/consultants, commissions payable to intermediaries/consultants (excluding commission on risk premiums) and investment consulting fees not included within the investment management charge. The administration charge component includes all retirement fund administration fees/charges, investment administration fees/charges not included within the investment management charge,” continued Davison.
“The costs included under “other costs” in the charges table includes guarantee premiums/charges, regulatory, compliance and governance costs like contingency reserve account levies, FSCA levies, fidelity insurance and professional indemnity premiums, actuarial fees, audit fees, trustee and fund official’s remuneration and expenses, communication expenses and all other charges flowing via the fund that do not fit into the other categories,” added Davison.
Coming to terms with the regulation
“The new RSC disclosure standard aims to make it easier for employers to compare apples with apples and choose the best umbrella fund for their employees’ needs. However, as with most new legislation, teething problems are to be expected as Financial Services Providers (FSPs) come to terms with the new regulation,” said Michelle Acton, Principal Consultant at Old Mutual Corporate Consultants.
“Until now, comparing umbrella fund costs has been difficult because fees can be charged and disclosed in many different ways. The RSC disclosure standard will compel providers to disclose and break down the costs in the same format. We believe all industry participants will comply, even if they are not ASISA members, as non-compliance is likely to be viewed very negatively by customers,” continued Acton.
“Some of the anticipated challenges include ensuring stakeholders gain a full understanding of the disclosure standard and dealing with exceptions caused by funds that are markedly different from the standard assumptions, as well as cross-subsidies between the fees of the various parts of the umbrella fund solution. Also required is a shift in thinking from rand per member costs or percentage of salary fees towards a basis where all costs are effectively converted to a percentage of assets,” noted Acton.
So, what does matter?
To this end, Davison said the RSC Disclosure Standard gives employers, advisers and boards of trustees a clearer view of retirement savings costs and makes it easy for them to compare charges on competing commercial umbrella funds. “But how big a factor is cost to a prospective participating employer when making their umbrella fund decision?”
As part of an RSC survey, Old Mutual surveyed employers and intermediaries to find out what really matters to them when choosing an umbrella fund. It provided worthwhile insights into what prospective umbrella fund clients would be considering when making this very important decision. The six main fund selection criteria were: overall cost, investment options and investment performance, administration, benefit flexibility and value add, governance and the credibility and reputation of the fund sponsor.
The results of Old Mutual’s RSC survey confirm that fund costs are indeed a very important consideration when choosing an umbrella fund. However, they also confirm that there are many other factors of high importance.
Whilst it is evident from the survey that prospective participating employers do not base their fund choice only on costs, Davison concluded by saying the inclusion of the RSC tables will now make the cost components the easiest factors to compare across fund offerings, allowing prospective participating employers to be able to focus instead on the other areas of value. Ultimately, the best umbrella fund is not necessarily the cheapest one. It is the one that adds the most value to the lives and futures of fund members in exchange for the fees they pay.”
Editor’s Thoughts: From the above, it is clear that the RSC will ease the complexity in the decision-making process around umbrella funds. But, do you believe problems are to be expected as FSPs come to terms with the new regulation? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za
Article published courtesy of FANews
