THE RETIREMENT INDUSTRY’S PRESSING ISSUES
15 Oct 2013
GIB Employee Benefits lists and comments on the more urgent reforms required.
Treasury’s Retirement Reform proposals were discussed at length at the recently held Institute of Retirement Funds conference. GIB lists the more urgent reforms required with our comments.
Compulsory preservation of retirement savings must be enforced as far as practical.
Glenn Gamsy, Principal Officer of the Destiny Retirement Funds wrote a paper in November 2012 wherein he provided insight into the damage leakage causes from members cashing in savings before retirement. The hope is that the various role players (particularly Treasury and Unions) engage and resolve this matter urgently. It is agreed that there will be short term pain but it is unquestionably the only long term solution.
Provident Funds which permit members to take all their savings as a cash lump sum must be phased out.
Liz Botes, GIB’s Principal Consultant, says that most of us undoubtedly prefer the option to disinvest our hard saved funds as a lump sum and are averse to purchasing an annuity/pension, however, the vast majority of us lack the responsibility to manage large sums at retirement. For this reason and because of the need for the harmonisation of retirement funding and tax treatment, Provident Funds need to be phased out.
Costs must be reduced, and the cost of purchasing a pension must be addressed. Before the advent of defined contribution funds, members of defined benefit funds moved seamlessly and cost-free from being a contributing member to being a pensioner. The cost of purchasing an annuity is too high when combined with other costs such as high asset management fees plus the advent of performance fees.
Glenn Gamsy comments that costs have always been a major focus at GIB. The company’s mission statement since inception has been largely focused on costs. "Financial Advisors definitely have a place and should be remunerated but members/the consumer shouldn`t feel obligated to use an advisor. GIB is an example of an administrator that doesn’t rely on independent advisors to distribute its services and products and incorporates in-house fund consultants into its offering in order to save costs for the funds that it administers but this style of service offering doesn’t necessarily suit all companies/funds”.
He goes on to say that “performance fees provide for an interesting discussion. Most consumers are drawn to the concept because it seems to align their interests with the asset managers. Unfortunately, this sentiment is only half true. It is more correct to say that managers will earn slightly below "fair fees" if they perform poorly and earn exorbitant fees if they perform well. The latter can also conceivably encourage asset managers to take unnecessary risks in order to outperform.”
PF130 is the FSB’s guidance note on the Good Governance of Retirement Funds. It needs updating and to be made a statutory requirement.
Liz Botes comments that currently PF130 only provides guidance to Trustee Boards and does not enforce the law. It has nonetheless been an important document which is also used as a measure against which the conduct of funds may be evaluated by Retirement Industry Regulators. By making PF130 a statutory requirement, Trustee Boards will have more certainty as to the actual requirements of good governance expected by the Regulators.
Trustee Training and minimum qualifications need to be made compulsory.
The current environment of Fund consolidation is paving the way for the professionalisation of Trustees. This would result in the standards not only being imposed on Trustees, but actually becoming a part of the daily functions of the Trustees who’s only concern will be the Fund they look after. Additionally, conflicts of interest need to be minimized as a Trustee must not be influenced by anything else besides looking after the needs of the membership.
The financial services industry needs increased competition, particularly by encouraging more companies to break the dominance and protected status of the life assurance industry by not restricting products such as investment linked living annuities to the domain of life assurers.
Warren Flynn, GIB`s investment specialist comments that the life assurance industry has had a stranglehold on this market for far too long. In order to combat this, GIB will be launching the Destiny Living Annuity in the 1st quarter of 2014 in order to offer members a low cost alternative.
Warren adds, “we are so excited about the fact that for the first time people will be able to utilise the Destiny Investment Portfolios from the beginning of their careers right until they receive their last annuity payment during retirement”.
A major overhaul is required of life assurance retirement annuities (RA’s) with their upfront commissions which encourage unscrupulous, commission driven financial advisers to replace products to the detriment of consumers and the confiscatory penalties that are applied when RA members are churned from one product to another or can simply no longer afford to pay premiums.
Glenn Gamsy responds that this encapsulates the problems in the life assurance industry. "Upfront commissions should be phased-out”. GIB has applied to the Financial Services Board for the registration of the Destiny Retirement Annuity Fund which will not offer commissions or fees to third parties. “If a consumer would like to become a member, they will do so directly and may invest via LifeStage or Choice using the same investment portfolios that have been successfully used by Destiny Umbrella and Preservation members for over a decade. This will encourage the move towards fee based advice which GIB favours.”
Costs will be around 1.5% per annum which compares extremely favorably to insurers like Discovery Invest, Old Mutual and Liberty Life with their costs of over 3.5%. Notwithstanding their high ongoing fees, insurers still impose penalties on early termination.
Warren Flynn adds; “in addition to the far lower fees, the Destiny RA also comes with the expertise of the GIB Investment Committee as well as Best of Breed Asset Managers. Lastly, GIB’s core satellite approach of using a blend of active and passive managers will ensure that the investment portfolios continue to outperform”.
Default investment choices must be introduced to help retirement fund members, both in the build-up to retirement and during retirement, to make cheap and efficient investment decisions.
Trustees should take responsibility by setting up either choice portfolios with a default or a life stage option. The Destiny Retirement Funds have 5 portfolios and employer committees can either use them in the full choice format or as LifeStage. Says Warren Flynn, "GIB believes in setting parameters or defaults for members who need guidance whilst still providing choice for those who prefer to make their own personalised decisions."
For instance, the current South African investment debate is which of active or passive investments will perform better over the long term, after taking costs into consideration. It would be unreasonable to expect members to decide if given the choice. GIB’s Investment Committee has done extensive research in this regard and has found unequivocal evidence that from a long term perspective there is certainly merit in holding both passive and active investments via a model that we refer to as “optimal blending”.
With low cost trackers at the core of the portfolio and actively managed funds as the satellite, this approach to portfolio construction has proven to be extremely efficient in building wealth over the long term. The effect of high costs on an investment portfolio over time cannot be emphasized enough so with an efficient, cost effective passive core at the heart of a portfolio we ensure that the overall portfolio costs are kept to a minimum.