Pension charges need to be cut

And if asset management charges are too high, government could refloat the idea of a simple, cheap, state-sponsored product, similar to the retail savings bond.

These proposals were conspicuous by their absence from Treasury's paper on "Charges in SA Retirement Funds", which focuses on co-operation with the private sector.

Olano Makhubela, head of financial products at the National Treasury, says the retirement fund sector "has cracks but it is not yet broken".

Treasury's David McCarthy, who wrote the bulk of the report and is steering the retirement reform process, says many products are cosmetically enhanced, like a cake in a bakery window, as they need to be sold, when a plain, home-baked cake would be adequate.

Recurring charges

But according to the old adage, investments are sold and not bought and intermediaries asking high commissions dominate the distribution of retirement products, especially into the small business and self-employed sector.

McCarthy says that a clearing house could be introduced allowing smaller employers to choose their retirement plans without having to consult a broker.

He adds that many members are not sensitive to recurring charges, while an initial upfront charge is considered highly objectionable. Yet the impact of a 5% upfront charge is far less than even a 0,5% recurring charge.

Treasury makes it clear it wants the sector to get rid of charges which are considered unfair to clients - such as performance fees off artificially low bases, high charges for poorly defined guarantees and treating early surrender fees as a loss of loyalty bonuses.

But there are no hard caps on fees at this stage, though McCarthy says a cap is being considered on the charges which can be levied on the default fund, offered to members who do not wish to exercise choice.

In the circumstances, it is not surprising that few in the private sector have dared comment and what has been said is bland or self-serving.

Value for money

Ralph Mupita, chief executive of Old Mutual Emerging Markets, says it is vital for members of funds to receive value for money. But he doesn't then focus on product charges, arguing rather that compulsion to join funds, preservation on leaving funds and annuitisation (taking a monthly pension rather than a lump sum) are the key issues. Mupita is, of course, talking to his own books, as all three of these trends would keep more money on the books of Old Mutual and keep it there for longer.

John Anderson, head of research and development at Alexander Forbes, says the group would like to offer its full backing to reducing surrender penalties and the proper structuring of performance fees.

The report was critical of many commercial umbrellas, which have an average cost of 2%. Anderson says the aggregate cost ratio of the Forbes umbrella is 0,7% and it continues to fall. But he is concerned that if charges are cut excessively, this will lead to a reduction in the quality of service or talent in the sector.

Anton Gildenhuys, head of actuarial services at Sanlam, says the market is already doing a good job providing clients with a better product at a lower price. The reduction in yield over 20 years of a Sanlam retirement annuity policy was 2,8% in 2004 and this fell to 2,2% for policies currently being issued

Ismail Momoniat, deputy director-general for financial markets, says the process of increasing long-term savings will not happen overnight as there is a culture of instant gratification: people would rather put spare cash towards their cellphones than save, and take out unsecured loans rather than build assets.

"And in order to take on the task of building savings, we cannot afford such a fragmented financial sector. We have 3,000 funds in SA and this should be 300 or ideally even 100 strong funds," Momoniat added.

Source: Financial Mail via I-Net Bridge