Retirement savings decisions cannot be based on cost comparisons alone
From September this year all commercially sponsored umbrella funds must include a charge table disclosing fees for investment management, administration, advice and other charges. The new Retirement Savings Cost (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.
This is according to 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. All providers that are members of the Association for Savings and Investment South Africa (ASISA) must comply. 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.”
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, notes Acton.
According to her the RSC standard will improve client understanding of the costs in the long run, enabling them to gain a better appreciation of the value for money of the overall solution as well as the sub-components. “It will also allow clients to compare costs on a like-for-like basis, thereby helping them to decide which umbrella fund to appoint. Although costs are an essential part of any umbrella fund solution and excessive costs can erode the benefits accrued to members over time, it would be unfortunate if the RSC reduced umbrella fund decision making to a matter of costs alone.”
Armed with a better understanding of the cost components decision-makers will need to interrogate the various services (investment, advice, administration, other) on their merits and the value they add to the employer and its members in order to assess the value for money and hence make a good decision, Acton notes. “As with most things, paying a lower fee may mean receiving an inferior solution. However, paying a higher fee is not an assurance of better quality. It is not all about costs.”
“Our research with employers and intermediaries shows that the disclosure of costs solely as a percentage of assets is not easily understood, as the industry has become used to using rand amounts or percentage of salary. Another issue that may arise is that the benefits of a transition from the current short-term view of retirement costs to one that considers a longer period might not be apparent and fully appreciated,” Acton explains.
Complying with RSC
The RSC requires ASISA members to break down the various cost elements into four different components:
* investment management
* other costs
This will be presented in the form of an RSC Charges Table (see example below) and all charges will be presented as a percentage of assets, says Acton.
“There will be rules-driven notes under the table, which will give detail on the specific costs included under each charge category, as well as standard notes explaining the ASISA assumptions used in the RSC calculation, she says.
One of the valuable insights expected from RSC will be a better understanding of the fact that different types of fees have profoundly different impacts on the asset accumulation of members, bearing in mind that accumulating sufficient assets is the goal of retirement savings, states Acton
“A glance at the sample table shows that advice, which is a percentage of salary in this example, has a bigger impact in the short term, but this reduces over time. This is similarly true of a rand per member charge as can be seen for administration. The investment management charge, usually a percentage of assets, is much flatter, meaning that the impact does not reduce over time, although this could be the case to an extent if the asset management fees are based on a sliding scale,” she explains.
Old Mutual Corporate Consultants believes the new disclosure standard is a great step forward for the industry and will create a better understanding of costs and allow meaningful comparisons. This can only be positive for the retirement outcomes of South Africans, concludes Acton.