As we already know, South Africans are terrible savers. We borrow too much, and save hardly anything, and precious few South Africans are in a position to retire when age 65 rolls around. To deal with this, government has been systematically studying and revising the rules and regulations around the SA retirement industry.
One of the positive changes that has emerged from this is the emergence of independent financial advisers – advisers who do not represent one company or another (remember your Old Mutual guy from 20 years ago?), but rather, independent advisers who get their fees directly from the client.
More changes are also afoot, including changes to rules around who must contribute to retirement savings, and how retirement capital is handled when retirement age arrives. Overall, I think these developments are to the good. South Africans have shown no inclination to save on their own, so it’s clearly necessary for the state to step in, especially since the burden of penniless retirees falls on government shoulders. – FDÂ
ALEC HOGG:  Well, joining us now to think strategically about retirement reforms, retirement annuities, where to expect predictable returns and growth investments is Mike Estment, Chief Executive of NFB Financial Services. Mike, just to go back to a conversation we were having earlier… Nothing to do with the OTC, which is going to be interesting because you have hundreds of thousands of shareholders who suddenly can’t trade anymore. I think there’s going to be a political knock-on on that one. Let’s get back to what Gert Kapp was telling us from PricewaterhouseCoopers (PwC), that this move by government to try to force people to a degree, to look after their own retirement is a double-edged sword. On the one hand, fine…we do want to be able to have a population of elderly people who aren’t reliant on the state, but on the other hand, there is a concern about the costs involved in having to do so.
MIKE ESTMENT:  I think the benefit of the regulatory enforcement is felt in many other countries around the world. The lack of that enforcement, which has led to the development of our industry into some very, very significant players who have habits that have been established over decades, has cost the investor significantly. The professionalization of the advisory markets – and I’m not talking to try to substantiate our existence, but that’s where I fit in – and the creation of a genuinely independent force out there who are dependent on the client to make the decision around fees, has been a fantastic development.
ALEC HOGG: Â Have you seen people leaving the industry as a consequence?
MIKE ESTMENT:  Massive issues have happened there, Alec. They start not only with the transparency, which is important, but you need size to prosper. However, in a country like ours you have a massive cross-section of providers of advice and providers of service. The OTC market is an example, so the names I saw flash up during your presentation are that a company might be a vendor or provider of that service itself, so theoretically you’d hope that there wouldn’t be arbitraging and playing games there, but you never know. What the industry has done is it has professionalised. What it did was it said you have to tell the client what’s going on. That’s not typical historically, so there were deals going on between fund and administrator, between an administrator and an advisor, and there were overseas incentives – almost like a medical industry.
ALEC HOGG:  What do you mean ‘deals’?
MIKE ESTMENT:  Well, you’d have a fee and then there’d be a rebate. Now, what that rebate was…. Honestly, if you look at even a sophisticated investor, how would they know that? Whom would they ask? Would they be told the truth? There’s law now to protect that entitlement – that right. That law has a massive positive effect at the bottom end of the market in terms of smaller savings. What Treasury did is it said we don’t really require people with a serious amount of money to be able to save more. If you can save three-hundred-and-fifty-thousand Rand per year into a pensions product, it’s unlikely that you’re going to be destitute. It’s unlikely that you’re going to be a Ward of the State, so that number is reasonable. There will always be a counter-argument to that, but that number is not focused on the ultra-wealthy. As the previous speaker said, should tax be the driver of retirement savings, it’s a facilitator and it’s a catalyst, but it shouldn’t be the core of it. Retirement savings is therefore a percentage of one’s income. At the top end, it’s not really that consequential. At the bottom end, it is very, very touch-and-go. The clear definition between investment costs, administrative costs, the cost of life cover or maybe other ancillaries…
ALEC HOGG:  The guys at the bottom will be hit the hardest though, because it’s small numbers, so the proportion or the percentage of the fees that have been taken off is very high.
MIKE ESTMENT:  Yes, so what Treasury’s preservation strategy, fee transparency strategy, and its segregating to a large degree the advisor and the provider – that’s good stuff. That there might be a political kickback, they’ve provided for inasmuch as they’re saying ‘we’re not just going to order you now and just say you cannot have access’. If you had vested rights and you’re over 50 years old, you will have access to certain parts of your provident fund, which historically, was dealt with differently to a pension fund. If you are 60, you have absolutely vested rights so if you said ‘I’m leaving my employer to create my little takeaway business or my gardening business’, you’re not going to be precluded from access to that capital.
ALEC HOGG:  Or buy a Domino’s Pizza, as David Shapiro and I were talking about earlier.
MIKE ESTMENT: Â Exactly.
ALEC HOGG:  It seems very sensible, Mike. Are you in favour? Do you think it’s been handled rationally and in a good manner?
MIKE ESTMENT:  The regulator has the toughest job because in the armchairs, where you and I are now, it’s easy to criticise and there will probably always be unintended consequences, but that’s what a legal process allows. It’s going to take rational people debating rational issues, to evolve this.
ALEC HOGG: Â Are we on the right track?
MIKE ESTMENT:  Yes, we’re categorically on the right track because South Africa’s terrible at saving.
ALEC HOGG:  We’re terrible at saving. We’re terrible at football, but we’re pretty good at many other things, thank goodness. That was Mike Estment, Chief Executive of NFB Financial Services.Â
After the break, our Southern African viewers will cross to international programming, while the rest of sub-Saharan Africa can catch Power Lunch [inaudible 0:13:55.6]. Who knows? If we start saving a lot more, maybe Bafana Bafana will get to the next World Cup.
