As more detail emerges about National Treasury’s retirement reform proposals, the retirement funding industry is gearing up to deal with the changed environment. Below, Prescient Life CEO Daniel Acres talks about the way the industry is going to have to evolve. In particular, he has a lot to say on the subject of costs. South African retirement products, especially retirement annuities, are among the most expensive (in terms of fees) in the world. Although there are cheap alternatives available for people who want to save and invest – ETFs for example – pure retirement products, like retirement annuities with their tax advantages, are very costly. Treasury wants to change that, to bring South African fees in line with the rest of the world. But the change won’t be easy, especially as the companies that have benefited from these high fees resist change. Acres gives some interesting perspective on the challenges ahead. – FD
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ALEC HOGG: The South African government is currently in the process of brainstorming reforms for retirement savings for citizens to perhaps put more money away into the future and be better provided for. This is in response to perceived low savings rates in this country. I’m not so sure that it’s perceived, as we heard from Nerina a little earlier, it’s pretty much the fact that we like to spend more than we save in South Africa. We are not alone in that regard. Joining us now to provide the latest on what’s just come out from Treasury is Daniel Acres. He’s the Chief Executive of Prescient Life. Daniel, nice to have you in the studio to really put a little bit more of a spotlight or more of a focus on what Treasury has been saying because last week we had those amazing announcements coming out from Signia with Magda Wierzycka telling us that she is going to charge half as much as anyone else in the marketplace with exchange traded funds, and indeed that she’s also going to be slashing the prices on retirement annuities, she said in response to what Treasury has been saying.
DANIEL ACRES: Yes, absolutely, I think there is going to be a lot of pressure on the industry to come forward and take the proposals to heart and also to the retirement funds themselves. There’s a lot of deep thinking that needs to be done within the funds. It’s not just the service providers that are actually working for them. We’re very conscious about cost but it’s also the fact that national treasury have said there’s a duel prong initiative; we have to worry about what’s in the best interest of the member but also worry about the cost aspect so does the lowest cost necessarily always imply the best thing for the member, and it’s a compromise of value, what is the best value for the member? So if you’re serving both of those duel initiatives then you’ll probably be doing what they are intending.
ALEC HOGG: But reading your report, you say that South African funds are the most expensive, retirement annuities, these things that we are all told by our financial advisers we have to buy because they are so good for our tax position, they’re the most expensive in the world.
DANIEL ACRES: That’s scary and I think that there are a number of good reasons for that, specifically the fact that the industry as a whole, we don’t have auto enrollment here so when you join an employer you don’t have to necessarily join a pension fund. We also don’t have preservation in place so for example when you leave an employer, you can take that whole benefit in cash. Now, obviously as you combine all those assets together, you get the scale that you need to really achieve low cost and that’s what National Treasury is pushing for. So there has been a lot of different proposals that have come out and they all fit together to make sure that that retirement savings pot that you have doesn’t actually start leaking over time.
ALEC HOGG: I know Gugu is keen to ask you this but what’s that got to do with high costs.
DANIEL ACRES: Well, it’s very much the scale. The bigger you are, the cheaper it is to provide the service. So to give as an example, if you take an asset manager and you have a specific fund manager managing a portfolio, whether they’re managing a R10 million portfolio or a R100 million portfolio, it’s the same cost to pay their salary.
ALEC HOGG: So if you’re a portfolio manager, like Allan Gray, and you charge the same as a portfolio manager like yourselves, Prescient, and they might have 1,000 times the assets under administration, they make 1,000 times your profit.
DANIEL ACRES: Exactly.
ALEC HOGG: It puts that in perspective, doesn’t it?
GUGULETHU MFUPHI: It’s good for business but not necessarily for the individual who’s trying to save for their retirement. But on that, Daniel, I understand that the industry is not too keen on these cheaper products coming in and they say that if they are introduced too hastily or too quickly, that could have a negative impact for the industry. How so?
DANIEL ACRES: I think it depends where you sit in the industry. We’ve certainly been pushing this for about three years, even before the retirement reforms came out, from a life perspective saying that you need to have some kind of cheap default retirement annuity in place for your members that are leaving a fund. So I wouldn’t say that it’s certainly the whole industry but obviously there are a number of players who are very dependent on large performance fees who don’t want to see those mechanisms going away. I think on the advice side as well, so we’re not..
ALEC HOGG: You can’t just say that and walk on. There are some people who are dependent on large performance fees, ie they are getting fantastic profits. Of course they don’t want it to go away. Why should you if you’ve got the most expensive structure in the world?
DANIEL ACRES: No, absolutely.
ALEC HOGG: What are they doing to Magda? Has anyone threatened to take her out yet?
DANIEL ACRES: Look, I don’t think, Magda, what she’s come up with is great. If you look at that offering there are certainly index products in there they are providing which are cheaper; there are also multi managed products which are more expensive. I think we need to be careful not to hype up what certain people have versus others. If you look at some offerings you can get administrational RA’s for 20 basis points which has been there historically for the last ten years but there are also different types of investment options. We just need to make sure that when we market these kinds of things people actually know what they’re buying.
ALEC HOGG: Exchange Traded Funds are very simple. They’re index trackers. You pay a fee. Hers is 0.4, the next best in the market is 0.8. There is no way you can say we are comparing apples with lemons in that way.
DANIEL ACRES: No, absolutely not. An Exchange Traded Fund, that’s great, you are essentially index tracking but what I’m saying is there are other offerings that are multi managed that have more active components and those will be expensive.
ALEC HOGG: Loss leaders and profit gainers. I had a Lebanese friend who used to run a fruit shop in Southgate where I used to live and he said, he had certain of his products which were loss leaders and there were certain members of the community who only came and bought those. So clearly when it comes to exchange traded funds, that’s what we should be doing, going to Magda.
GUGULETHU MFUPHI: But even with that, Daniel, this brings my question to you, you mentioned that big companies want to keep their profits, Alec, but naturally we know that in South Africa we have a high unemployment rate, so many people who are dependent on grants and particularly when they reach their pensionable years. How do we find some kind of middle ground to develop it where companies can maintain their profits but that South Africans are also encouraged to save for their retirement?
DANIEL ACRES: I think we’ve tried the approach of encouraging the tax incentivized approach to get people to save and unfortunately it doesn’t really have that big an impact on your lower income earners. The tax incentive is not really there. So the only way you can actually do it is to do what Treasury is proposing and it’s to force people to be a member of a retirement fund. Again, by that process you gather the scale and then… Yes, but I do think there is pressure on the industry. You’ve got to address cost where it’s unreasonable but at the same time it’s very difficult to do in the market where you don’t have essentially as large a retirement industry as you should have.
ALEC HOGG: You declared a 16 cent dividend which is up 18% on last year’s dividend, another ten cents special dividend. Where is your capital position now?
DANIEL ACRES: The cash?
ALEC HOGG: What makes you think that they are going to get this preservation through this time because every other attempt at it has been met by a solid no from civil society, from labour, even from business?
DANIEL ACRES: If you look at the proposals in detail, what they’ve said is that any rights you have up until 2015 will be protected and essentially if you have a benefit at that date, any growth on that benefit will also be protected. So we’re looking at these proposals and yes there’s a lot of work to be done from an administration perspective and everything else but the point is it’s going to take another 20 to 30 years for them to actually work in. The other point is that there are subtle things, so for example we have a minimum de minimus level, so that’s the minimum amount that you don’t have to invest in an annuity at the moment of 75,000. That’s been doubled to 150,000. And if you have to actually look at the size of the benefits that people have, that 150,000 does cover quite a large proportion of your lower income market. So even with the proposals they won’t be forced to annuitise.
ALEC HOGG: Lots of interesting stuff there.
GUGULETHU MFUPHI: Very interesting. Daniel, thank you so much for your time today. That was Daniel Acres who is the Chief Executive of Prescient Life.
