In the first of a four-part series, Magda Wierzycka, CEO of Sygnia Asset Management takes us through retirement annuities, a comprehensive analysis of costs across some of South Africa’s leading financial services providers in which she presents a compelling case for a carefully-chosen RA, underpinned by an index-tracking investment strategy.
By Magda Wierzycka
The tax changes to level the playing field between retirement annuities (RAs), provident funds, and pension funds may have been postponed, but these are coming. These changes to non-retirement funding income (NRFI) were due to take effect on 1 March 2015 and, when they are introduced in the next few years, could well trigger a fundamental shift in the manner in which companies deal with retirement savings of their employees. Think back to the mass conversion from defined benefit to defined contribution funds in the nineties, and the post-2005 consolidation of stand-alone funds into umbrella funds, and you’ll have some idea of just how big this change could be.
From an employer’s perspective, offering employees an RA instead of a pension or provident fund makes sense. There is no need for costly governance structures, no risk to the employer and no reams of paperwork to complete when a person terminates employment.
From an employee’s perspective, he or she has complete portability and investment flexibility, with no need to link employment to their personal savings provision. The tax treatment of contributions, estate duties and benefits on retirement will be identical.
An RA has the enhanced benefit of not forcing a retirement date on an employee. Now, RAs can be held indefinitely, and an employee can decide for themselves, once they’re past the age of 55, when to actually retire and access their savings.
However, if RAs are to give pension and provident funds a run for their money, it is important that investors arm themselves with knowledge of the most important component of an RA: the cost structure.
I’ve limited this analysis to the RAs offered by Linked Investment Services Providers (LISP) platforms. This analysis excludes traditional RAs offered by life assurers which carry the legacies of high initial fees, penalties, and hidden costs (as well as many other components which are rather best left for another day!).
Similarly to how I conducted the ETF research last year, the relevant companies’ own websites provided the fee disclosures (or non-
disclosures as the case may be). Once again, it took a long time to strip away the layers of obfuscation to arrive at the actual numbers.
When investing in an RA, there are three decisions that any investor needs to make:
1. Do I use a financial advisor?
The use of a financial advisor is a decision entirely up to the investor. Fees are negotiated between the advisor and the investor and, in South Africa, these generally range between 0.50% per annum and 1% per annum (based largely on the investor’s asset size and negotiating power). Upfront fees for financial advisors are becoming rare. Controlling the cost of this component rests squarely in the hands of the investor.
2. What investment strategy/fund/unit trust do I adopt?
Investors have a wide choice of unit trusts at their disposal (the total rand-denominated unit trust fund universe now numbers over 1,100). But, the choice does depend on which LISP platform you choose. On average, the wider the menu of choices, the higher the administration fee. Most LISPs are prepared to lower, or even waive their administration fees if you choose to invest in funds offered by their own in-house asset management companies. The only restriction on investment choice is that it has to comply with Regulation 28 of the Pension Funds Act (in order to receive the tax benefit). Hence, it is best to stick to multi-asset class unit trusts with international exposure.
3. Which RA do I choose?
The RAs which offer flexible investment choices are mostly offered by LISP platforms. The cost of the RA “wrapper” is typically amalgamated into the administration fee, and is not quoted for separately (but it is worth checking). As RAs are generic products, as I’d argue, cost should be the only consideration when making a decision.
The three decisions aren’t difficult to make at all, but it is important that you consider these questions carefully. In the next instalment, we’ll tackle the well-established active versus passive debate. The numbers shouldn’t surprise you, although they probably will!
* Magda Wierzycka is chief executive officer of Sygnia Asset Management. Magda is an actuary with over 20 years’ experience in the South African asset management industry. She started her career as a product development and investments actuary at Southern Life in 1993, followed by two years at Alexander Forbes as an investment consultant. In 1997 she joined Coronation as Head of Institutional Business and a director. She left in 2003 to take over as Chief Executive Officer of the African Harvest group. After negotiating the sale of African Harvest Fund Managers to Cadiz in 2006, she led the management buy-out of the remainder of the group which resulted in the formation of Sygnia. Since 2006 she has headed Sygnia as its Chief Executive Officer.
