INDIVIDUAL MEMBER CHOICE MADE EASY - 'True Lifestage' is the innovative, cost-efficient solution

As trustees, how do you cater for the needs of different members? How can you avoid being blamed – even sued – for offering costly Individual Member Choice (IMC)? Or for offering an incorrect strategy on the trustee-default portfolio?

To offer IMC does alleviate trustee liability if a full range of cost-efficient choices are provided. But IMC does not protect trustees when most fund members, placed in the trustee-default portfolio, don’t select it (see table).

Given that investment strategy accounts for 80% to 90% of a fund’s performance (and manager selection only 5% to 18%), of particular concern is the lifestage strategy your fund uses for its trustee-default portfolio. This is where most of your fund and member risk is concentrated.

ASSET MANAGERS AND ASSET CONSULTANTS TEND TO CATER FOR DIFFERENT MEMBER NEEDS BY USING:

1. IMC portfolios, with the extra personal adviser costs (up to 3% initial and 1% per year thereafter), plus the extra administration costs (IMC access and switching costs), with no guarantee of investment success, and

   • with potentially lower investment returns, especially since members and their advisers do not have the skills and resources of a full-time asset manager;

2. Common ‘lifestage’ solutions that divide the trustee- default portfolio into smaller portfolios (with higher fees) and multiple switching over the lifetime of each member (with higher costs). For a 1 000 member fund, over 8 000 financial switch transactions might be required. An error in any one can cost a few hundred thousand rand in administration liability.
   • "Common Lifestage" is not recommended, due to the extra overall costs that can easily be up to 2% per year, effectively reducing investment returns by 2% per year, and thereby
   • increasing the average contribution from around 14% to 22% of salary, for a young member, to maintain the same pension (70% of final salary, with inflation increases).

Instead, ‘True Lifestage’ caters for members’ individual needs within a single trustee-default fund – without the higher costs of smaller portfolios, massive switching transactions, and potential administration liabilities. It is substantially better for your fund because it can:

• Reduce asset management charges by up to 20 basis points per year;
• Avoid high administration charges and liabilities (up to 2% per year on fund value), so avoiding a potential contribution increase of up to 50% (eg, from 14% to 22%);
• Provide comfort to trustees, by demonstrating they have applied their minds;
• Enhance long-term returns relative to the risk for each member (using a risk-optimiser);
• Offer a flexible retirement age (unlike common lifestage whose final portfolio is usually tied to a guaranteed or insured product with inflexible terms and large withdrawal penalties);
• Provide monthly updates on the critical strategic asset allocation which constantly changes with membership movements (thus requiring monthly active governance).

At present, KPMG is the only organisation to provide True Lifestage, offered via Stamina within its Governance Advisory Service. It provides true independence, and is not linked to any asset manager, or multi-manager, via cross-shareholding or commissions.

IN ADDITION, KPMG’S GOVERNANCE SERVICE INCLUDES:

• Trustee Training. KPMG has spent over R1.8 million on production of a comprehensive Trustee Toolkit;
• Service Level Agreement reviews. Contract management and fair value tender assessments on administrators, asset managers, asset and benefit consultants, insurers etc. In KPMG’s experience, clients have saved up to 30% on service provider fees;
• Investment performance reviews on portfolios supervised by asset managers and consultants;
• Specific cost reviews (for example: on existing guaranteed funds and insurance products).
• Regulation 28 reviews on current and proposed regulations.

KPMG is not owned or influenced by a service provider. Not only does this make for best governance, but ethically and legally KPMG is required to break conflicts of interest. Trust Law requires that the best interests of the fund are put first, in order to bring enhanced value to your fund, its members and pensioners.

Where a lifestage strategy is provided by a multi-manager, there’s a conflict when this manager needs to be changed due to underperformance. It means that the long-term lifestage strategy will automatically be changed to that of the new multi-manager (each having different lifestage views and products). Thus, you get a lifestage strategy that is neither consistent nor long-term and is therefore ineffective.

• It is therefore critical that your fund uses a governance consultant, independent of the multi-manager, to provide True Lifestage.

KPMG’s governance advisory service works with your existing service providers, who continue to select investments, provide administration etc, but where KPMG provides an added protection layer, and cost saving, for your fund and trustees.

For further information, kindly contact KPMG at (011) 647 5043, and ask for
Jannon Solomon jannon.solomon@kpmg.co.za, or
Peter Tshabalala peter.tshabalala@kpmg.co.za.