PRODUCT SELECTION: Editorials: Edition: March / May 2020

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Value judgments

Costs not the be-all and end-all when offers from fund managers are compared, Rael Bloom* points out.

Acritical issue in the retirement-fund industry is its costs and their impact on member outcomes. In aiming to deliver value for money (VFM), it’s ultimately about deciding whether the benefit (the value) of buying something justifies the cost (the money). As with any purchase, assessing VFM requires informed judgment. Many commentators tend to look past the benefits and narrow in on costs as the most predictable and measurable component. But a focus on fees alone does not provide meaningful assessment. A concentration only on costs will lead to unintended consequences. There is a range of different role players that make up the retirement-industry value chain. These include fund sponsors, trustees, administrators, consultants and investment managers. They provide services for which they charge fees. The questions are whether fees are commensurate with each of the services provided, and whether they align the long-term interests of members with those of the service providers. A big challenge in assessing VFM is comparability across offerings, given the different ways in which providers charge for their services. ASISA’s Retirement Savings Cost (RSC) Disclosure Standard, which came into effect last year, is designed to help employers make better cost comparisons between different umbrella funds. RSC helps employers assess the VFM of each cost component by separating out the costs of advice, administration, investment management and ‘other’ costs. The Default Pension Regulations also require comprehensive disclosure on the costs of default investments and should further improve cost transparency. Take investment costs. They should be seen in the context of the portfolio strategy. For example, highequity portfolios are typically more expensive than low-equity portfolios. Fees also vary across different investment strategies, most notably whether a strategy is actively managed or tracks an index. Performance-based fees are prevalent feature in many of the larger SA retirement funds. Appropriately structured, they ensure that the fees charged for active management are linked to the performance (and hence value) delivered. Another important VFM consideration is sustainability. Regulation 28 of the Pension Funds Act requires trustees to consider environmental, social and governance (ESG) factors when making investments. Retirement funds therefore need to ensure that their appointed investment managers are able to meet their sustainability obligations.

To ensure good VFM for fund members:

Be clear about the outcome you require and the services that you need. Focus on the total benefit and costs across the full value chain;

Understand that future returns are unknown and VFM decisions require informed judgment;

Ensure that all aspects of investment management are covered, including the need for effective ESG practices;

Understand your costs. Make sure that they are competitive and commensurate with the quality and scope of services provided, and create the right incentives for good outcomes;

Avoid interest conflicts wherever they may create conditions that work against the member’s best interests.

To significantly improve VFM, the industry needs to address such issues as ensuring that more people contribute higher amounts to retirement funds, preservation rates improve and better decisions are made at retirement. The effectiveness of the default regulations will only become evident in time.

*Bloom is product development actuary at Coronation. This is a summarised version of his article in the January edition of Corospondent. Visit www.coronation.com/institutional for the full article.