SANLAM CORPORATE: Expert Opinions: Edition July / September 2019

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Vital pointers

Sanlam executive Viresh Maharaj discusses key findings for

fund members’ financial resilience.

In the megatrend of consolidation from standalone funds into umbrella arrangements, shown in our benchmark survey, we must caution that one structure is not necessarily better than the other. Trustees and employers must apply themselves to considering various dimensions such as governance, member engagement and cyber security. The ultimate question is how best to enable financial resilience for fund members. For some, this means enhancing existing frameworks within standalone funds; for others it means transitioning from standalones to high-quality umbrella funds, and increasingly it also means switching from one umbrella to another. This speaks to our findings among the umbrella respondents. It indicates that employers are now beginning to review their existing providers and are engaging on potential switches between providers. A maturing and competitive market is reflected. Our survey of professional independent employee-benefits (EB) consultants suggests that they see great potential in newer umbrella funds. They should actively be comparing these to the large incumbents. With greater competition there’s greater attention to reviewing the choice of umbrella providers that can enhance financial resilience for more members.

Group Risk

On group risk, we asked the EB consultants to provide the top advice themes. Uppermost for their clients were increases in funeral cover, increases in insurance rates and introduction of severe illness benefits. Half of the consultants have experienced large rate increases and more claims being declined by insurers. This indicates extreme pressure across the group-risk industry that requires collective attention. Average contributions into funds are broadly similar between umbrellas and stands alone at about 16% annually. Taking this a bit further, we’ve estimated an average net contribution of 13% based on the average risk premiums, administration fees and estimated consulting fees. So what does 13% actually mean to the average member? On this basis a new employee with a 40-year investment horizon would anticipate a net replacement ratio of 56%. An older employee with 10 years to retirement and no other savings would

expect a ratio of 9%. The average on its own does not provide significant insight as it means different things to different individuals, and average net contribution levels are too low irrespective of age. Individuals have many levers to affect their replacement ratios. These include starting to save earlier, delaying retirement or contributing more. A popular lever applied in our industry is to reduce costs. So let’s consider it. If we reduce the average administration and consulting costs to zero, will this have a material effect on member outcomes? In short, no.

Waiving fees

The impact of waiving average admin and consulting fees over a 40-year period is just a 5% uplift on a 20-year old person’s replacement ratio. The impact on a 50- year-old is just 1% more. Then, assuming a total investment cost of 1%, the complete removal of investment fees adds another 13% for the 20-year-old and 1% for the 50-year-old. So there’d be a total uplift ranging from 2% to 18% over a period of 10 to 40 years if average investment costs are completely waived. This is hardly realistic and frames the limited potential for reduced costs to improve outcomes. Once costs are in the zone of reasonability and competitiveness, marginal differences in fees do not meaningfully affect retirement outcomes. Yet they occupy a disproportionate amount of attention. The fixation on costs can distract from more impactful issues such as healthcare which is seen by the EB consultants as slightly more important to members than retirement funding. This arises from the increased drawdown on salaries due to the ever-higher costs of healthcare, the impact of medical debt as well as paying for parents’ healthcare. It was significantly indicated that integrated employee benefits, not retirement funding alone, would have a large impact on the financial resilience of members. We see this as a sign for the future.

For more information on Sanlam Benchmark, visit:

www.sanlambenchmark.co.za