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Costs and their Implications on Retirement savings

Costs and their Implications on Retirement savings. 12 September 2019. Panel Facilitator: Ms Wilma Mokupo Panel Members : Ms Mabatho Seeiso Mr Steven Nathan Ms Kirshni Totaram Ms Nerina Visser Mr Rowan Burger. Wilma’s opening remarks.

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Costs and their Implications on Retirement savings

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  1. Costs and their Implications on Retirement savings 12 September 2019

  2. Panel Facilitator: Ms Wilma MokupoPanel Members:Ms Mabatho SeeisoMr Steven NathanMs Kirshni TotaramMs Nerina VisserMr Rowan Burger

  3. Wilma’s opening remarks

  4. FSCA receives financial statements, statistics and quarterly reports from over 1,300 active funds (2019). What does this this tell us about what the cost-drivers are in relation to? - accumulated funds / asset based fees - contributions based fees - fees taken from benefit payments - fees for transfers - investment fees - MVR – market value adjusters - FVA – fair value adjustments - Administration expenses (admin fees, audit fees, actuarial fees, FSCA fees (levies, penalties, service fees), secretarial fees, consulting fees, training, trustee expenses & remuneration, principal officer expenses & remuneration, legal fees, other (specify: e.g. marketing, meeting allowances (stipends/ pendiums), travel expenses includes flights, accommodation, meals, car hire, etc.) Note fund’s Expense Policy and Directive 8 Should FSCA publish trends and average costs across different types of funds? What else?

  5. Mabatho’s opening remarks

  6. The higher the costs the less you have for retirement Impact of High Costs on Retirement Funds Ad hoc Costs Investment Fees Administration Costs Retail Institutional Unplanned for costs on the rise Money market fee from 0.16% to 0.24%. Retail fee up to 0.50% • Risk Premiums • Administration fees • Trustee expenses • Legal fees • Enforcement • Consulting fees • Auditing fees • Actuarial • Auditing • FSCA Levies etc • Legal Fees a big concern • Litigious environment Value in pooling fund Cost s more to be a small/ retail investor • Asset Management Fees • Type of investment matters e.g. passive, active, smooth bonus funds • Product Structuring Fee • Investment platform fee

  7. Fund Costs: Things to think about?

  8. Fund Costs: What Can We do? • Pension Funds • Benchmark fees and costs • Perform audit to understand true costs • Implement cost effective solutions • Negotiate better fees • Seek independent input where there is conflict • e.g. Trustee remuneration • Service Providers • Transparency • Manage conflicts better i.e. shareholder value creation versus customer value creation • Performance • Regulator • Governance accountability across all players • E.g. Implications for umbrella funds versus stand alone funds? • Develop frameworks that help the industry on costs management?

  9. Steven’s opening remarks

  10. Why costs matter • Investment returns are finite, around CPI+ 6%1 • High costs can erode 50% of members’ final pension pot • The greatest predicator of future investment performance2 • Member costs = industry revenues ”Don’t ask a barber if you need a hair cut.” Warren Buffett 1 Data from 1900 to 2018, investment periods ranging from 5 to 40 years, Regulation 28 Balanced Fund with up to 75% in equities. Source: Dimson, Marsh, Staunton, 10X Investments 2 Morningstar research, 2010 and 2016

  11. Where do industry costs reside? What fees do members pay? Investment management Administration Consulting Standalone Fund case study: • R1bn in assets, 4 000 members • Fees % assets 1.4% 10X Investments estimate • Two problems • Total fees are too high • Fee allocation mis-aligned to member value

  12. Kirshni’s opening remarks

  13. Value for Money… Measuring value for money • Clarity of outcome required • Costs are critical • Quality and scope of services • Consistency in comparison • Ability of retirement funds to understand their options Fees have a significant impact on retirement outcomes and should be considered across the value-chain and over the full-life of savings Member outcomes are best served by an open, competitive, transparent and well-regulated market with low barriers to entry

  14. Impact of net alpha on return Note:Values shown assuming nominal growth of 10% p.a. excluding alpha.

  15. More about costs… Costs have come down materially over the past 10 years • Regulation has helped reduce number of funds significantly The major retirement funds in South Africa are professional and well-run • Institutional advice market has operated professionally over time • Skills to assist Boards of Trustees in analyzing, quantifying and comparing offerings • Operates on a transparent basis according to client preferences Costs vary depending on: • Asset allocation and use of alternate asset classes • Type of investment strategy chosen – fundamental or rules-based • Prevalence and structure of performance-based fees Industry continuing to improve disclosure and understanding • Retirement Fund EAC standard good example

  16. The industry has allocated well

  17. Nerina’s opening remarks

  18. Cost Efficiency in Index-Tracking Investments Why are they cheaper? • Management fee for active vs. so-called passive • Activity costs money • Frictional cost of transacting • Frequency of transacting • In low return environment it is increasingly difficult to add more alpha than the cost of generating such alpha

  19. Cost Efficiency in ETFs vs. CISs or segregated portfolios • Primary market vs. Secondary market • Transaction costs • Securities Transfer Tax (STT) • Other statutory charges (JSE, STRATE, IPL) • Cost of implementing frequent cash flows erode value

  20. How big is impact of cash flows? What does it cost to invest R100m in the All Share Index at 5bps brokerage? * STT: Securities Transfer Tax = 0.25% non-negotiable

  21. How big is impact of periodic cash flows? R100m lump sum vs. 4 flows of R25m each vs. 20 flows of R5m each (31.1 bps) (33.6 bps) (100.8 bps) Source: JSE / Strate data; etfSA calculations

  22. All Investing is Active… Low-churn Bottom-up Top-down Traditional‘Passive’- Market capweighted indices(eg S&P500, FTSE100,Top40, etc.) Rules-basedActive SkillDiv+, RAFI, Low volatility, etc. • TraditionalActive Skill- Value Investing • Growth/Momentum- etc. ‘InnovationCreep’ through ‘smart’ indices & ETFs …but the level of activity varies ‘Active’ Dynamic Active Passive Lowest activity level Lowest trading cost Highest activity level Highest trading cost Buy & Hold

  23. Evolution of “passive” investment strategies • Exposure to broad-based equity market indices • Traditional “passive” investing • Efficient exposure to (market) beta • Benefit: low cost, transparency, operational and tax efficiency • Expansion of “passive” to other asset classes • Application of indexation beyond equities • ETFs with non-equity underlyings allow for multi-asset class exposure via stock exchange • Benefit : ease of transaction; security of custody, clearing, settlement • Rise of “smart beta” and alternative investment strategies • Rules-based investment decisions, commoditisation of active decision making • Index construction evolves from “performance benchmarks” to “allocation guidelines” • Benefit : multi-factor performance drivers; exposure consistency & style purity

  24. Classification of “smart” beta • Factor / Strategy / Style • Proven alpha-generating capabilities • Designed to outperform traditional beta over time • Caution: factors also go through cycles – don’t try to “time” it • Thematic • Targeted exposure to a particular theme, e.g. ESG, Shari’ah • Not designed to produce alpha • Caution : do not measure performance relative to traditional beta

  25. Rowan’s opening remarks

  26. Putting Costs in Context • Inherent trade offs in any system • Costs are important but must be understood in context • Non negotiables: • Regulation • Disclosure • Knowledge Communication Portability

  27. Strategic View on Costs • Ours is a voluntary, tax incentivised retirement system • Consequences on market outcomes & behaviours • There is a balance we need to strike between the level of regulation & reporting and the associated costs • Is our challenge adequacy, coverage or efficiency?

  28. Analysing Contributions Contribution Analysis Only have 4.7m contributors vs 16.5m employed Coverage is a problem! Not getting anywhere near the level of contributions to deliver adequate benefits Analysis from SARS 2018 data

  29. Fixing the Problem • Improving disclosure and value to members • Engagement vs reporting problem • Have we achieved the regulatory target of reducing fund numbers? • Improving access and adequacy • Greater mandation will drive down costs but reduce choice • The introduction of the new default regulations will improve retirement outcomes

  30. On the Costs Journey • Has the level of competition in the market resulted in a better deal for members? • New entrants • Reduction in complexity • Policy uncertainty • Better disclosure • Commoditised group insurance market • At what point do you just need time?

  31. More engagement There are many trade offs we need to decide on: Standardisation Customisation Solidarity Individualisation Paternalism Autonomy Rules Principles

  32. Questions from Everyone… Madame Programme Director: We will now take questions from the audience?

  33. THANK YOU

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