What do Turkey and the Czech Republic have in common?
They are the only 2 countries with pension/provident fund fees that are on average more expensive than South Africa’s!
That is according to a Technical Discussion Paper written in 2013 by National Treasury. It has not been updated yet. While new competition in the market is putting pressure on these fees, it’s safe to say many South Africans who are relying on their pension fund for their retirement will be sadly disappointed, in part, due to excessive fees destroying their hard-earned investment returns.
So what IS the difference? Total fund fees typically range from around 1,5% pa (for newer more competitive options) to 5% pa (for older structures). How much has a retiree paid in fees over his working life if his fund charged 5% pa vs a fund that charges 1,5% pa? The answer is 40%! Over a working life of 40 years, contributing every month, a new retiree has paid across 70% of all his returns if the total fees came to 5% pa vs 30% if 1.5% pa was charged! That is staggering!
In reality very few still charge in the range of 5% pa but even at 3% pa the cost is 50% of total returns.
That makes a BIG difference to the outcome.
The same Paper mentioned above outlines a major problem in the South African market being a lack of prescribed uniformity in disclosing those fees, allowing for great variance in the market. The regulator has recognised this and new legislation is coming soon (March 2019) to try to establish uniformity. We expect that similar to regulation that has tried to pin this down in the individual investment space, there will still be anomalies to work around to decipher the true fees being charged.
What therefore can be done? Ask the right questions.
Fees are charged in 5 main categories:
Some of these are charged on the monthly contributions, while others are charged on the assets growing within the fund. Some are charged on both. Also within investment management there may be various layers of fees charged by different parties in the investment process.
Logically, fees charged on contributions are fairly easy to understand and track, while fees charged on assets grow exponentially. Over a number of years those fees can grow grossly disproportionately to the service being received unless they are clearly understood by the client and regularly reviewed. It would be wise for employers to ensure that this is included in any service level agreement signed with a fund administrator.
Another danger to look out for is charge shifting. A new quote may offer minimal, or even 0% admin fees, while opaquely charging more on investment management for example. Alternatively investment management fees may be low while the fees on risk benefits, if included, are inflated. When comparing quotes it’s vital that company employers employ independent advisors, who have the ability and time to break down exactly what is being charged and where.
FinBofs.com will do this for you, and present the growth of those fees over time in a clear and understandable way, so that employers to make informed decisions. (See example below from Allan Gray – line graph showing how fees increase for various structures and the dots showing the final fund values as a result of the fees.)