Transparency and good governance lacking in the Retirement Industry (2014-04-25)

February 20, 2015  3551  3551   

Article by Ian Young and Terrance M. Booysen

Why are so many citizens unhappy at the pay-out stage and why aren’t people saving enough for their retirement?

The answers to these questions are actually quite simple.  The industry itself has caused this dilemma because of inter alia; historically high cost and commission structures, structuring of products such as guaranteed products, smoothed bonuses and penalty clauses.  This has also been allowed to happen by Trustees Boards approaching retirement fund issues from a perspective of what suits them personally – and not “walking” in their members’ shoes.  The same goes for employers who participate in umbrella funds.  Too often the “corporate speak” of these meetings is more important than the real needs of members.  In reality, the average person simply cannot actually understand the complexity of their insurance products and they become bull dozed with fear tactics adopted by many unscrupulous players in the industry.

A “less is more approach”

There is a clear case in the industry for a “less is more approach”.  Members care about benefits – not posh offices, boardrooms and egos.  National Treasury clearly states the obvious: the industry needs to ensure simpler products, lower costs and improved savings.  Too many suppliers are using the “market beating” returns to attract business but their high costs negate any benefit these returns may derive for the man in the street.  In fact seventy-five percent of asset managers do not beat the index.

A retirement fund is after all a savings vehicle, or at least it is supposed to be.  As employers, we have to be seen therefore as placing people at the heart of the issue, and tackling the perceived lack of care for their wellbeing and that of their communities.  It is easy to grow R250 per month (escalating annually) to R1m over 40 years.  Why are we not seeing this?

The questions we raise in this article are; where do you stand as a leader in industry and are you taking a lead as the perceived guardian of your employees’ future?

What needs to happen?

For ease of getting straight to the point, let’s not debate the fact that it is the company’s obligation and moral duty to provide a retirement fund for its employees.  However, in creating the fund it must be established upon the basis that it meets the requirements of all the company’s employees, and not for the leaders of the company alone.  Remember of course that whilst the management of the company only consists of between 10 - 15 percent of its structures, the pay differential between management and the average employee remains quite uneven.  With this in mind, employers should also bear the following factors in mind, namely:

• choose the fund carefully, and ensure that -- as the guardian for others -- the benefits of the fund will meet the needs of all the employees;
• diligently eliminate cost layers and complexity;
• choose simple benefits and structures;
• maximise savings and ensure transparency; and
• ensure suppliers’ smart technology can easily support members and keep them informed.

There are countless examples in South Africa where employees have been members of their company’s retirement fund for their whole working lives, only to discover at the end of their working lives that the fund value is nowhere near what they had been promised, leaving them in desperate poverty.  With class actions now alive and well in South Africa, including the myriad of employee protective legislation already in place, it won’t be too long until someone takes legal action against employers and boards for knowingly, over a period of many years, allowing such a situation to arise.  Irrespective as to how this situation has come about -- by omission or otherwise -- employers will need to rapidly address this unacceptable state of affairs, particularly since companies in South Africa are generally expected to report upon the manner in which they safeguard the interests of their human capital within their annual Integrated Reporting.

Since most employers are counselled by actuaries, consultants and investment gurus when deciding upon the manner and type of funds the company will support, clearly it is nearly impossible for companies and their board of directors to claim ignorance when retirement funds have been ill-chosen and where employees are left stranded.
  

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