There is no doubt that the Two-pot system that comes into effect on 1 September 2024 brings with it some profound changes to the retirement funding landscape in South Africa.
I personally am happy that the legislature has finally helped us savers from ourselves and will be forcing us to preserve two-thirds of our retirement savings until retirement. This law has removed one of the biggest obstacles that South Africans have faced in achieving a decent standard of living at retirement – leakage (taking money out of our retirement funds when we change jobs throughout our working careers).
Allowing access to the savings pot is also a practical solution to urgent short term financial needs of savers. Some people seem concerned about allowing access to a portion of members’ retirement savings but my perspective is this: if we currently allow access to one-third of retirement savings at retirement (and 100% upon exit prior to retirement) – why should we be concerned about members now accessing their one-third prior to retirement?
This Two-pot legislation addresses the structural hinderance of low preservation rates in the current retirement funding system, whilst offering a practical solution to savers’ short term urgent financial needs.
So well done to the policy makers!
I am not so sure that the retirement fund service providers (administrators in particular) have served members/ savers as well? Administrators have (dare I say as usual) taken this new legislation as an opportunity to take more of our savings in fees than they already do!
The administrators blame the policy makers/ legislature for these fees – referring to the additional administration costs implemented over the last decade as the cost of the additional governance.
The irony that the regulator and legislature’s attempts at keeping the industry honest and ensuring transparency of costs has led to the administrators charging more!
Administration functions will definitely become more complex under the two-pot system, but in contemplating these new two-pot costs I have begun to wonder if the extra costs being passed on to savers is commensurate with the extra work involved?
I am sure there were a lot of system development costs and a lot of work that went into designing revised processes and procedures, but are these not once off in nature? Going forward, after the initial set up, the system and processes and procedures will be dealt with in the same way as they always have. I don’t see any ongoing additional ongoing costs here.
Should the administrators not charge a once off fee rather than increase base costs in perpetuity? Most, it seems, have not chosen to increase base administration costs but some have. This latter pricing approach is definitely better for shareholders!
And then there will be an increase in the claims volumes the administrators will have to process each year. I acknowledge that this is at the heart of the cost issue.
I have noticed that most administrators are planning to charge a transaction based – per claim processed – fee which intuitively makes sense. There is extra work to be done and so extra fees to be paid and those fees should be paid by the members that created the work – the savings pot claimants. But what is a fair fee? I have seen fees ranging from zero to R600 per claim quoted by the industry.
But here is my gripe…
Let us assume that an administrator charges a current fee of R50 per member per month on average across their membership base. That’s R600 per member per year.
Now with Two-pot we can expect maybe 50% – 80% of membership to claim in year 1 due to the hype and expectation generated over the last couple of years. Let us randomly say the claims incidence is 70% in the first year and then it settles to 50% over time.
If the administrator charges R500 per claim, then (using the 70% assumption) the annual revenue earned by the administrator will be 58% more than prior to two-pot! After the first year the revenue will settle down to 42% more than prior to Two-pot.
Bonuses all round?
Does Two-pot add that much in operating costs or are some administrators using this as an opportunity to increase profits?
If you consider that compulsory preservation of 67% of our savings (the retirement pot) is around 7 times the current industry preservation rate of around 10%, then we can assume that the administrators are going to (over time) earn 7 times the preservation revenue they used to. Is that not enough compensation for the extra work involved in implementing the Two-pot system?
Charging a fee to recover extra operating costs is one thing, but increasing profits is opportunistic!
Congratulations and thank you to those administrators that are not taking the opportunity to gouge savers.
The regulator should take note of those administrators that have used this change in legislation as an opportunity to increase profits by charging savers more as this is significantly impacting the future retirement savings of retirement fund members.
Lindsay Lofstedt is a Director of Optimate Financial Solutions where he aims to educate Employee Benefit decision makers on the various strategies and structures available in the market (highlighting the pros and cons and cost/ benefit implications of each potential strategy) and keeping them informed of market benchmarks and developments so that they are empowered to make sound decisions around the employee benefits arrangements. Contact him on lindsay@ofs.co.za