Regulator berates service providers for overcharging pension funds
Exploitation spans the spectrum of professions, industry regulator says
Most service providers, including lawyers and administrators, are overcharging retirement funds, endangering the ability of employees to retire with dignity, the industry regulator says.
Naheem Essop, a specialist analyst in the retirement funds supervision division at the Financial Sector Conduct Authority, said despite their size, retirement funds are not using their economies of scale to bargain for better services at reasonable prices for their members.
Essop, speaking at the annual conference for Pension Lawyers Association of SA in Johannesburg on Monday, said the exploitation spans the spectrum of providers, from external legal advisers to administrators and investment advisers.
“All too often we pick up that retirement funds are paying service providers well in excess of reasonable market rates. A prime example is the appointment of external legal advisers to the funds. It is cheaper for retirement funds to be sued in a high court than it is to get advice from a pension fund lawyer,” Essop said.
In most instances pension lawyers charge 300% to 400% more than the high court tariffs, he said. In one extreme example, a lawyer charged a pension fund that was applying for exemption to the Financial Sector Conduct Authority R72,000 for a two-page document that contained a “standard submission”.
“It induces a sense of shame. The question you should ask yourself in your personal capacity is whether it would be acceptable for an attorney to charge R72,000 for two pages. It is a challenge that is not only confined to legal advisers.
“One has to wonder, if we were more diligent about the fees we have to pay to providers, what effect would that have on our members? What effect would it have on your pensioners’ standard of living and the right to live with dignity?” Essop said.
He urged pension fund trustees to shop around and negotiate hourly rates with lawyers. While the Financial Sector Conduct Authority can go the regulatory route to prohibit trustees from using noncompetitive service providers, Essop said the regulator will have to carefully weigh that option.
“We do have regulatory tools at our disposal. But we’ll have to consider whether we want to go that route. At this point we hope and expect trustees to take what we are saying and apply their minds.”
Asked if the authority could provide price guidelines for pension fund trustees, Essop said it would be difficult to do so because the regulator would need to draft different ones for attorneys, administrators, actuaries and investment advisers.
The association does not provide commentary on behalf of its members.
David Hurford, director of consulting and marketing at Fairheads Benefit Services, said as far as administrators are concerned, most are price competitive even though they can improve the disclosure of their fees.
“I don’t deny that there are those who take advantage. But I wouldn’t say those are in the majority. For the most part, service providers are competing very hard to provide very low-cost deals to their membership,” Hurford said.
Hurford said having the effective annual cost measure for pension funds will make it easier for trustees to compare different funds and to see what they pay for which services. The measure, a standardised disclosure on investment charges, became effective in the unit trusts industry in 2016.
Even though the measure does not yet apply to pension funds, Fairheads started publishing costs for its beneficiary funds around the same time. The Association for Savings and Investments SA is looking to extend this measure to the entire retirement fund industry, Hurford said.