Alexander Forbes seeks to plug the gap after exiting insurance
SA’s largest pension fund administrator Alexander Forbes is on the hunt for acquisitions as it looks to plug the revenue gap that will be left when it disposes of its insurance operations.
CEO Dawie de Villiers said on Tuesday the sale of the short-term insurance business, whose buyer the company expects to announce sometime in July, will bring much needed capital for Alexander Forbes to increase the size of its retirement administration business and revamp its IT systems.
The short-term insurance business contributed 20% of Alexander Forbes’s annual revenue. In the 2019 financial year ended in March, it collected R1.8bn in gross written premiums, up 5%.
“Once the insurance business is off (the balance sheet), we can start with the next process,” said De Villiers regarding the planned acquisition of administrators.
De Villiers said his preference was to buy one big administrator so that Alexander Forbes could increase its size immediately but he was not averse to acquiring smaller companies too.
Some of the large independent pension fund administrators in SA are Metal Industries Benefit Funds Administrators, Fairheads Benefit Services and Fedgroup Employee Benefits. As far as the consultants’ side is concerned, one of the big players is Absa Consultants and Actuaries, which was acquired by Sanlam Employee Benefits during De Villiers’s tenure.
“First prize would be to buy scale once-off and do one transaction. But if I have to buy two or three smaller ones, I’ll do that. We’ve started the investigations obviously into what’s available and what’s possible,” said De Villiers.
Apart from acquisitions in the administration business, he said Alexander Forbes will also focus on giving advice to pension fund members. Before the retirement funds default regulations, which came into effect in March, pension fund administrators like Alexander Forbes only provided advice to funds and their trustees. Now they are allowed to advise individual members as well and De Villiers said the company was positioning itself to be an advice-led business.
Alexander Forbes will have a competitive edge over existing financial planning firms as it will charge wholesale and not retail advice fees.
The new regulations also required pension fund administrators to create default in-fund preservation when people change jobs. Alexander Forbes has already benefited as people left R3bn invested in its in-fund preservation vehicle. De Villiers says this will generate a new revenue stream.
“The extra revenue will come from more clients joining us because we’ll offer the best advice, but also from keeping individuals with us throughout their journeys. If we keep individuals with us for 40% longer than they would have stayed in our pension funds, we’d generate revenues from them for much longer.”
In March Alexander Forbes announced a new strategy which would steer the company in a different direction to the one envisaged by former CEO Andrew Darfoor, who was axed in September. Most notable was the decision to scale down its retail operations. It had already started withdrawing from its retail life insurance business in July 2018.
The refocusing of Alexander Forbes’s business is however coming at a high cost.
In the 2019 financial year, the group’s operating expenses increased by 13% at a time when operating income was up by only 6% and operating profit down 7%. The company’s cost-to-income ratio shot up to 76%, which was way above its target of 70%. The write-offs related to a cancelled IT revamp project initiated by Darfoor. Although these were one-offs, there will be recurring costs as the group invests to scale up its operations.