GRANT BASE: Survey aims to quantify fees charged for two-pot withdrawals

The two-pot system, which came into effect on September 1, has sparked concern that savings component withdrawals will reduce members’ future benefits on retirement. However, this is counterbalanced by the fact that members may be able to reduce their level of financial distress and that the mandatory preservation of members’ retirement components will over time increase member benefits and replacement ratios on retirement.

The number and amount of savings component withdrawals shortly after September 1 (and in future tax years) is unknown at this stage, but is expected to be material. Various commentators have focused on the tax that will be paid to the SA Revenue Service on these withdrawals, and the effect this will have on the economy, but the other “leakage” from the system will be the fees paid to administrators.

Savings component withdrawals are a significant change for administrators that historically paid benefits (other than in respect of divorce and maintenance orders) only on the exit of members from funds. Under the two-pot system the administrators will pay benefits while the member remains a member of the fund. This means there will be a large increase in the number of claims payments, possibly as high as four or five times the normal number of annual payments, and this will reoccur if members request a savings component withdrawal each year.

There has been significant work and costs involved for retirement fund administrators in developing and updating administration systems and processes for the two-pot system. The ongoing work and cost involved will depend critically on any human involvement at the administrator (and the employer’s human resources department), with many administrators moving towards technology-based request processes through WhatsApp, mobile application or member website options. Most of the administrators have, therefore, decided to charge an additional fee for savings component withdrawals, an increase in the basic retirement fund administration fee or a combination of the two.

Survey results

Keystone Actuarial Solutions, an independent actuarial consulting firm, has conducted a survey of medium and large commercial retirement fund administrators to determine the fees they will charge (including VAT where applicable) in respect of the two-pot system, and particularly the fee for savings component withdrawals.

The responses received are summarised in the accompanying table. The fees used in the table are reflected, for illustrative purposes, on two sample withdrawal amounts. In future, savings component withdrawal amounts could be higher than R30,000. 

Where administrators manage both stand-alone and umbrella arrangements, they appear to be charging the same fee under both arrangements. Note that Keystone has not specifically surveyed the fees charged in respect of retirement annuity funds and preservation funds. GQM and Momentum will charge an additional R115 and R100, respectively, if the withdrawal requires manual intervention by the administrator.

Most of the administrators are charging a flat fee irrespective of the value of the savings component withdrawal, while two administrations are charging a scaled fee depending on the value of the savings component withdrawal. Their average fee will depend on the profile of the actual savings component withdrawals of their respective administration books, but is likely to be in the same range as the flat fee for the other administrators.

The structure of the fee (fixed rand amount or percentage of savings component withdrawal) will obviously affect members differently depending on the value of their savings component withdrawal.

Withdrawal fees

Based on the average withdrawal fee of R320 (and a number of other assumptions), Keystone estimates that the withdrawal fees that could be paid to commercial administrators in the coming months could be in the range of R640m to R1.25bn. These amounts exclude any fees as a result of the increase in the base administration fee. If members request a savings component withdrawal each year in future, the fee to administrators could be R500m to R1bn each year.

We would hope that all of the administrators, once they have recovered any initial expenses of implementing the two-pot system, will assess their ongoing costs and, if applicable, adjust their savings component withdrawal fees appropriately.

Three administrators have also explicitly confirmed that they would increase their base administration fee by between 2.8% and 4% on September 1 due to the implementation of the two-pot system.

The other administrators have confirmed that their administration fees will not increase from September 1 (specifically as a consequence of the implementation of the system), but several noted that they may increase their administration fee on the next fee review date once the actual profile and number of savings component withdrawals is known.

Note that the above fees exclude fees that have been incurred by other service providers that are related to the implementation of the two-pot system, such as communication and member information costs, drafting of rule amendments, or any increase in insurance premiums.

• Base is a consulting actuary at Keystone Actuarial Solutions.