SA’s retirement planning industry must adapt and transform for survival

There’s never a bad time to start planning for your retirement, with SA’s retirement planning industry one of the best in the world to do so — and it will be even better once it has diversified to reflect the country’s people.

This was the consensus at a Business Day Dialogue hosted by ASI, where I was joined by Viresh Maharaj, managing executive of corporate distribution at Sanlam, Andrew Davison, head of advice at Old Mutual Corporate Consultants, and independent scenario planner Clem Sunter.

The issue of diversity and the transformation required to achieve it, is a burning topic in the country’s business environment — and not just in financial services. However, this sector sets out to build relationships of trust with its clients, who tend to trust people similar to them. That’s why older people tend to not trust younger advisers, for example.

While great work is being done to redress imbalances and provide opportunities for black investment advisers and black asset managers, there are still only 51 black-owned asset managers across public and private markets, with just 8.8% of SA’s savings and investment pool owned by black people.

It’s the responsibility of the whole industry to change what we look like, so that we can reach out to more South Africans to help them protect their futures. People trust advisers who look like them, who share a language and a culture with them, and who truly understand what their financial needs are.

There’s another way that the industry needs to transform: while pension funds exist to promote the financial wellbeing of their members, they’re not doing enough to drive financial education and literacy. I also believe that the regulator needs to insist on a greater emphasis on this, as well as on transparency and the disclosure of conflicts of interest.

For example, just 16% of the financial advisory market are independent brokers, with the balance being tied to a single financial institution, each with its own interests and alliances.

Financial advisers should also have a holistic view of their clients’ needs, which is why it doesn’t make sense to have one person advising on an individual’s wealth management and retirement planning, and another managing their medical aid advisory. “Tied” agents have a loyalty to their employer — but they also have a narrow view of the solutions that are available, and can only advise on the products of the company they work for.

One way that could directly affect an individual’s investment growth is if an independent adviser could negotiate on their charges. According to the National Treasury, a reduction of charges from 2.5% a year of assets under management to 0.5% a year of assets under management would lead to a benefit increase of 60% over 40 years.

SA has one of the best regulatory frameworks in the world when it comes to retirement planning, and regulation 28 of the Pension Funds Act gives very clear and specific guidance to financial advisers and asset managers about how citizens’ retirement savings should be invested. It’s a significant industry: there are 5,118 retirement funds in SA, with an institutional fund investment of R2.5-trillion, according to the Association for Savings & Investment SA. The SA retirement funding sector has the fifth-highest assets-to-GDP ratio in the world.

It’s for this reason that the recent media spotlight on the notion of government prescribing that investment funds assets should be invested in ailing state-owned enterprises is misconceived.

Our country’s history — and the history of countries such as Greece — shows that prescribed assets don’t work — and indeed, the forced investing in prescribed assets was abolished in 1989. Regulation 28 limits equity to 75% of retirement fund investments. Bonds and listed properties are required to make up the rest of the investments. Regulation 28 also requires that 60% of assets be invested in SA assets.

At ASI, we understand the need for funding to drive the infrastructure development, and we would support prescribing assets under particular conditions. These would include identifying ways to guarantee that the funds were used as intended, and that they would yield at least the expected return on investment. A limited time frame would need to be defined, corruption would need to be dealt with severely if it occurs, and there would have to be transparency throughout the process.

The answer may lie in funding stable state-owned enterprises. There should also be a legal obligation that compels the financial services sector to address diversity and other pressing issues in the pension fund and medical aid sectors in SA.

As an industry, and as a country, we need to address the issues that reduce the effectiveness of retirement funds, and find ways to make their benefits more accessible to more people. Consumer education is paramount, and investors should be more greatly incentivised to preserve their investments in funds when they change employers.

About the author: Anthony Govender is founder and CEO of ASI Financial Services.

This article was paid for by ASI.