The overarching aim of this proposal will be to bring all workers left out in the cold - where employers don't have a fund - into the formal retirement savings system.
The paper is a short- to medium-term solution to enhance the sector's structure and to make it more cost-effective.
It is also a major step forward to broaden social security. According to John Anderson, managing director of Alexander Forbes Financial Services, social security is a much longer-term initiative, which could take another 10 to 15 years to fully implement.
The Treasury's plan envisages a much broader role for new pensions regulator Rosemary Hunter when it comes to standardising cost structures across the sector, consolidating funds from 3,000 to 100, and implementing auto-enrolment systems for companies - or the self-employed - that do not have a fund for their workers.
The most startling revelation in the paper is that recurring management costs are hitting pensioners the hardest. A move by SA to get in line with some of the lower charges elsewhere in the world can leave 50% more in pension funds.
The research showed if charges could be reduced from 3.5% to 0.5% a year, the same benefit could be received with contributions that are about half as large.
But it is the Treasury's table on cost comparisons around the world that is the most telling.
SA's retirement annuity funds are pushing the global envelope with charges of 3.50%, but umbrella funds are also very high by global standards. However, the data does reflect some good progress on charges by other funds. Treasury deputy director-general Ismail Momoniat calls the existing structure of the sector "problematic", saying it is almost impossible to properly compare products.
He is pushing for standardisation on cost structures and significant consolidation of funds.
"If you look at medium to large funds, the costs compare quite well, like for big employers. Smaller businesses and the self-employed are large sectors that are uncovered," Anderson says.
He says that the sector hasn't been able to demonstrate good value for money for the smaller sectors and that ways to improve the situation are now being sought.
"We are also pleased that the (Treasury's) paper is setting some standards and principles in relation to fees, and removing practices that are not in clients' best interests," Anderson says.
Penalties and the structuring of performance fees are areas Alexander Forbes says will need particular attention.
"Overall, our experience of umbrella costs, in particular for larger, established umbrella funds with appropriately priced defaults, are that the cost ratios compare favourably to what the Treasury has set out in its paper," he says. "For example, the aggregate cost ratio of our own umbrella amounts to 0.71%, and has been decreasing over the last number of years."
To achieve the Treasury's goals, some drastic interventions are proposed. The sector can comment on these until the end of September, before the new system is implemented by law next year.
Elements of Obama care-style cost reduction in the US and New Zealand's auto-enrolment system are being considered, which should usher in the use of exchanges that list funds meeting conditions such as design, scale and charges, along with the exploration of a system that will require employers to enrol employees into one of six retirement funds automatically.
The mandatory system for employers without funds - those with funds should be able to carry on as usual - could see the clearing house, or exchange, being integrated with the revenue service tax collection system. The exchange would then standardise administration processes. This will be an important change as it could alleviate the pain of sky-high transfer charges when members switch funds.
One of the more startling findings in the report is that the disclosure of charge levels to members and regulators is low, and customers, for various reasons, may not be sensitive to this.
The head of pensions law at Routledge Modise, Hunter Thyne, says the devil would be in the detail. He says not much is said in the Treasury's proposals relating to the mode of implementation, specifically in regard to an automatic opt-n fund.
"Although a novel idea, there would be an obvious need for centralised benefits administration, which may be carried out either in the public or private sector. It is difficult to comprehend the manner in which this may be achieved," he says.
Furthermore, he says it is difficult to comprehend how the regulator will enforce the mandatory disclosure of costs.
Source: Business Day via I-Net Bridge
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