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Charges in Retirement Provision

On 11 July, the National Treasury released the last paper in a series of five technical discussion papers on promoting household savings and reforming the retirement industry.

The first four were:

  • Enabling a better income in retirement
  • Preservation, portability and governance for retirement funds (both released on 21 September 2012)
  • Incentivising non-retirement household savings and
  • Simplifying the tax treatment of retirement funds (both released on 4 October 2012).

All the papers are available on the National Treasury website (

This paper, Charges in South African Retirement Funds, presents an overview, based on the information available to National Treasury, of the current level of charges during the accumulation phase (i.e. before retirement) in South African retirement funds, provides an international comparison, and examines the drivers of observed charge levels. Several possible draft options for reform are presented. It is not the goal of the paper to propose any particular approach. Rather, it is intended to facilitate engagement with retirement funds, service providers and other stakeholders, as well as to promote public consultations on how the charges of retirement funds can be reduced during the accumulation phase. The ultimate intention of the paper is to assist South Africans in getting the best possible value for the retirement savings they make.

Draft Proposals

The proposed draft reforms can be divided into the following broad themes.

  • Encouraging fund consolidation: Most existing retirement funds do not have the necessary size to achieve sufficient economies of scale, which leads to higher costs and lower benefits for members.
  • Improving fund governance: Although the process of strengthening fund governance has already started with amendments to the PFA in 2013, more needs to be done.
  • Strengthening fund regulation: A strong and effective regulator is essential in ensuring a well-functioning retirement system. The regulator needs to have the power to effectively monitor all aspects of the retirement system, including costs, and the power to intervene where necessary to protect the interests of members.
  • Retaining the role of the workplace: Given the higher costs associated with individually-distributed arrangements, and the low degree of financial sophistication of the South African workforce, it is recommended that the primary place where retirement savings products are distributed remain the workplace.
  • Simplifying plan design: In order to increase competition based on price, a significant simplification of the design of retirement products permitted to qualify for tax exemption, is proposed.
  • Ensuring effective intermediation: While intermediation of all types is important, it can be expensive, and may be conflicted by remuneration structures. Work is currently underway in the retail space to explore ways in which the remuneration of intermediaries may better align their incentives with customers. This review will be expanded to include intermediary remuneration in the group retirement space. Various aspects of investment platforms, including the payment of rebates by investment managers to platform providers, will be also be investigated.
  • Mandating enrolment into retirement funds: A significant driver of the cost of private funds is the need to distribute them to individuals. To reduce these costs, one option may be to require employers to automatically enrol their employees into a retirement fund, which may be a stand-alone pension fund, an umbrella fund, or a retirement annuity fund.
  • Creating a retirement fund exchange or clearing house: One option, to ensure that auto-enrolment is effectively implemented, may be to create an exchange that allows smaller employers and their employees to compare different plans easily, and to choose one which meets their needs, without their requiring financial advice.
  • Establishing a default fund: Another requirement for effective auto-enrolment is that there should be a default fund for those employers who do not specify a fund themselves.

Further details can be found at:

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