Average administrative costs per retirement fund member increased from 2006 to 2018, but this overall increase conceals that average costs have fallen for particular fund types and classes and benefit structures.
This is one of the findings contained in a report, published by the FSCA and National Treasury, on the economies of scale in the South African retirement fund industry. The report updates a 2011 study “Economies of scale and pension fund plans: evidence from South Africa”.
The report was commissioned by Nedlac as part of the social security and retirement reform discussions.
According to the report:
- The retirement fund industry has grown significantly, with fund membership more than tripling from 3.5 million members in 2006 to 13 million in 2018.
- The number of funds has declined from 1 918 in 2006 to 1 262 in 2018, suggesting there has been consolidation within the industry.
- Smaller funds – those with less than 1 000 members – experienced a decrease in membership, whereas larger funds have grown.
- There has been an increase in the average number of assets per member for all fund sizes, with the exception of mid-sized funds.
Looking at average administrative expenses by fund size in 2006 and 2018 (see table below), the study found:
- Average administrative expenses fell as fund size increased, although average administrative costs have increased for all fund sizes.
- Administrative expenses as a percentage of total assets increased for all fund sizes, except for the largest funds.
The study also analysed fund membership and administrative expenses by fund type and class and benefit structure (see table below).
Results by type of fund
- The number of ordinary retirement funds has declined, while the number of preservation funds and umbrella funds has increased.
- There has been marked increase in the average membership of umbrella funds.
- Real administrative costs per member have increased from 2006 to 2018 for ordinary and umbrella funds, but they have fallen for preservation funds.
Results by class of fund
- The average fund size is much higher for all fund classes in 2018, but the number of pension and provident funds has declined.
- Average administrative expenses have decreased for provident funds, but they have increased for pension and retirement annuity funds.
Results by benefit structure
- The same pattern of increasing average fund size and decreasing number of funds is seen across different benefit structures.
- Average administrative expenses have fallen for defined contribution and hybrid plans, but average expenses have increased for defined benefit plans.
Room for economies of scale to improve
According to the study, economies of scale do not meaningfully vary with fund size, with the exception of older funds (those that survived both sample periods: 1996 to 2006 and 2007 to 2018) over the period 2007 to 2018. In this is case, the optimal fund size is 300 000. In 2018, most funds have fewer than 300 000 members. This suggests that some funds might be operating at diseconomies of scale, while most funds have potential economies of scale available.
Preservation funds and RAs are operating at an efficient scale, although there are relatively few funds of these types. On the other hand, ordinary funds and pension funds have the lowest estimated cost elasticities and have the greatest potential economies of scale.
No benefit structure is operating at an efficient scale, although defined benefit funds have the greatest potential economies of scale.
The full report can be accessed on the FSCA’s website.