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While pension fund members already withdrew about R35 billion from their retirement savings under the two-pot retirement system, pension fund administrators are expected to make up to R1.25 billion in administration fees by the end of February 2025.
Keystone Actuarial Services surveyed administrators in September to find out how much they will charge for withdrawals and points out that savings pot withdrawals under the two-pot retirement system have fundamentally changed the nature of these administrators to where they now have to also fulfil the role of a “bank” where members can make periodic cash withdrawals.
“In reality, many members may have higher amounts in the savings component of their pension funds than they have in their bank accounts. Therefore, they implemented stringent processes and security checks to prevent the possibility of fraudulent withdrawals.”
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According to Keystone various commentators focussed on the tax that will be paid to Sars and the effect this will have on the economy, but the other “leakage” from the system will be the fees paid to administrators.
Administrators now handle an increased number of claim payments, possibly as high as four or five times the normal number of annual payments and this will reoccur if members withdraw funds every year, Keystone says.
“The administrators had to change their administration systems to administer member benefits within the various components, verify the identity of the member requesting a withdrawal, process the requests and do the payments.”
Therefore, Keystone says, there has been significant work and costs involved in developing and updating administration systems and processes for the two-pot retirement system. The ongoing work and cost involved will depend critically on any human involvement.
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“Most of the administrators therefore decided to charge an additional fee for withdrawals and the additional administration costs of the two-pot retirement system, such as maintaining separate records of each component and changes to communication, such as benefits statements, by charging either a fee for each withdrawal, an increase in the basic administration fee or a combination of the two.”
Keystone did the survey to help funds understand the competitiveness of the fees their administrators charge among medium and large commercial retirement fund administrators to determine the fees they will charge for withdrawals. This table is a summary of the fees:
[Insert Table-two-pot-retirement-system-fees]
According to Keystone, most administrators charge a flat fee irrespective of the value of the withdrawal, while two administrations charge a scaled fee depending on the value of the withdrawal. Their average fee will depend on the profile of the actual withdrawals of their administration books but is likely to be in the same range as the flat fee for the other administrators.
The structure of the fee will obviously affect members differently depending on the value of their withdrawals.
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Three administrators confirmed that they will increase their base administration fee by between 2.80% and 4.00% on 1 September 2024 due to the implementation of the two-pot retirement system.
Keystone says the other administrators confirmed that their administration fees will not increase on 1 September 2024, but several noted that they may increase their administration fee on the next fee review date once the actual profile and number of withdrawals are known.
“The profile of savings component withdrawals by amount and administrator is not known at this stage, but based on reasonable assumptions may average out at a fee of about R320 per withdrawal. Based on an average assumed withdrawal of, say, R20 000, the fee will then be an average of 1.6% of the amount withdrawn.
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“A number of estimates of the total expected initial withdrawals have been published, mostly in the range of R50 billion to R100 billion. Based on these estimates and excluding an estimate of withdrawals in respect of government employee fund members, the withdrawal fees that could be paid to administrators in the tax year from 1 September 2024 to 29 February 2025 could be in the range of R640 million to R1.25 billion, excluding any fees as a result of the increase in the base administration fee.”
Keystone also says assuming that most of the members who made withdrawals shortly after 1 September 2024, take a further withdrawal in each subsequent tax year, the direct savings component withdrawal fees could result in a fee to the administrators of some R500 million to R1 billion every year.
“This will represent a material windfall to the administrators and a consequent reduction to member benefits.”
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According to a report on BusinessLIVE, the Financial Sector Conduct Authority (FSCA) is currently investigating the administrative fees that fund administrators charge. The FSCA told Moneyweb that it is looking at the fees charged by administrators and funds for two-pot retirement system withdrawals as part of its supervisory obligation.
The FSCA is anticipated to issue a report on its findings before the end of January 2025, Moneyweb reports, saying that it understands that the FSCA sent a questionnaire to retirement funds and administrators asking them specifically about the fees they charge as well as the costs involved in readying themselves for the two-pot retirement system.
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