The pension problem

On Wednesday Desmond Smith stepped down as chairman of Sanlam. This marked the end of a 50 year association with the retirement industry.

Speaking at the Sanlam BENCHMARK Symposium in Stellenbosch last week, Smith noted that a lot had changed in half a century. When he started out there was no formalised corporate governance of pension funds, unit trusts had only just been introduced to South Africa and there was very little regulatory intervention.

“Fifty years later we are in situation that is very different and I believe it’s one where the needs of fund members are far better served,” said Smith. “There is far greater expertise, knowledge and capacity in the industry. There is also far greater choice and flexibility, despite the avalanche of regulation we now face.”

Despite these improvements however, members in general are still getting poor outcomes. The CEO of Sanlam Employee Benefits, Dawie de Villiers, noted that there are a number of obstacles in the way of people getting the best they could out of their retirement products.

The first is costs. Even though they have come down, they remain a hindrance because the complexity of cost structures means it’s very difficult for anyone to know exactly what they are paying.

The products themselves have also grown very complex, which isn’t necessarily to the benefit of members.

“Talking as a product provider, it’s very easy to put bells and whistles on everything to make it look sexy and smart, but is that always in the best interests of the member?” said De Villiers. “I think we need to go back to simplicity, and standardisation so that at the point of retirement members know what they are getting.”

Similarly, while the taxation benefits of being in a retirement vehicle are excellent, many members simply don’t understand or appreciate them.

“These are a massive advantage, but people don’t recognise it because of the complexity,” said De Villiers. “Do members and even advisers understand all the benefits when it comes to taxation? I think this is part of what has to change.”

The core issue is that there is a general lack of simplicity and transparency. In a world where employers guaranteed people’s pensions that may not have mattered so much, but in the current environment where members are ultimately responsible for their own money and carry all the risk, this is extremely problematic.

The result of all this complexity, De Villiers noted, is that members don’t get the value they should because they get intimidated into inertia. They don’t know what choices to make, and so they end up doing nothing.

This is why he is strongly in favour of the introduction of defaults and standardisation across the industry. This doesn’t mean that everyone must be boxed into the same vanilla products, but that providers can offer genuinely relevant solutions to people who are unable or unwilling to choose for themselves.

“I believe that defaults are very powerful,” De Villiers said. “For the end member who doesn’t have the knowledge as to what investments to choose, what contribution rate to choose, or how to think about annuitisation, having some guidance is wonderful. But the person who wants to make a choice can still make that choice.”

Something similar applies to cover for life insurance, disability and dread disease within retirement funds.

“We have gotten to a point where even policy documents are so complex and different that it’s very difficult for a consultant to analyse the difference between the offerings of two companies,” said De Villiers. “It’s very difficult for members to understand, and it’s also difficult for human resources departments to know what is in or out when they want to claim.”

This is why there is a growing demand for standardisation, where providers offer the same cover, with the same benefits.

“If we get this right, yes, it will put more emphasis on the price as it will be pure commodity, but that’s just the start of it,” said De Villiers. “Because when you have standardisation and you have the price issue ticked, then employers and consultants start to ask who do I trust, who will pay my claims on time, and who offers the best service. And that’s the value we can add as an industry.”

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