The regulator of pension funds, the Financial Sector Conduct Authority (FSCA), will implement a value framework to measure if the benefits and returns received by retirement funds members justify the fees paid to the funds.

A value framework is a system designed to assess whether individual pension funds are delivering adequate value to their members, and can be codified in law.

The announcement of a value framework was made by FSCA divisional executive for retirement funds supervision Zareena Camroodien, speaking at the Institute of Retirement Funds Africa (Irfa) annual conference in Cape Town.

“No single global definition exists, but value for money generally means all the costs charged are justified by the overall benefits delivered to members over the long term,” said Camroodien.

She said there is growing recognition, both locally and internationally, that costs, fees, and inefficiencies significantly erode retirement savings over time.

At the same time, the Money Summit held by Moneyweb on 1 September heard that fees charged by asset managers have dropped substantially over the past 15 years.

Retirement industry challenges

Camroodien said South Africa’s retirement saving funds face a range of challenges including a fragmented and high-cost market, lower than desired member engagement, and a heavy reliance on default retirement options, employer-driven selection of retirement funds, and poor information making it hard to compare funds.

“It is against this backdrop that the FSCA has placed increasing focus on value for money.”

She said a value framework would aim to “promote consistency in evaluating member outcomes and support stronger governance” but did not say if it would be made into law or used as a guideline.

A framework would help improve the transparency of fees, retirement fund performance and highlight underperforming funds, she said.

“When members and beneficiaries see value, the profits will follow, so it’s really about providing value for money, so that the entire ecosystem can thrive.”

Value for money frameworks currently exist in other jurisdictions including Australia and the UK, she said, adding that the FSCA framework would draw on key elements of the Australian and UK models.

It would apply a transparent, outcomes-focused methodology.

“The framework will leverage formulae and indicators already widely used in the South African industry such as return on investment [ROI] and the total expense ratio [TER] to ensure practicality, comparability and ease of implementation,” Camroodien said.

FSCA supports centralised management of retirement funds

National Treasury recently published a discussion paper, suggesting the centralised management and administration of unclaimed benefits – estimated at R88 billion – with more than half sitting in retirement funds, drawing on previous work by the FCSA on this issue.

Treasury has suggested that body administer unclaimed benefits, making it easier for beneficiaries or advisors to trace money in a central place.

It also suggested that the money be managed by the Corporation for Public Deposits (CPD), an agency of the South African Reserve Bank.

The idea of all unclaimed billions being managed by the CPD has concerned some in the retirement industry as it is not geared for long-term investing of funds for maximum returns. It is usually used for short-term management of government cash deposits or short-term investments.

Camroodien said the FSCA supports the establishment of a central administrator and also supports the CPD as the responsible custodian of unclaimed assets.

Read more @moneyweb