Retirement fund administrators estimate the two-pot system will add R300 million a year to the cost of administering funds, says FSCA deputy commissioner Astrid Ludin.
The FSCA, the Pension Funds Adjudicator, and National Treasury on Tuesday briefed the National Assembly’s Standing Committee on Finance on the implementation of the two-pot system and arrear contributions.
Ludin informed MPs of how the Authority is monitoring the implementation of the two-pot system, as well as its request for information about the costs associated with implementing the system and how administrators and funds plan to recover these costs.
Read: Data reveals trends in members’ two-pot withdrawals
According to the data received by the FSCA, administrators incurred an initial cost of R1.63 billion to implement the two-pot system.
The cost of R1 629 646 673 was broken down as follows: R1 053 194 753 on IT system changes, R305 633 788 on additional administrative staff, R54 468 552 on member communication, R28 279 600 on establishing or expanding call centres, R26 455 437 on staff training, and R161 414 550 on other costs.
Administrators expect the ongoing costs associated with the two-pot system will come to an additional R300m a year. They estimate it will take six to seven years to recover the initial and ongoing costs, with half the expenditure recovered in about four years, Ludin said.
The FSCA is still analysing the data it has received from funds/administrators about costs and fees, Ludin said, and “it would be premature to express any view” on whether the Authority should have the power to regulate fees, but “ultimately, what we want is to ensure that members get value for money”. To this end, the Authority wants to look at administrative costs in total – not only the costs associated with the two-pot system.
It is important that administrators are transparent about their fees, so that funds have comparable information and can “shop around” and members can hold their funds to account, she said.
Fees to recover costs
The FSCA accepts that administrators have to cover their costs, but their fees should be reasonable. The Authority is evaluating whether the fees are reasonable. If it believes they are not, it will explore whether it is necessary to cap or regulate fees, Ludin said. Doing so will require changes to legislation.
According to data compiled by the FSCA, 64% of administrators/funds have decided to absorb some or all of the costs. A few (6%) are charging only a once-off fee, while others are charging a savings withdrawal fee (47%) or are increasing their base administration fee (14%), or a combination thereof.
To date, only 40% of members who are eligible to make a savings component withdrawal have claimed or are likely to claim. This presents a challenge for administrators in how to structure their fees, because if they waive fees on withdrawals, the additional costs must be borne by the 60% of members who are not claiming. Ludin said it appears that funds and administrators are trying to reach a balance between recouping costs entirely from withdrawals and increasing their base fees.
There is substantial variation in how fees are charged, particularly for savings component withdrawals. Some administrators charge only a flat fee, and some charge a flat fee plus a percentage, with a cap.
The FSCA is analysing the fees charged at administrator level and will engage with administrators whose fees are “outliers”, Ludin said.
The FSCA will publish a report early next year once it has analysed the data.
Alvinah Thela, National Treasury’s chief director for financial sector development, said that once the FSCA has finalised its analysis, Treasury will engage with the Authority over possible measures that need to be put in place.
This may take the form of a Conduct Standard, or “some form of transparency and disclosure that can nudge some form of making sure there is an alignment [of fees] – although […] we might be opening ourselves to competition issues” – so that there are not many outlier fees.
