Pension industry led astray by its advisers?
Tilman Friedrich, Managing Director of Retirement Fund Solutions comments on the Namibian pension fund industry and how it does or doesn’t serve its members.
Over the past 20 years, our industry has undergone tremendous changes. Until Namibia’s independence, Namibian funds were underwritten by a single insurance company with no choice and no flexibility regarding risk reassurance, investments and specialist service providers. Funds did not need to be audited nor prepare annual financial statements and they were not managed by a board of trustees. Funds were defined benefit funds where the member did not care about returns or investment managers. That risk was carried by the employer who typically had little or no insight other than being informed every three years if the fund had a deficit to be made good by the employer.
Those were the good old days for insurers who had the market wrapped up. Namibia’s impending independence provided a convincing argument to advisers to have the insurers’ shackles broken. Most funds were liquidated, members were allowed to take their money or transfer it to what was perceived to be a ‘safer haven’. A new dawn broke, new funds being established as defined contribution arrangement instead of the prior defined benefit arrangement. Boards of trustees were established and placed in charge. Funds had to prepare audited annual financial statements and were free to choose their service providers. The risk of poor investment returns was transferred from the sponsoring employer to the member.
But were the trustees really in charge and were they actually capable of managing the affairs of their fund? I venture to say that very few were indeed and even today very few are. Being burdened with other responsibilities concerning their businesses it is hard to point a finger at trustees. What actually happened was that advisers quietly took control of the pension fund business of their clients.
Advisers have since done a great job in continuously developing and inventing new products and services, in many cases not unselfishly at all, but rather often with the intention to broaden their product offering and build their own business. This created an environment prone to conflicts of interest producing excesses such as bulking and other dubious practices. Does anyone believe that the integrity of the industry has improved since?
What makes things worse in my view is that even the regulator is chasing shadows, not understanding the technicalities of many of these products and services and the hidden interests of their sponsors, and just following what are made out to be trends instead of critically probing with the view to assess whether it is in the interests of service providers or of members.
Its typical response is to impose more and more onerous requirements on funds and the industry, accelerating a move away from free standing funds into umbrella funds, where they will once again be under the total control of the product provider.
Clearly some of the product providers’ main interest will be to grow their revenue and margins in contrast with a free standing fund where the employer as sponsor and its employees typically take a very personal interest in the business of the fund exclusively for the sake of its members . In South Africa the regulator has decided in a rather haphazard way that the number of free standing funds must be reduced and that any fund of less than 3,000 members should be accommodated in an umbrella fund.
The premise of a pension fund is that it is a compulsory group arrangement. By definition it is not intended to and does not meet the full spectrum of members’ widely diverging needs.
With active interest and participation of the employer in a fund, it is likely a fund will meet the needs of the majority of members, and at a reasonable cost.
Nowadays there is an unfortunate trend to introduce more and more individual choice and complexity into these group arrangements, as if they were retail arrangements. All of these features however increase member costs, often primarily for the benefit of the product or service provider rather than the member. In this scenario the free market mechanism is ineffective, as the member is left to the devices of the fund’s particular service or product provider. Individual or retail retirement funding arrangements offer those few members with exceptional needs a wide choice of alternatives, at significantly higher costs, while the market mechanism should serve to promote the interests of the individual. Since these arrangements are only exploited by a minority, they can only serve to complement compulsory pension fund arrangements and should be considered for the exceptional needs rather than adding to the complexity of the pension fund.
It is often rather amusing to read articles by so-called financial experts where it is so obvious that they merely pretend to provide expert opinion, yet too blatantly promote their service or product instead.
It is futile to question how developments of our industry over the past 20 years have impacted on members’ benefits. I suspect that members today in many instances are significantly worse off in terms of benefits received for every dollar invested in the system, as the result of the self-interests of their advisers.
Can one at least say that members are on average more satisfied with their retirement arrangement than they were 20 years ago? Again I venture to say that despite all the options and choices that were introduced into many pension funds, these have not really led to a positive improvement in members’ perceptions.