What is a retirement fund administration service worth to you?
Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He is a member of the legal and technical committee of RFIN. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.
Those who follow South African financial media, and more specifically, articles dealing with the pension funds industry, will no doubt realise how much noise is nowadays made about costs and the eroding effect costs have on the benefit members will eventually receive. The SA FSB is on a major drive to reduce costs, effectively forcing funds into umbrella funds.
One of the problems in this industry is that a significant proportion of costs cannot really be quantified and will not be part of the equation of cost versus benefit.
If you choose an asset manager offering the lowest management fees, can you be sure you will secure a better outcome? Of course not, but how do you factor in future out – or under performance? If you choose any other service provider, such as your consultant, your actuary, your insurer or your administrator on the basis of lowest costs, can you be sure of a better outcome? Again, definitely not. How do you factor in future losses, direct and consequential, such as industrial action by your employees, arising from inferior service delivery?
If you choose to move to an umbrella fund because of it relieving you from your obligation to serve as a trustee or principal officer or to designate staff at your cost to these positions, can you be sure of a better outcome? Once again I venture to say, definitely not. How do you factor in the cost of future industrial action by dissatisfied staff for the wrong doings of a third party over which you have very little or no influence?
Retirement Fund Solutions believes that the question of fees needs to be seen more philosophically. Yes costs erode the outcome, always. How about if you did it yourself, assuming you really want to save all costs? Would you be in a better position? This is the key question in our view. We are all in an occupation to serve or to produce for other people, who in turn are in the same position, to the best of our ability. We all want to live, eat and drink and if we don’t produce our own food and drink we have to buy it from someone who does. That person spends his time on doing that and does not have to attend to his investment because I do this for him again. The first principle is, whatever you do not do yourself, you will have to pay someone to do it for you. Specialisation and a functional free market mechanism is really what one should be concerned about. Once these two factors are in place, the outcome should be optimal. Given that you cannot be a master of all trades and therefore have to rely on the free market mechanism and specialisation, the second important principle is that of ownership. A free market economy with individual ownership of production factors, has proven to be superior to an economy with collective ownership of production factors. It has been shown all over again that this principle holds true for pension funds as well. Where a fund is managed through collective ownership, it is usually dysfunctional, at the expense of its members. Where a fund is driven by the conviction of ownership of the employer, it is usually functioning exemplary, for the benefit of its members. In the same vein, an umbrella fund will never be able to emulate the advantages of true ownership.
Unfortunately, it appears that our regulator is intent on removing the directional and tempering influence of the employer from the management of pension funds. We believe that we will live to regret it, should this become the order of the day in pension fund business.