That’s the view of Mark Henson and Patrick Duggan, investment managers at Investec Wealth & Investment, who manage Investec’s pension fund offering to the SME sector.

Catalyst for disruption and innovation

Henson says the SME sector and its employees are often left under-serviced by the industry. This is largely because of changes to regulation and the industry over the last two decades. At the same time however, it’s created a catalyst for disruption and product innovation, he argues.

Explaining the changes, Henson says there been a big shift from the old defined benefit (DB) pension funds, to defined contribution (DC) standalone schemes, be it a pension fund or a provident fund.

At the same time, there’s also been consolidation from standalone funds into umbrella funds.

“The aim with these multi-employer umbrella funds was to improve economies of scale. The theory was that it would drive down costs and ultimately benefit all end-members behind those particular schemes,” he explains.

Consolidation into umbrella funds was also driven by the growing fiduciary responsibility placed on the shoulders of trustees.

However this shift into umbrella funds has not always led to the best outcomes. One problem is a misconception among employers of their duties to employees.

“Many employers, I think, make the mistake (and boards are incorrectly informed), as far as their outsourcing of that fiduciary responsibility is concerned, [of thinking that] they’ve been absolved their responsibility entirely, by moving into an umbrella fund. This is not the case,” he says.

Duggan points out that there’s often a lack of knowledge among trustees of what solutions are out there and what is appropriate for employees, leading to unnecessary layers of costs for solutions that aren’t required.

“It’s like buying a cellphone contract, where you’re offered a hundred free SMSs [but] we’re all using WhatsApp now. So you’ve got this bundled solution, [where] you don’t really understand what’s in the package, and you don’t understand what you’re paying for,” says Duggan.

Recent industry changes seek to change this. Examples are the push for product harmonisation (of the different types of retirement schemes available), along with standardisation of cost disclosure.

“Hopefully, through the levelling of the playing fields through the products, and the cost disclosures, that’s going to create the opportunity, and bring in new competition into the marketplace, and potentially, we’ll see some product innovation,” says Henson.

This will hopefully drive down costs. Costs are often the biggest eroder of value over time for a pension fund member. Henson says that, according to a report by National Treasury, a 2.5% difference in fees over a 40-year period can halve one’s capital at retirement at 65.

Given that only 6% of South African retirees have enough to retire on and maintain their standard of living, it’s crucial that all stakeholders tackle these issues. This means that boards, members and pension providers need to work together to provide better solutions – and hence better retirement outcomes – Henson argues.

“Members need to have access to information and be part of a transparent solution, in terms of fees and reporting. There also needs to be flexibility and customisation, particularly at the level of the pension fund,” concludes Henson.