A recent article in Finweek (It’s derby time, 22 March 2012) likened the debates on active versus passive investing, retirement annuities versus unit trusts and fees versus commissions, to a football derby. But football derbies are highly emotional affairs, reflecting our individual, and often irrational, loyalties. In contrast, all retirement investors essentially have the same objective: to secure a pension that will preserve their standard of living through-out retirement. The universal question: what is the surest and safest way to get there? Unlike football results, savings outcomes do matter, and they do have life-long consequences. Finding the optimal answer must therefore be a dispassionate and goal driven process that does not give room to emotional arguments.

A recent discussion paper issued by the Department of Economic Development recommended that South African retirement funds should help finance the country’s infrastructure development. To this end, the State should “regulate a substantial part of retirement funds to be invested in…development finance institution financial instruments.” This flies in the face of Regulation 28, which barely a year ago, stated unequivocally that the State “does not prescribe what assets a fund should be invested in as this would counter the principles guiding a fund to act in its best interests.” Its subsequent public commentary suggests that the Department also has a poor understanding of retirement investing principles. Does this mean the Department is ignorant on these matters, or just unprincipled?

Worried that someone is making off with your pension? If not, you should be. Much like plane accidents, pension fraud is over-reported in the media, perhaps because of the life-threatening consequences and the subliminal fear it could happen to anyone. But the incidence of fraud is actually quite low. In fact, the real threat does not come from the few miscreants who embezzle investors’ money; it comes from the industry’s high fee structures, and the regulator’s failure to curb these excesses. As long as these industry fees remain unregulated, unwary investors are at risk of losing a large part of their pension pot.

The 2011 budget speech proposed some radical retirement reforms (in the context of an otherwise fairly stable environment), subject to industry comment. This year’s speech confirmed many of these proposals, cleared up ambiguous matters and, encouragingly, also addressed some of our specific concerns. There were also unexpected tax rate developments and a strong message to the financial sector to clean up its act.

How would the investment landscape change if investment products were bought rather than sold? The UK has banned commission-based financial advice from 2013 and is moving to a fee-based model. Although no such move is imminent in South Africa, we believe it would improve overall industry practices. In our view many of the industry ills – high fees, too much choice and complexity, and poor transparency – are the side effects of a deeper cause, namely the industry’s distribution model, and its dependence on commission-driven recommendations dressed up as advice. Break this habit, and the industry will have to focus on investors’ rather than advisers’ needs.

10X has shied away from alternate asset classes, such as hedge and private equity funds. Among our key concerns: high fees, poor transparency, complexity and trading restrictions. Admittedly, some of these concerns had an anecdotal basis, but not anymore. Simon Lack’s exposé of the hedge fund industry (The Hedge Fund Mirage) supports our ‘prejudice’ with insider insight and hard numbers. His conclusion: yes, hedge funds have created a huge amount of wealth, but almost all of this has gone to managers rather than investors. Which raises the question whether upping the local prudential limit on hedge funds, as permitted by revised Regulation 28, is really all that prudent.

Retirement saving would be far more successful if left to parents, rather than their children. Why? Because we tend to take much better care of our children, than of ourselves. We may neglect our own retirement, but we would think twice about prejudicing our children that way. So it would a lot of sense from a behavioral perspective. It would make even more sense financially: by bagging 65 years of compound returns (and keeping a lid on costs), we could cut total retirement savings contributions by up to 90%!

Is there a difference between a fair outcome and a fairness outcome in the pension fund industry? The question arises as the FSB’s “Treat Customers Fairly (TCF)” initiative, set for 2014, mandates fairness outcomes in the financial sector. But will those deliver the fair outcomes that investors anticipate? The investing reality in South Africa This [...]

If South Africa’s healthcare sector was run by the investment industry: our lighthearted take on a serious subject.

The bulk of retirement investors are disengaged from the savings process. Their apathy and ignorance is shamelessly exploited by the industry’s marketing and distribution machine, which creates illusions of future wealth and suggests the possible rather than the probable. To this end, the industry perpetuates six investment myths that serve the interests of the industry but not the investor. Most realise far too late they have been duped, with severe consequences to their pension. The sooner they become aware of these myths – and the positive alternatives available in the market – the better.