Auto-enrolment must be managed to prevent cost increase

By on July 3, 2014

Proposals released by National Treasury strongly emphasised government’s commitment to auto-enrolment to correct inefficiency and improve the poor savings rate in the current South African retirement system, but care needs to be taken according to Craig Aitchison.

Auto-enrolment needs to be part of a pre-determined process, otherwise the mandatory savings system may actually increase costs to employers and members. This is the view of Aitchison, Corporate General Manager of Customer Solutions at Old Mutual Corporate. He urges employers, especially those of small businesses, to carefully consider management of auto-enrolment in retirement funds, should this become mandatory.

The alternative is increased costs, possibly at the members’ expense. This is the current experience of the United Kingdom, which implemented auto-enrolment 1 October 2012. “Smaller businesses may have fewer resources to devote to auto-enrolment requirements and the costs are likely to have a greater impact on them,” explains Aitchison.

Aitchison says that while larger corporate employers may have resources to better transition to auto-enrolment practices, including access to specialist pension advice, small businesses will need to look at consolidating resources to gear up for the change.

A well-managed umbrella fund, which is a highly cost-efficient retirement savings solution for employees, can positively address the challenges they may face.

“Umbrella funds enable employers to auto-enrol their employees in a simple, pre-determined way, with changes managed via the monthly payroll submissions. This allows employers to keep their eye on their core business. It’s a good solution for small businesses as well as large corporates.”

Aitchison explains that in an umbrella fund the administrative burden and other governance costs are shared by the participating employers in the fund. This pooling of assets and sharing of costs gives rise to economies of scale and lower charges to members. Retirement fund members therefore benefit because a larger proportion of their contributions will go towards their retirement savings.

Aitchison explains that latest industry statistics from the Financial Services Board (FSB) shows that funds with fewer than 20 members pay on average ten times more administration fees as a total percentage of contributions, compared to large funds with over 10 000 members.

“Our practical experience has demonstrated that standalone funds (where a retirement fund administers its own fund) can benefit by moving to umbrella funds.  The standalone funds that have moved into the Old Mutual SuperFund umbrella offering have benefited from a substantial reduction in administration fees per member, with reductions ranging from 8 percent to 80 percent, and most sub-funds now spend on average 45 percent less than before to administer and manage their fund.

“Due to improvements in the economies of scale, Old Mutual SuperFund has in turn been able to reduce charges for its members, in a systematic fashion. When expressing expenses as a percentage of assets, the average cost experienced by SuperFund members has declined by over 35 percent since 2005,” concludes Aitchison.

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