Question:
Our Company Pension Fund has changed administrators to an umbrella fund a few months ago. We were informed it would be cheaper but new TER has increase from 2.25% to 3.36% (includes death/disability as with previous administrator) but still with a decrease in benefits. I find this absolutely horrendous. What is the average TER for Umbrella Funds? Is this not too expensive. Is there any way I can exit the fund without resigning from my job and transfer my credit to a cheaper retirement annuity. Also, if I had a million rand fund credit with 20 yrs to retirement, by how much more would my pension be reduced on average by this extra 1.11% in percentage terms come retirement (say with a monthly contribution of 7.5% for employee & employee?) I'm really concerned as this is my hard earned cash. We are encouraged to save but our efforts are being negated by what I consider profit based institutions instead of a client benefit service. Thank you for your response. Denton
Answer:
Denton, You cannot include death/disability in your TER, that is an insurance cost; you need to evaluate the cost of risk cover by comparing it to available rates elsewhere in the market. This is a competitive market, so the rate should not have gone up by a full percentage point (if you got it so much cheaper than before), esp. if your benefits have decreased. Note that is is not the umbrella fund that provides the risk cover, although the administrator may provide a broker function.
The cost of insurance depends on the level of cover taken and on the company's income and demographic profile, so there is no standard rate. The fund's TER should only cover the investment-related charges, and these can vary from under 1% to 2.5%. Paying 1.11% extra in investment-related fees over 20 years for your scenario will reduce your final retirement benefit by around 15% (this depends on the value of your contributions). Then you must also consider the lesser amount invested in the fund because of your higher insurance cost.
You cannot exit the fund without resigning first. But we agree with your sentiments, that the funds should be run for the benefit of members, not for the benefit of service providers. At the earliest opportunity, you should challenge the fund trustees (or your employer's fund management committee, if applicable) as to how the higher fees benefit employees, and whether they should not rather consider a low cost service provider (such as 10X Investments).
