Small pension funds increasingly face the prospect of rising administration costs, commission to brokers and group death and disability cover wiping out pension benefits.
This has led to more life assurers turning away small funds and offering pooled arrangements or individual products, such as retirement annuities, as alternatives. It has also led to a growth in small companies providing dedicated services for small pension funds.
If you belong to a pension fund with fewer than 30 members, chances are that your retirement fund may be looking for a new administrator.
Administrative costs, the cost of providing death and disability cover and commissions to brokers are gobbling up to 34 percent of retirement fund contributions in some funds leaving less and less for investing. The costs, commissions and risk cover have increased by about 20 percent over the past five years.
This means less money going to your retirement savings and a lower pension at retirement.
Don Brown, chief executive of Momentum Employee Benefits, says when the costs of administering a scheme eat up 15 percent of the joint contributions made by you and your employer, it is no longer in the members' interest for the assurer to administer the scheme, because that leaves practically no money to invest for retirement.
Derek Smorenburg, managing director of Total Care Strategy, a company which specialises in the administration of small to medium company retirement funds, says few employees are aware of the risk to their retirement savings.
Southern Life, since it was taken over by Momentum, has written to 900 of the 3 000 funds giving notice of termination of pension fund administration services.
Sanlam says it has laid down minimum standards for segregated funds. In general, this means funds with an annual premium of R100 000 a year and a group size of less than 20 to 30 members, may have to look elsewhere for administrative help.
Fedsure's Odette Pinto say the company will quote on all funds, no matter how small they are and they will be accepted provided they can pay the administration charges.
"We review our rates every year," she says.
Old Mutual has an umbrella fund called Orion which administers most of its small funds, but is investigating whether other small funds not yet included can be moved to the Orion product.
An administrator is entitled to resign from administering a pension fund, after giving three months notice, Smorenburg says.
Your employer should also be aware that there are many private pension fund administrators prepared to look after small funds, but your employer should check prices. Commissions and other costs of retirement annuities should also be examined.
Anton Kruger, from Sanlam says small funds should look to a combination of individual products, such as unit trusts, for those who do not qualify for a tax break or retirement annuities.
Smorenburg says he is able to save funds up to 43 percent in costs by bypassing brokers, negotiating competitive rates from life companies for group life and disability assurance and having low overheads.
HOW COSTS AND COMMISSIONS ERODE YOUR CONTRIBUTIONS
You would pay the following out of a joint contribution made to a retirement fund by you and your employer.
* A commission of 7,5 percent on the first R110 000. Thereafter you pay: five percent on the next R80 000; three percent on the next R220 000; two percent on R790 000; and one percent in excess of R1,2 million a year. This is paid annually to the broker who first introduced your fund to an insurance company.
* The cost of group life and disability cover can be as much as 20 percent of contributions; and
* A life assurer's administration costs are about 6,5 percent (but can go up to 12,5 percent).