One of the things I do is to serve as a trustee of a quite large retirement fund. Recently the fund was visited by representatives of a linked product company and a financial adviser, who sells its products.
The object of the visit was to attempt to convince the trustees of the fund that members should be given a much wider array of investment choices.
They spent much time detailing the advantages, namely the greater range of choices.
They spent very little time on the downside the risk and the costs. In fact the full extent of the costs had to be squeezed out of them.
At the time I was a bit concerned at the nature of the presentation.
The concern that has been lingering in my mind was recently brought to the fore by a speech made by Andre Swanepoel, deputy registrar of pension funds at the annual meeting of the Institute of Retirement Funds.
Swanepoel's speech was about empowerment of retirement fund members and this includes greater say over investment decisions.
He argues that government has a stake in ensuring a stable and sound retirement industry, not only because it does not want a horde of elderly people banging at the doors of the state treasury, but also because government gives tax advantages to individuals to save for retirement.
As such, regulators like himself have every reason to ensure proper decisions are taken in the investment of retirement money and to ensure that "only fit and proper" people are involved in making investment decisions.
It also means that the doors can not be thrown open for every member to make their own investment decisions.
Swanepoel did not directly name the product factories but he was clearly concerned about the role they are playing.
Currently most large retirement funds have one or two asset management companies working as investment managers with actuarial consultants keeping a check on them on behalf of trustees.
The amount paid to the asset managers is negotiated.
With a linked product company, a "financial adviser" is normally involved, who is paid an initial and an ongoing commission for getting the business. The company itself also has fees, and the underlying asset managers or unit trust funds also take a cut.
The theory is that through the linked product company you, as a member of a defined contribution fund, will be able to give instructions with the help of a financial adviser, about exactly where your funds should be invested instead of being left in an amorphous pool in which the investment options are all made for you.
So what does Swanepoel have to say about this and what are his concerns?
* Need for choices: He says that there are probably only a few members of a fund who would make use of a wide range of choices, which come with additional costs. In other words, the costs of the desire of a few people to be given this investment flexibility would be subsidised by those who do not want or need the choice;
* Costs. Even if all members want the greater choice they need to be aware of the costs, which are rising. Costs also include commissions and fees. Although the regulators would like to do away with limits on commissions as a general rule, the problem within the retirement industry is that members themselves are not be involved in negotiations on fees.
On top of this it is normally compulsory to belong to a retirement fund. Added to this, with the large sums of money and commissions involved, there is potential for fraudulent activity;
* Unwise investment decisions. Most people, he says, have to be protected from themselves. Problems in involving investment decisions include popular sentiment, misselling, and making the wrong decisions when everyone is panicking. There is evidence that shows most retirement fund members, given choices, will make buying decisions at the top of the market and selling decisions at the bottom; and
* Not having sufficient information. Very few members have the background or experience to make correct decisions on how investments relate to such things as benefit options, contribution rates and tax.
Swanepoel's arguments are valid and funds considering the wider options for members should tread carefully.
A question that the retirement industry should consider is whether a board of trustees that permits wider choice which results in bad performance could be being sued by individual members.