How government is telling you to invest

Magnus Heystek | 2013-08-04 23:47:39

Shift the focus from the fee propaganda war to the opportunity cost of government regulation.

If you asked the average South African - if there were such an animal - whether we were a predominantly free-market economy or a socialist one, the answer would almost automatically be a nod for the former.

However, that would be ignoring the rapid inroads by government and its regulators into almost all aspects of our daily living. There is almost no sphere of human activity were we are not regulated in one way or the other, in many ways far more intrusive and authoritarian than what we voted to change almost 20 years ago.

The regulatory industry - and I deliberately call it an industry - has grown in leaps and bounds over the last two decades, creating huge numbers of people spending very large amounts of  money, firstly on themselves, staff and perks before any visible effect can be seen by the man on the street.

And remember, gentle reader, the money for this largesse comes from only two sources: either direct taxes or via direct levies on goods and services from people who consume these items.

And it always seem to be the politically-connected who pop up as chairman or CEO of this or that regulator, be it the Estate Agency Board or one of the countless and largely ineffective Setas for example.

If there is an industry, there will be a well-paid and well-staffed regulator, generally pretending to be acting in the interest of the ubiquitous consumer or man-on-the-street.

Even the investment industry has not escaped attention from either the Financial Services Board or Treasury, which have loaded massive regulation onto almost every aspect which deals with money, saving and investment, taking its cue from the over-zealous regulators in mainly the United Kingdom and Australia.

The more laissez faire approach to the investment industry, as is followed in the Far East or the USA, seems to have been discarded in favour of tighter and tighter legislation. Speak to any CEO in the financial services industry in private and the consensus is that regulation is out of control and becoming a massive burden for which, perversely, the consumer will eventually pay.

Some three years ago, for instance, Johann van Zyl, CEO of Sanlam caused something of a commotion when he called the Fais-exams, which more than 140 000 people in the investment industry had to write, a “waste of time” on national radio.

Leon Louw, the highly articulate and intellectual CEO of the Free Market Foundation, has also on many occasions described the Fais-legislation as an utter failure, adding to the regulatory trauma of investment practitioners.

SA’s Treasury, for instance, has been mounting a full scale assault on the retirement investment industry using a strategy that reminds one of general Joseph Goebbels, propaganda minster in the Nazi regime, who taught the world that you can convince a great many people by repeating a half-truth so often that it eventually is accepted as fact.

Recently Treasury held a media conference at which the issue of costs in the retirement industry was put under the spotlight, once again. I don’t think that the investment industry has a problem with the issue being discussed but when statements are sent into the world that “SA’s retirement costs are the highest in the world” one gets the feeling that there might be more at stake here than superficially meets the eye.

SA’s media naturally lapped up these statements and it was therefore no surprise that these pronouncements made their way to the front pages of the newspapers, especially the ones with a more socialist slant.

I can understand that the reporting on this issue was very superficial by the general media, but when Business Day, a normally well-balanced and generally pro-business paper runs a report headlined: “High investment fees will ruin your retirement”, you realise that if this were a propaganda war, Treasury would be winning hands down against the retirement investment industry.

SA’s media seemingly lapped up these very selective statistics on investment costs as retirement has become a very hot item right now. I failed to find any original reporting and research on this matter and basically could determine that most of the reporting was merely a re-write of the press hand-outs. I also failed to find any comment from the investment industry in any of these reports.

There is no question that the issue of fees and costs is important, but to suggest that we have the highest “retirement fees in the world” is simply not true.

Any retirement practitioner will tell you that free market forces have forced retirement costs down considerably in recent years, at both fund level and administrative level, and that these costs are now not out of line with that of the rest of the world, and definitely cheaper than those countries which Treasury has selectively chosen to compare us with.

Treasury has also said that it thinks SA has too many pension funds (3 500) and ideally would like to see no more than 100 umbrella funds, ostensibly to bring down costs.

Very little is ever said about the costs of regulation which have increased substantially in recent years, mitigating, in many instances, the cost reductions which the market has imposed on the industry.

What Reg 28 costs you over time

The general investing public also does not fully understand the opportunity cost of government regulation, with Regulation 28 being a prime example.

Briefly, Reg 28 determines the maximum exposure to asset classes individual investments may have in retirement annuities, pension and provident fund preservation funds as well as pension funds.

Basically it states that investors in any of these products cannot exceed a maximum exposure of 75% to equities, 25% to property and 25% to offshore investments, amongst others.

These limits were previously controlled at fund level prior to April 2011 but are now applied at individual level. In short Treasury has become your asset allocator and telling you as an investor how to invest. Why should a young investor with a 30- to 40-year time horizon not be fully exposed to equities if he or she so decides? Or someone who intends retiring overseas not have 100% of their retirement capital in offshore assets?

How much will this cost the average investor over time?  Equities over all rolling five-year periods since 1960 have beaten a balanced mandate by anything between 3 and 7% per annum.

Has this loss to the individual investor ever been quantified?  Most members of the financial media are probably not even aware of Reg 28 and what the effect can be over time on the retirement capital of an individual.

The long-term loss to the ultimate retirement capital of a saver as a result of Reg 28 dwarfs the issue of costs.

Treasury has seemingly introduced the regulation to “protect” the investing consumer.

Even stranger is that this regulation is only applied during the build-up phase of a retiree, but not when the retiree eventually retires and moves his or her capital into a living annuity - today the most popular default option for investors at retirement.

Then investors or their advisors can do what they like in terms of asset allocation, even going 100% into gold and resource shares, or 100% into offshore assets, both of which examples I have seen in recent years.

In one example, I have seen a former colleague of mine advised by Alexander Forbes to go 100% offshore in 2001 - with disastrous losses when the rand strengthened.

It would make more sense to impose Reg 28 at living annuity stage, i.e. after retirement than during the crucial build-up of retirement capital.

There is also a fear among investment executives that Reg 28 can quite quickly be turned into prescribed assets, a regulation that existed under the previous regime that forced pension funds to invest in politically-motivated but poorly-yielding government projects, such as roads, water and housing for instance.

Again this would mean lower returns for investors over time as their assets are diverted without their consent into schemes that have become politically popular.

Even the normally very logical Matthew Lester, professor in taxation at the Rhodes Business School and a member of the Tax Review Enquiry waded into this controversial area with his column in the Business Times on Sunday.

“Perhaps we could make a difference by encouraging ‘healthy debt’. Could retirement funds not stand security for the deposit component of a first time home-owner? Similarly could retirement fund capital not be used as security for tertiary education student loans that responsible children will repay after their graduation?” he asks.

On a final note: why is government so obsessed with control over pension funds? For the same reason Jesse James robbed banks: because that’s where the money is.

*Magnus Heystek is a director at Brenthurst Wealth. He can be emailed at for ideas and suggestions.