Two-pot withdrawal fee warning

Concerns have been raised about the fees that financial institutions charge for two-pot withdrawals. These charges may be unreasonably high or place a burden on members who have not made any withdrawals.

Recently, the Financial Sector Conduct Authority (FSCA) announced that they are looking into the fees financial institutions are charging you when you draw money from your retirement fund under the new two-pot system.

Its recent survey revealed the average fee for withdrawing R30,000 is over R350, although there is significant variation among providers.

While most funds applied a flat fee of between R200 and R350, one administrator charged as much as R600, finance expert Maya Fischer-French explained on eNCA.

That flat fee means that you would pay the same amount whether you were withdrawing R2,000 or R30,000.

Another administrator decided to implement a “sliding scale” system instead, which charged members 2% of their withdrawal amount.

According to Fischer-French, it is important that the people who make the withdrawals bear these costs rather than the fund itself since that burden would then fall on non-withdrawing members as well.

FSCA Deputy Commissioner Astrid Ludin clarified on The Money Show that the FSCA has issued a request for information which these financial institutions are obligated to respond to, but no formal investigation is underway yet.

The authority has received responses from nearly 90 financial entities.

The information they requested concerns the costs that administrators and pension funds have incurred to prepare for the two-pot system.

Ludin explained that many systematic changes had to be made before the two-pot system was implemented in September this year.

For example, some companies implemented call centres and hired additional staff to field queries from members.

The FSCA has also requested information about how these companies plan to recover these costs.

Institutions are taking varied approaches to cover these expenses, she said.

Some have kept their fees unchanged, absorbing the costs into their existing charges. “For some, it’s been normal. Business has not changed, and the fees haven’t changed.”

Others have introduced withdrawal fees, increased monthly charges, or implemented a mix of these methods.

“In some instances where there were significant investments, administrators are recovering fees in different ways.”

At the moment, the FSCA is trying to understand the relationship between the fees that have been levied and the costs that have been incurred – either as a once-off or as an ongoing cost.

Understanding the ongoing cost is especially important since, going forward, these withdrawals will keep happening annually, which means that financial institutions will need to absorb the cost, increase their fees, or implement a withdrawal charge.

Adding to this challenge is that, at this stage, nobody knows what to expect in terms of how much will be withdrawn annually.

Ludin explained that the FSCA’s focus in this enquiry is to understand whether there is a reasonable relationship between the fees charged and the actual costs incurred – since concerns have been raised that this could be seen as a way in which administrators recoup more than reasonable costs.

“So we’re going to be interrogating that to understand that relationship where we find that there isn’t a clear relationship, and we think the fees can’t be justified.”

However, it is important to note that just because different funds charge more, it doesn’t necessarily mean their fees are unreasonable.

Ludin said legitimate factors, such as differences in IT systems or operational scale, could cause variations in costs between institutions.

For example, some institutions might incur higher costs due to older or more complex systems, which could justify higher fees.

The FSCA will account for these factors while analysing the data and expects that administrators have substantiating evidence ready to explain their fees if questioned further.

Although the FSCA does not have any power to regulate how much these entities charge, as a supervising body, it does have the power to apply pressure.

Ludin added that while some bodies always choose not to comply, the vast majority willingly cooperate with the FSCA.

“I wouldn’t say that we need additional powers at this stage to be able to deal with that. We don’t know whether there’s a problem, and we can’t say that administrators won’t engage with us.”