South Africans who rely on a pension paid in dollars, euros or pounds face a hidden expense every month when the money is turned into rand. The loss does not appear as a fee on a bank statement; it is built into the exchange rate that the bank applies. For retirees whose income depends on a single, recurring foreign payment, that hidden margin can erode a sizeable portion of their purchasing power over a decade or more.
Harry Scherzer, chief executive of foreign-exchange specialist Future Forex, explained that the amount a retiree finally receives is the product of two forces: the movement of the currency market, which no one can control, and the conversion rate set by the bank, which is a controllable factor. “Dividing the rand amount received by the foreign amount sent, and comparing that figure to the mid-market rate for the same day, shows the gap between the reference rate and the rate applied,” Scherzer said. That gap is known as the spread, the margin a bank or forex provider builds into the rate itself rather than charging as a separate, visible fee.
What is the spread?
The mid-market rate, sometimes called the interbank rate, is the benchmark price at which banks trade currencies with each other. It is the most transparent reference point for the true value of a currency pair on any given day. When a bank offers a conversion rate that is lower than the mid-market rate, the difference is the spread. Because the spread is embedded in the quoted rate, retirees see only the final rand amount and may never realise that a portion of it has been taken as an invisible charge.
Future Forex illustrated the impact with a simple example. A pension fixed at a foreign amount that would be worth roughly R47 000 at a market-reflective rate could be converted at a rate with a wider margin to about R45 900. The shortfall of around R1 100 per month adds up to more than R13 000 a year, quietly, without ever showing up as a deduction anywhere. Over a ten-year retirement, that hidden loss could exceed R130 000.
According to the World Bank, banks remain the most expensive channel for moving money internationally, averaging a cost of 14.55 per cent, compared with a global average of 6.49 per cent across all provider types. Sub-Saharan Africa is the costliest region to receive money into, at 8.78 per cent. Scherzer noted that most retirees use traditional banks for their pension transfers, meaning they are likely paying the highest possible spread.
The advice from Future Forex is straightforward: treat the exchange-rate conversion like any other major financial product. Retirees should ask providers to show the live mid-market rate alongside the offered rate, and shop around for the best spread. “Retirees rarely renegotiate their car insurance or medical aid without shopping around, yet many never apply the same scrutiny to the rate applied to their single largest recurring source of income,” Scherzer warned.
