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2014/04/15
1
A legislative & industry update
October 2013
HOT TOPICS SEMINAR
Fiona Renton
Fiona Renton has a BA and LLB from Rhodes
University and an LLM from Wits University.
She currently holds the position of Head of
Legal Services of Alexander Forbes Financial
Services (Pty) Ltd She has been in the
financial services industry for nearly thirteen
years, of which the last seven have been as
Head of the Legal Services department.
Fiona has been involved in many projects,
which cover different types of legislation and
clients. She has written many articles on
topical issues, both for Alexander Forbes’
clients, as well as industry publications. She
is responsible for editing all publications
issued by Legal Services.
Fiona has been a Trustee of the Alexander
Forbes Retirement Fund for seven years.
She is currently a member of the Legal and
Technical Committee of the Institute of
Retirement Funds.
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Head of Best Practice in the
Alexander Forbes Research and
Product Development division.
Responsible for developing and
aligning the best practice advice and
consulting tools to support corporate,
institutional and individual client
strategies.
A CFP® and holds a BCom
(Insurance Science) degree and
Advanced Post Graduate Diploma in
Financial Planning Law.
Has 13 years experience in the
pension funds industry
Member of the Alexander Forbes
Investment Consulting Committee,
Risk Benefits Committee and also
chairs the Governance Committee.
Michael Prinsloo
BCom; Certified Financial Planner (Fellow of
the Institute).
Principal Consultant to a number of large
funds.
With AF for 20 years.
Durban C&A Branch Head
CV: Clive Francis
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A Principal Consultant
Consults to a number of clients in the Eastern Cape and is a part-time member of the Alexander Forbes Research & Product Development team.
With Alexander Forbes for 10 years
Current chairperson of the Alexander Forbes Risk Benefit Committee.
Secretary of the Financial Planning Institute in the Eastern Cape and sits on the FPI Inter Sector Group Committees for Employee Benefits and Risk.
Belinda holds a B.Com, CFP®,Certificate of Proficiency (Insurance Institute of SA),
Intermediate Certificate in Business Studies (Insurance Institute of SA)
Post Graduate Diploma in Financial Planning
Advanced Post Graduate Diploma in Employee Benefits
Belinda Sullivan
Chairman of the Hot Topics Seminars
David heads up two companies: Investment Consulting & Trustee Services
and ICTS Tracing Services
He sits on numerous boards as an independent trustee.
He is well known throughout the industry for his numerous trustee education
courses.
David Weil
He is an elected council member of the IRF
and Chairman of the IRF Education
Committee.
David is also the Managing Editor of the
Pensions World SA magazine.
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Martin is the Branch Head - Pretoria for
Alexander Forbes Consultants and Actuaries
He is the Principal Consultant to a number of
large retirement funds.
He is a CFP® and holds a LLB, LLM
(Corporate Law) and an MBA.
He is also an admitted attorney and a
member of the Financial Planning Institute.
Martin Teubes
Robyn Hodges
Robyn has a Bachelor of Business Science
(Hons) LLB from the University of Cape Town
and an Advanced Tax Certificate. She was
admitted as an attorney in 1996.
Robyn has worked in the retirement fund
industry for 15 years
She has dealt extensively with all the technical
aspects of employee benefits.
She has sat on the Alexander Forbes surplus
committee as well as on a number of surplus
tribunals and served as a trustee on an umbrella
fund for six years.
As a fund consultant she has consulted to an
extensive portfolio of both defined benefit and
defined contribution funds and consult on all
aspects of employee benefits, inter alia, risk
benefits, investment strategies and corporate
governance issues.
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Saul is a Principal Consultant at
Alexander Forbes in Cape Town.
He has 19 years of Employee Benefits
experience in the industry.
He has the following qualifications:
BA, LLB, PDip Tax, HCIS
Saul is a Admitted Attorney & Certified
Financial Planner
Saul Leeman
Setting the scene
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SECTION 1
REFORMING THE RETIREMENT LANDSCAPE
Taxation Laws Amendment Bill
What will be the new deductible contribution rate
allowed for members of all funds – and how will
those contributions be calculated and taxed
from 1 March 2015?
Question 1
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T-day (2015)
Date when tax rules
on contributions change
Important dates | T-day & P-day
P-day (?)
Date when preservation
rules change
Alignment of dates – 1 March 2016?
Current tax position on contributions
ER contributions deductible
up to 20%
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Proposed tax change to contributions
Taxation Laws Amendment Bill 2013 includes
reform proposals for T-day
Practical example 1 | Pension fund
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Practical example 2 | Provident fund
Practical example 3 | Pension fund – high earner
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Roll over relief where caps are exceeded
Amount added as taxable fringe benefit will be
determined by a formula:
Y x ((A x F) + L) less
employee contribution
A: value of ‘annuity accrual rate’
L: value of ‘lump sum accrual rate’
F: value of ‘fund factor’
Y: ‘retirement funding income’ per member
DB funds | Different tax regime will apply
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Are provident funds becoming pension funds –
what are the new annuitisation requirements that
will apply to retirement benefits paid by
provident funds from 1 March 2015?
Question 2
Poor preservation rates highlight a problem
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Non-preservation reduces replacement ratios
Non-preservation also an issue at retirement
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Pension Provident
Current | Pension vs. Provident fund at retirement
de minimus
R75 000
Pension Provident
2/3 compulsory
annuity
Limited to 1/3 cash
2/3 compulsory
annuity
Limited to 1/3 cash
Proposed changes | Pension fund = Provident fund
de minimus
R150 000
de minimus
R150 000
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Vested rights | Members younger than 55 at T-day
Accumulated fund credits Growth on X
‘new’ contributions plus growth thereon
T-day (1 March 2015?)
X Y
Full access
Limited access – must annuitise 2/3
Z
Maximum cash
at retirement = X Y Z + + 1/3 of
Vested rights | Members 55 and older at T-day
Accumulated fund credits Growth on X
‘new’ contributions plus growth thereon
T-day (1 March 2015?)
X Y
Full access
Full access
Z
Maximum cash
at retirement = X Y Z + +
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What tax changes will apply to the payment of
premiums and the payment of benefits relating
to disability policies with effect from
1 March 2014?
Question 3
Capital protection (e.g. PTD):
Protect against loss of income
earning capacity
Lump sum benefit
Income protection (e.g. PHI):
Protect against loss of income
Annuity benefit (monthly)
Different types of disability insurance policies
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Income protection:
Employer-owned policies
Individual-owned policies
Tax treatment for both:
Premiums are tax deductible
Benefit is taxable
Current tax treatment of premiums & benefits
PHI premiums taxable
PHI benefit will be tax free
Effective:1 March 2014
Possibly: 1 March 2015?
No transitional period
Alignment with tax treatment
of employer owned life,
disability & dread disease
Proposed tax changes | Disability income policies
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What discussions should trustees be having as a
result of the changes addressed in the Taxation
Laws Amendment Bill?
Question 4
Items for discussion
Number of funds
Pension vs. Provident &
hybrid
EE vs. ER contribution
Def. Salary
Contribution rates
Rand caps
Risk benefit structure
Aspects for consideration by Trustees
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Number and type of funds
Employee vs. Employer contributions?
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Tax deductible limits based on the higher of
‘taxable income’ or ‘remuneration’ – does it still
make sense to have ‘pensionable salaries’?
Contribution rates:
Flexibility?
Allow to highest tax deductible limits?
Rand caps:
Systems / payrolls set up for Pre-tax vs. Post-tax
Rand caps / tax deductible limits should not
prohibit individuals from contributing based
on retirement income needs
Pensionable salary, contribution rates and caps?
Implications if PHI benefit remains at 75%:
• May be ‘better off’ disabled vs. employed
• Potential increase in claims
• Potential increase in premiums
Risk benefit structures?
Possible reduction in
disability cover
Higher taxable incomes=
less take home pay
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Practical examples | low and high earners
Practical matters for consideration by Trustees
Practical matters?
Rule changes
Communication
EE contracts
Payroll / Pay slips
Fund administrator capabilities
Costs
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SECTION 1
REFORMING THE RETIREMENT LANDSCAPE
Costs in the retirement fund industry
What were the main findings and proposals
outlined in National Treasury’s paper ’Charges in
South African retirement funds’?
Question 5
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Why is a review of costs necessary?
Usually a % of
assets i.e.
recurring
Usually a % of
contribution /
payroll i.e. initial
Costs vs. charges
Drivers of cost / charges
Effect of charges
Compares SA to other countries
Several draft findings
Several policy proposals
National Treasury’s latest discussion paper
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Costs vs. charges
Effect of initial versus recurring charges
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Key cost drivers
Size of fund
Degree of preservation
Extent of compulsion
Degree of subsidy
Level & cost of risk
benefits
How assets are
invested
Functions performed
Quality of services
Governance & regulatory structures
Cost basis
Regulatory structure of charges
Degree of cross-subsidy
Price sensitivity of customers
Degree of market competition
Product diversity
Degree of disclosure
The way costs are passed onto members as charges
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RiY
Reduction in Yield
The extra return
needed to reach the
projected benefit if
there were no costs
at all
RiY | RiMV – what is this?
RiMV
Reduction in Maturity
Value or charge ratio
The difference in final
benefit against the
projected benefits if
there were no costs at
all
Charges in SA retirement funds
Source: National Treasury, Technical discussion paper A for public
comment, Charges in South African Retirement Funds, 11 July 2013
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International comparison of SA charges
Source: National Treasury, Technical discussion paper A for public comment,
Charges in South African Retirement Funds, 11 July 2013
National Treasury’s areas of concern
Structural issues
Variation
Disclosure
Initial versus recurring
Charge shifting within investments
Type of investment products
Financial intermediaries
Platforms
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National Treasury’s proposals
Encouraging fund consolidation
Improving fund governance
Strengthening fund regulation
Retaining role of the workplace
Simplifying plan design
Ensuring effective intermediation
Mandating enrolment into retirement funds
Retirement fund exchange or clearing house
Establishing a default fund
What insights related to retirement fund costs and
charges does our retirement fund experience
provide on the findings and conclusions of the
Paper?
Question 6
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Charges on retirement funds
Understanding the retirement fund environment
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Understand environment | Room for consolidation
Source: FSB Annual Pensions Report 2010
Less than 1% of
total members
in retirement funds
About 58% of
total number of
retirement
funds
Funds < 100
members, face
much higher
costs
Understand environment |Economies of scale
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Understand environment |Connected system
Not consider costs in isolation, but:
- Cost / benefit trade-offs
- Minimise value destruction
For example:
Costs vs. benefits
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Focus on evolving needs of members
likely to meet individual needs
Standardisation of benefit design is...
NOT
Instead
Conduct regular reviews of design
Employers assume greater EB responsibility
Principles for defaults
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High impact reduction on total charges?
Increased
Preservation
Fund consolidation
Increased
Annuitisation
Existing regulation & governance
FSB
Compliance
Reporting standards
Audit
FAIS
PFA
13B licence
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Key drivers:
Industry consolidation
Increased focus on governance & awareness
Increased competition
Charges have been reducing overtime
Structure & disclosure of fees
Appropriate spectrum of investment strategies
Intermediation & incentives
Auto-enrolment
Fund exchange or clearing house
Financial literacy
A few further insights ...
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Umbrella Funds | consider the total cost
Higher contributions and reducing charges
Results in reducing RiY over time
Be aware of all the charges (it is not just about admin)
Consider investment guarantee or smoothing charges
Consider measures of expenses (TER, RiY) on an all-in basis, both at inception and over time
Example: new member joining at age 25, contributing
15%, NRA 65
Impact of fees on replacement ratios
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What is the message to Trustees?
Be aware of all
costs: absolute
& relative
Understand:
impact on
RR
Understand:
drivers of
costs
Constructive
dialogue with
stakeholders
Aim:
appropriate &
sustainable
Weigh up:
COSTS vs.
BENEFITS
What should trustees consider when reviewing
asset management fees, in particular
performance fees?
Question 7
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Active managers: Fixed fees | Performance fees
~80% of assets managed with fixed
& performance fee components
~19% of assets managed with fixed
fee component only
~1% of assets managed with
performance fee component only
~99% of
assets
managed
with
fixed
fee component
So let’s take a closer look at fixed fees
Asset class or type of mandate
Combined with performance fees
Size of assets Manager capacity
& past performance
Fixed fees
Global equities = universe of
~16 000 shares
Local equities = universe of
~200 shares
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Regulation & disclosure:
ASISA industry guidelines
TER (Total Expense Ratio)
Pooled life funds (Life licence)
Segregated mandates
Now let’s take a closer look at performance fees
Performance fees can account for more than 75%
of total asset management fees
What to consider when evaluating performance fees
• Always align with mandate objectives
• Award manager skill not market beta
Benchmark
• To beat before earning performance fees
Hurdle
• Share of outperformance
• Global best practice – not more than 20%
Participation rate
• Overall outperformance level
• Limit needless risk taking
Cap
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What to consider when evaluating performance fees
• Align with investment time horizon
• Cumulative from inception
• Rolling periods – ‘forgive underperformance’
Measurement period
• Most important aspect!
• ‘New’ outperformance
High water mark
• Kept current
• If underperformance, then ‘pot’ should reduce
Clawbacks & crystallisation periods
Minimum disclosure for investment
managers –TER on quarterly basis
Industry standard / guideline on performance
fee methodologies
Improving education for consultants &
trustees – fee structures are complex!
Changes that we expect
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SECTION 2
INSIGHTS FROM PENSION FUND ADJUDICATOR
CASES
Who wants to be a trustee? Personal liability for
trustees – the new reality?
Question 8
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Facts:
Complainant – widow of deceased member about non-
payment of insured death portion
Employer / Trustee (also MD of company) – failed to
pay premiums, therefore insurer repudiated death claim
Failure to fulfil fiduciary duties
Case: M v Art Medical Equipment Pension Fund (now liquidated) & Others
Outcome:
Adjudicator found that the trustee had failed to protect
the interests of members and to act with due care &
diligence as required of trustees by law and the office
they occupy. Trustee was held personally liable.
Trustee had the duty to ensure receipt & transmission
of premiums to the insurer. Trustees conduct led to the
loss.
Case: AM (the employer) and Others v IF Umbrella Pension Fund and
IF Umbrella Provident Fund (the funds) and Former Trustees of the
Funds
Facts:
Complainant – participating employer & members of
about the reduction in fund credits to rebuild member
records (Auditing firm charged R20 million)
Defence raised by former Trustees
Trustee liability extended to wrongdoings of 3rd parties
Outcome:
Adjudicator agreed that the Rules permitted the deduction, but Trustees failed to exercise proper oversight over the previous administrator
Trustees found to have failed to fulfil fiduciary duties & were negligent. Trustees were held personally liable.
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Personal liability for Trustees if they fail to
observe their fiduciary duties
Understand extent of Trustee responsibility
Perform duties with due care & diligence
FSLGAB – limitation of Trustee liability
Lessons to be learnt from these cases
In what circumstances does the Adjudicator order
that a fund or employer pay a benefit, plus
punitive interest at 15.5 per cent?
Question 9
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N v National Tertiary Retirement Fund
Facts:
Complainant – unduly withholding benefit &
requested late payment interest to be charged
Fund did not receive withdrawal claim form
Non-payment of benefits
Outcome:
Adjudicator accessed whether party was entitled
to interest – did parties agree or if the Fund is in
default?
It was found that there was no agreement i.r.o
interest in Fund Rules & Fund was not in default
Fund was not ordered to pay interest on the
benefit due
Non-payment of benefits
S v Gauteng Building Industry Pension Plan & Provident Fund
Facts:
Complaint – non-payment of withdrawal benefit
Fund was not aware of the complainant’s
termination of employment
Outcome:
Adjudicator ordered Fund to pay benefit plus
interest at 15.5%
Did not apply principles set out in the N v National
Tertiary Retirement Fund
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Case: T v The Private Security Sector Provident Fund and Others
Facts:
Complaint – non-payment of withdrawal benefit,
due to complainant not being registered as a
member
Employer did not respond to complaint
Employer’s failure to register a member
Outcome:
Adjudicator held that employer & fund put him in
same financial position had been registered as a
member. Plus late payment interest of 15.5% p.a.
Cases: M v Murray & Roberts Pension Fund;
N v Amplats Group Provident Fund
non payment of death benefit
delays in section 37C decisions
payment plus 15.5% interest ordered, irrespective
of whether the trustees were negligent or not
Delays in S37C distributions
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P v Momentum Retirement Annuity Fund
Facts:
Complainant – mother of deceased about delayed
payment of death benefit - she claimed dependence
Trustees were unable to locate wife in Russia
Resolved to distribute benefit to the complainant,
provided the deceased’s estate was solvent. Requested
certified copy of letter of executorship & written
confirmation that the estate was solvent.
Delays in S37C distributions
Outcome:
Adjudicator found complainant was a dependent, but
Fund should have paid immediately after resolution, as
requested doc’s unnecessary & caused delay.
Ordered punitive interest to be paid by Fund.
Six months unreasonable even though
Act allowed 12 months.
Inconsistency in ordering punitive interest
Imposing punitive interest a problem – Funds
do not always have reserves – may need to
deduct from current members’ benefits!
Funds are being held liable for interest even if
delay caused by complainant or employer
Lessons to be learnt from these cases
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A round up of principles coming out of Adjudicator
cases relating to section 37C death distributions
Question 10
May Trustees unreasonably & unfairly delay payment of death benefits?
Time Consequences
Is Trustees discretion unfettered?
Equitable distribution Dependency
S37C allows discretion to Trustees – but how much?
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S37C allows discretion to Trustees – but how much?
How are Trustees required to apply the Pension Funds Act?
Due care Diligence
To what extent are Trustees required to conduct investigations?
Proper proof Proper investigation
The Adjudicator has said that she will apply
Treating Customers Fairly principles in her
rulings – what could this mean in practice for
trustees?
Question 11
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What is Treating Customers Fairly?
Practical implications of TCF
• FSB’s TCF drive
• Conduct trends, feedback, supervision
What has the PFA said
about TCF?
• YES
• Not only FSP responsibility
Does TCF apply to funds &
Trustees?
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Practical implications of TCF
• Actual reporting
• Complaint statistics - categorised
What info will funds have to provide i.r.o
complaints & TCF?
• No cases in SA yet
• Have been PFA cases – take note
Have there been any
cases concerning
TCF?
Enhanced
supervision:
Comprehensive &
rigorous reporting
On-site examination
& assessments &
engagement with
Trustees
Customer surveys
PFA input & media
Consequences of TCF contraventions
Incentives & deterrence:
Public disclosure
Scrutiny may vary
Severe consequences
Enforcement committee
Fines & penalties
Termination / withdrawal
Name & shame funds
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See you at Hot Topics 2014!