HOT TOPICS SEMINAR - Alexander Forbes€¦ · 2014-03-20 · *WEF Global Competitiveness Report 2013/14 ** World Federation of Exchanges Source: JSE, Investment Solutions . 2014/03/20

2014/03/20

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HOT TOPICS SEMINAR

LEADING OPINION | Investing to secure your members’ retirement

SECTION 1

ECONOMIC LANDSCAPE

2014/03/20

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What were the main themes of 2013, in the context of:

a) Our economic environment (what drove beta); and

b) Asset manager strategies (what drove alpha)?

Question 1

Economic Environment

2013 – another

year of:

risk ON

risk OFF

Could we expect

the same for

2014?

2014/03/20

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Does this look familiar?

Despite initial expectations ALSI in 2012 = 26.7%

Strong

2nd half

Source: Bloomberg

2013 ended with new highs

Many thought 2013 would disappoint, but ALSI = 21.4%

Source: Bloomberg

Another strong 2nd half

2014/03/20

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2013 ended with new highs

MSCI World Index = 27.4% (in $), 20% stronger than EM

Source: Bloomberg

Good year for global equities

Asset class performance...

... in Rands over periods to 31 December 2013

Asset

Classes

Index 1 Year 3 Years 5 Years

Local Equities FTSE/JSE All Share

Index 21.43% 16.42% 19.93%

Local Bonds BESA All Bond Index 0.64% 8.29% 7.65%

Local Cash SteFi Index 5.18% 5.48% 6.49%

Global Equities MSCI World Index 57.23% 30.69% 18.60%

Global Bonds Citi WGBI 18.51% 18.00% 4.87%

Global Cash US 3month TBill 23.51% 16.63% 2.63%

2014/03/20

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Weak Rand

Depreciated by

26%

Euro crisis

2014/03/20

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Tapering QE

18 December 2013 | Bernanke announces $10bn cut in January 2014 to monthly purchases

Interest rates have no where to go...

Source: I-Net Bridge, Investec Asset Management

Short term interest rates in the UK, US & EU

...but UP

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... as seen with the ‘Fragile Five’

Source: Bloomberg, Investec Asset Management

Turkey announces a 5.5% increase to rates (28 Jan 2014)…

…hours later (29 Jan 2014) the SARB announces an “unexpected”

increase of 0.5%

Manager Watch™ Survey

https://www.alexanderforbes.co.za/busines

s/Asset%20Consulting%20Surveys/Annual

%20Retirement%20Fund%20Survey%2020

13.pdf

2014/03/20

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Strategies | Balanced funds

Primary drivers of performance are typically:

Asset allocation Global vs. Local

Asset classes within global & local

Asset strategy Value/momentum, market cap, low volatility

etc. for equities

Duration, credit, market timing & trading etc.

for fixed income

Sector allocation in each asset class

Security selection

Global allocations

Source: Investment Solutions

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Global equities allocations


Global equities was the place to be


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Key point for long term investors

Regardless of managers’ views,

all of the global balanced managers

(as per AF Manager Surveys)

managed to deliver CPI + 5% performance

over the 1, 3, 5 & 10 year periods on a

per annum basis

Strategies | Equity funds

Main sources of performance are:

Manager style/strategy

Sector allocation

Market risk

Security selection

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Large performance range of shares


Asset manager strategies

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

6/1

/2003

9/1

/2003

12/1

/2003

3/1

/2004

6/1

/2004

9/1

/2004

12/1

/2004

3/1

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6/1

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9/1

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12/1

/2005

3/1

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6/1

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9/1

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12/1

/2006

3/1

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6/1

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9/1

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12/1

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3/1

/2008

6/1

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9/1

/2008

12/1

/2008

3/1

/2009

6/1

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9/1

/2009

12/1

/2009

3/1

/2010

6/1

/2010

9/1

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12/1

/2010

3/1

/2011

6/1

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9/1

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3/1

/2012

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/2012

3/1

/2013

6/1

/2013

9/1

/2013

12/1

/2013

Rolling 1 Year Average Active returns - SWIX

Rolling 1 year Average Active returns

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Strategies | Bond funds

Main sources of performance are:

Portfolio positioning

Credit yield pick-up

Managing the portfolio term (duration)

Trading

Other sources: convexity optimisation,

carry trades, convertible bonds.

Bonds, a tough place to be

Source: Bloomberg

2014/03/20

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Tapering of quantitative easing is one of the main

economic events to play out in 2014 – what are

the possible effects?

Question 2

Scale of QE is unprecedented

Fed expanded its balance sheet from ~$800 billion to ~$4 trillion!

$ ,0.00

$ ,500.00

$ 1,000.00

$ 1,500.00

$ 2,000.00

$ 2,500.00

$ 3,000.00

$ 3,500.00

$ 4,000.00

$ 4,500.00

Bil

lio

ns

Total Assets of the Federal Reserve

Source: Federal Reserve

2014/03/20

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Tapering has started

Going from $85 billion

to $65 billion per

month!

How will pension funds be affected

Christine Romans, Chief Business Correspondent for CNN,

described ‘tapering’ as the most important driver of US defined

contribution (‘DC’) pension plans!

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Anticipate volatility & uncertainty

Negative views

Large decline in equity

markets

Large losses on bond

portfolios

Large losses in EM (e.g. SA)

If this happens:

Fed has already exhausted

all policy measures

Compound with global

economic risks

Positive views

QE has stabilized the US

economy, managed

unemployment & galvanized

economic growth

Tapering already priced in –

equity markets to deliver

moderate but positive

growth while bond prices

remain stable

Reality is likely to lie somewhere between these two extremes!

Prepare fund & members for this

Trustees to

consider

Review, decide & stick to strategy

Communicate to members

Alert employer

Volatility, but don’t panic

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Retain a well diversified strategy

Trustees should not try to time tapering

through asset allocation / manager

selection

Specialist approach

Balanced approach

Offshore allocations: QE – ‘search for yield’

Yields in developed nations normalising

Developing & EM – may suffer outflows

Understand the asset allocation

Stochastic asset liability modeling – can

help to derive a long term strategic asset

allocation to provide growth within acceptable risk

levels & protect principle objectives

Cash over long term - imprudent

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Keep a eye on your asset manager

Regulation 28 dictates that boards of

trustees should: “understand the changing

risk profile of assets of the fund over time,

taking into account comprehensive risk

analysis”

Trustees remain responsible for

compliance even when asset

management, for example, is outsourced

Interest rate risks & value of advice

Volatile rates implies volatile annuity prices

Focus on income affordability rather than

accumulated capital

When to annuitize?

DC FUNDS

Fund liabilities increased significantly as interest rates

fell on the back of QE

Liability driven investments (‘LDI’) helped

DB FUNDS

“In a perfect world we could separate the effects of the economy and QE, but this

simply is not feasible. Still, we think that QE at a minimum has accelerated the

demise of some pensions...Unfortunately, things got so bad for some pension

funds that they never had a chance to stick around to see the “long run”.” UBS

strategist Boris Rjavinski

2014/03/20

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In conclusion

“Given the unprecedented scale of the Fed’s QE

program it is impossible to reliably predict

exactly how markets will react to tapering”

No free “free lunches” – will be some risk for investors

Diversified portfolios designed to target suitable

liability related objectives, e.g. RR in DC funds

Engage with asset managers – how have they

positioned their portfolios for tapering?

Encourage members to seek advice

AF’s views

The history of asset managers

Question 3

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How does SA fare globally?

0.7% of world GDP

Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions


Less than 2% of global AUM

Source: World Bank (2012), Investment Solutions

2014/03/20

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53rd out of 148 countries in global competitiveness



Financial services industry ranks 3rd


SA ranks 1 out

of 144 for

Regulation of

Securities Exchanges

2014/03/20

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2012 - Towers Watson Top 500 list of global managers

6 25 6 10

1965 - the first unit

trusts in SA, by

2012 - R1 trillion in

assets

2012 - Pension assets as a percentage of GDP

101%

14%

110%

108%

64%

Size of industry

SA Equity Market – capitalisation over time

JSE listed in 2006

17th biggest exchange

by market cap (2012)

and most liquid

emerging market**

SA ranks 2nd out of 144

for availability of

financial services &

financing through local

equity markets*

*WEF Global Competitiveness Report 2013/14

** World Federation of Exchanges

Source: JSE, Investment Solutions

2014/03/20

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Concentration of the industry

Market share of 5 biggest asset managers in each country

61%

30%

43%

25%

Source: World Bank, Black Rock, Investment Solutions

Highly

concentrated

AUM by SA

2000 – just under R1.1 trillion

2012 – more than R3.8 trillion

Size of the industry

Life insurance companies losing market share

67%

42%

33%

58%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Dec 2002

Dec 2012

Life-company owned The rest

2014/03/20

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Dominant players

Largest managers overtime

Source: Investment Solutions, Alexander Forbes

Rank 2000 2005 2010 2012

1 OMIGSA OMIGSA OMIGSA OMIGSA

2 SIM SIM SIM Investec

3 LIBAM STANLIB STANLIB SIM

4 RMBAM RMBAM Allan Gray Coronation

5 Investec Investec Investec Allan Gray

6 Coronation Allan Gray Coronation STANLIB

7 Fedsure Investment Solutions Investment Solutions Investment Solutions

8 SCMB Coronation RMBAM Momentum

9 Investment Solutions Metropolitan ABSA Prescient

10 Metropolitan ABSA Prudential Futuregrowth

Dominant players

Top 10 asset managers & growth rates over the past 10 years

Foreign firms have found it difficult to break into SA market

2014/03/20

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Dominant players

Market share of black-owned & managed firms over time: Showing growth of AUM

Slower growth of market share


Challenges

Firms Increasing cost of regulatory compliance

NT’s call for lower fees

Market volatility & shrinking of funds

Longevity of firms relies on skill, luck (timing of

entering the industry) & patient investors

Investors Refine rigorous & robust manager selection

process

2014/03/20

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SECTION 2

INVESTMENT STRATEGIES

Have life stage strategies delivered appropriate

results in view of their intended objectives?

Question 4

2014/03/20

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Rationale & history of life stage

DB to DC conversions – passed risks from

employer to individual members:

Investment risk

Longevity risk

Planning & modeling risk

Life stage was largely a response to:

Detrimental member behaviour

Lack of financial awareness

Market volatility

Rationale & history of life stage

Text 1

Text 2

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-94

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Equities

Bonds

Cash

Inflation

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-94

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Equities

Notional Investment

Manage growth

Manage volatility

2014/03/20

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Life stage strategy

3 distinct phases

Life stage strategy

Example of asset class exposure in the

accumulation and pre-retirement phases

2014/03/20

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Primary objectives of life stage

Achieving investment returns in line with stated

objectives (e.g. RR)

Exposure to growth assets – for long enough

Diversification of returns

Limited volatility (preservation of capital) close to

retirement

Limited (negative) impact of member behaviour –

offering an embedded advice model

Simple for members to understand

Cost-effective to administer

To answer the question...

Impossible to categorically determine whether life

stage strategies have indeed ‘delivered appropriate

results in terms of all their objectives’

However, what we can say is that in a risk cognisant

world, developing our investment strategy such that at

inception its optimised to deliver our key objective

(RR) with a high probability & then refining this to

improve techniques – is intuitively correct. This does

not guarantee that in hindsight, a slightly different

structure could not have delivered a marginally better

result. It is all about maximising the probability of

success.

2014/03/20

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Accumulation portfolio | provided real growth

Commencement

date

Accumulation

portfolio performance

since commencement Inflation

Real return since

commencement

Fund A Mar-06 13.3% 6.5% 6.8%

Fund B Oct-06 12.9% 6.5% 6.3%

Fund C Jul-07 11.1% 6.4% 4.7%

Fund D Dec-00 15.3% 5.8% 9.5%

Most IPS targets met

De-risking portfolios | capital & volatility protection

Ran

ds

2014/03/20

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In conclusion

Continually evolving

Different life stage strategies & long timeframe

Life stage seems to have delivered on its’

measurable objectives

Believe life stage is appropriate

What are the criticisms of life stage investing and

how might life stage models evolve?

Question 5

2014/03/20

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Criticisms of life stage strategies

Too conservative

at retirement

Does not allow

for a smooth

transition into

retirement

Not focused on preservation of income

Most members access savings in cash

Criticisms of life stage strategies

“One size fits all” approach

Pre-retirement portfolio – fairly volatile (capital preservation vs. Income preservation)

Comparison of

performance

against...

2014/03/20

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Evolution of DC & life stage

Source: Principle Global Investors / CREATE-Research Survey 2013

Evolution of DC & life stage

Smooth transition from fund credit to

retirement income by better protecting level of

income

MIC – refined solutions which aim to further

align pre-retirement to cost of securing income

(e.g. LDI)

Alignment to default annuities

Optimising timing & implementation of de-

risking phase

Return maximisation in accumulation stage

2014/03/20

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What’s an appropriate investment strategy for

post-retirement and how should this be linked to

pre-retirement strategies?

Question 6

Change in projected incomes

Replacement ratio index of members born in different years

Declining pension outcomes over the long term, but

improved over the last three quarters of 2013

2014/03/20

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What we don’t want

What we do want

Stability of income

Income for life

Maintain standard of living

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Inflation-linked annuity

Guarantees monthly income for life

Level of income increases with inflation

Monthly Income

(net of income taxes)

Capital Needed

R5 000 R1 360 000

R15 000 R4 505 000

R25 000 R8 300 000

With-profit annuity

Guaranteed for life

Will not decrease in nominal terms

Increases depend on investment

performance of the bonus portfolio

Monthly Income

(net of income taxes)

Capital Needed

R5 000 R1 005 000

R15 000 R3 310 000

R25 000 R6 110 000

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Fixed annuities

Monthly Income

(net of income

taxes)

Capital Needed for

Level Annuity

Capital Needed for 5%

Escalating Annuity

R5 000 R630 000 R1 000 000

R15 000 R2 100 000 R3 310 000

R25 000 R3 850 000 R6 100 000

Guaranteed for life

Will not decrease in nominal terms

2 types: Fixed Level Annuity & Fixed

Escalating Annuity

Living annuity

Living annuity holder takes all the risk

No guarantees – longevity & investment

risk

What’s a feasible income level to draw?

Capital Inflation-linked annuity

per month

3.5% With-profit annuity

per month

R1 million R3 674 R4 990

R5 million R14 784 R21 164

2014/03/20

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Investment strategy

0

25

50

75

100

125

150

175

200

225

VA

LU

E/C

OS

T

DATE

VALUE OF INFLATION-LINKED BONDS VS COST OF THE INFLATION-LINKED ANNUITY

Value of Inflation-linked Bonds

Cost of an Inflation-linked Annuity

Purchasing power portfolios

Improve retirement income

Reduce chance of ‘undesirable outcomes’

R-

R500,000

R1000,000

R1500,000

R2000,000

R2500,000

RE

QU

IRE

D C

AP

ITA

L

DATE

REQUIRED CAPITAL TO PURCHASE REAL INCOME

Cost of an Annuity

Purchasing Power Moderator

2014/03/20

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Example | Annuity costs increase

Investment strategy needs to be cognisant of liabilities

June 2013 Annual

ALSI -5.7% 21.0%

ALBI -1.5% 6.2%

SAPY 4.4% 24.0%

STEFI 0.4% 4.7%

Purchasing Power Moderator -3.91% 14.36%

Monthly

Income needed

Capital needed

for income

Investment

Value

Affordability

Level

1 June 2013 R5 500 1 864 818 1 500 000 80.44%

1 July 2013 R5 500 1 659 085 1 441 393 86.88%

Improvement 12.04% -3.91% 6.44%

Example | Affordability level

R ,0

R 1,000

R 2,000

R 3,000

R 4,000

R 5,000

R 6,000

R 7,000

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Mo

nth

ly I

nco

me D

raw

n

Aff

ord

ab

ilit

y L

evel

AFFORDABILITY LEVEL OVER TIME

Affordability Level

Income Drawn

Inflation-linked drawdown

88%

2014/03/20

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Linking pre & post retirement

Post-retirement vehicle Asset backing this

vehicle

Retirement matching

strategy

Inflation-linked annuity Inflation-linked bonds Inflation-linked bonds

With-profit annuity Multi-asset class investment

strategy

Multi-asset class investment

strategy

Living annuity

Whatever was the chosen

investment strategy, but to

target inflationary increases a

significant portion of ILB’s

needs to be purchased

Purchasing power strategy

Retirement recipe

Receive education from the

beginning

Ensure that members understand what is

required to ensure a comfortable retirement.

Embrace sacrifice (PFA’s) and save Save more, lower consumption, prolong

income

Take on advice Advice does indeed add value.

Initiate an aggressive Capital Build-

up High allocation to growth asset classes.

Retirement matching strategy Obtain advice on what post-retirement

vehicle you can utilise and match to this

vehicle.

Effective post-retirement vehicle Aim for inflation linked annuity.

2014/03/20

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How can trustees practically implement a strategy

which incorporates a sustainable returns

approach?

Question 7

Shift in mindset...

...away from chasing short-term

gains to focusing on achieving

benchmark-beating returns over

time!

2014/03/20

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The RI & Ownership Guide

Industry led

initiative

Incorporates ESG

factors

Toolkit to assist

trustees & PO’s

Practical guidance

Step by step

strategy

RI policy

Interpretation of RI & how it’s aligned with

philosophy & objectives

Implementation & monitoring – assign responsible

person

Scope of application

Key ESG issues

Voting & engagement

Conflicts of interest

Investment approach

Reporting of ESG activities

2014/03/20

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Implementation

Starting point – focus on listed equities

Understand how investment managers

apply RI principles

Scrutinise policies, voting activity &

investment approach

Clear policy on fund’s goals, objectives &

commitments regarding active ownership

Disclosure & reporting

CRISA practice

note

Fully & publically

disclose General description

Period

Extent of engaged

stakeholders

Measures adopted

2014/03/20

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Recommended timeline

Source: Responsible Investment and Ownership: A Guide for Pension Funds in South Africa

Can a fair price be determined for active asset

(investment) management fees?

Question 8

2014/03/20

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Asset management fees

Reviewing the fee conundrum through

alternate lenses, from the perspective of the

consumer & value being purchased

Risk-return

Call & put derivative

options

“Naïve” framework

Using option mathematics to put forward a pricing

Framework:

Beta & Outperformance

Beta

Fee to access an

asset class / strategy

Outperformance

(“Alpha”)

Fee payable for

expectation that the

manager will

outperform the

benchmark

2014/03/20

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1 | Don’t pay more than what you get

Investors should not pay more than the value

derived

The relationship of risk & return

Higher absolute risk – rewarded with greater return

Active risk = relative risk = prospective tracking error

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2 | Don’t be fooled by randomness

Luck vs. Skill – should not pay extra for random outcomes

Probability of randomly achieving positive outperformance

outcomes with zero-skill:

Potential outperformance outcomes

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

15.87% 19.08% 22.66% 26.60% 30.85% 35.38% 40.13% 45.03% 50.00%

50% probability of achieving a positive outcome on a random

basis over 1 year. ~ 1 in 5 managers will randomly deliver a

return in excess of 3.5%!

Option theory

CALL option PUT option

Legal right to purchase investment

instrument at specific time at a

predefined price

Legal right to sell investment


predetermined price

Investors’ view: underlying asset

will increase in value (don’t want

exposure where asset loses value)

Investors’ view: seeking protection

from adverse movements in asset

value

Idealistic concept: access

additional performance being sold

by manager without incurring

downside risk

Idealistic concept: investment

manager wants to insure himself

from underperformance and passes

this to investor

Idealistic application: investor

pays premium to manager

Idealistic application: manager

pays insurance premium to investor

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3 | You need to eat off the same plate

Percentage value earned by manager on a 1% fee

Potential manager outcomes

0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Active fee 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

% to manager - 400% 200% 133% 100% 80% 67% 57% 50%

Not just about sharing value – commitment

Conversation should not only be about performance

Holistic relationship

Performance fees

A mechanism to align objectives?

The concept is sound – implementation is

flawed

Operational management of performance

fees needs review

2014/03/20

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What should I pay a skilful manager

Active Management Fee = Sharing Factor *

Skill Outcome – 20% * Call Option Price on Skill +

Passive Fee

Factor in formula Description

Sharing Factor The level of sharing (recommended: 50%)

Skill Outcome Expected long-term mean outperformance of

manager

Call Option Price Risk-neutral naïve price of a call option on the

manager skill outcome at a given level of risk

Passive Fee The passive fee to access the asset

Option theory | Recap

CALL option PUT option

Legal right to purchase investment


predefined price

Legal right to sell investment


predetermined price

Investors view: underlying asset will

increase in value (don’t want

exposure where asset loses value)

Investors view: seeking protection

from adverse movements in asset

value

Idealistic concept: access additional

performance being sold by manager

without incurring downside risk

Idealistic concept: investment

manager wants to insure himself

from underperformance and passes

this to investor

2014/03/20

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What should I pay a skilful manager

Skill (expected non-random outcome)

0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Call option price 1.60% 1.72% 1.85% 1.99% 2.14% 2.28% 2.44% 2.60% 2.76%

Put option price 1.60% 1.47% 1.36% 1.24% 1.14% 1.04% 0.95% 0.86% 0.78%

Max Active fee 0.00% 0.25% 0.50% 0.75% 1.00% 1.24% 1.49% 1.74% 1.98%

Fairness adj. 0.00% 0.13% 0.25% 0.37% 0.50% 0.62% 0.74% 0.87% 0.99%

Perf. premium 0.32% 0.34% 0.37% 0.40% 0.43% 0.46% 0.49% 0.52% 0.55%

Passive fee 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%

Total base fee -0.17% -0.07% 0.03% 0.13% 0.22% 0.31% 0.41% 0.50% 0.59%

Understanding your manager

2014/03/20

50

In conclusion

Clear investment strategy

Return expectations: Understood relative to objectives

Consistent with risk

Fair investment management fees

3 key principles: Don’t pay for more than the value received

Don’t pay for randomness

The manager & investor need to have commonly

aligned objectives

Appropriate benchmarks & performance

targets

Methodology for performance fees

SECTION 3

REFORM

2014/03/20

51

The 2014 National Budget Speech – what should

trustees consider?

Question 9

Aims for financial security

90% of adult SA’s to have access to financial

services by 2030

Reduce debt burden of households & root out

reckless lenders & unscrupulous debt collectors

Ensure pensioners have a secure income in

retirement

Retirement fund reform: Lowering costs in the retirement fund system

Regulations to reduce product charges

Compulsory employer-sponsored retirement plans

Accrual of retirement fund benefits “calculation date”

Cross-border retirement savings

Alignment between the Unemployment Insurance Act

and the Unemployment Insurance Contributions Act

2014/03/20

52

Retirement fund tax

With effect from 1 March 2014, the taxable income

brackets on withdrawal lump sums will be increased

by 10% and for retirement lump sums the increase is

almost 50%.

Retirement lump sums, the tax free limit increased

from R315 000 to R500 000 over the life time of the

taxpayer.

Withdrawal lump sums, the tax free limit increased

from R22 500 to R25 000 of the benefit due.

The aggregation principle still applies at exit date,

where the taxpayer has previously withdrawn from the

Fund.

Retirement fund tax

Pre-retirement lump-sum taxation (“Withdrawals”) - effective date

1 March 2014

Taxable income (R)

2013/14

Rates of tax

Taxable income (R)

2014/15

Rates of tax

R0 – R22 500

R22 501 – R600 000

R600 001 – R900 000

R900 001 +

0% of taxable income


above R22 500

R103 950 + 27% of

taxable income above

R600 000

R184 950 + 36% of


R900 000

R0 – R25 000

R25 001 – R660 000

R660 001 – R990 000

R990 001 +



above R25 000

R114 300 + 27% of


R660 000

R203 400 + 36% of


R990 000

2014/03/20

53

Retirement fund tax

Retirement lump-sum taxation (Also applicable to “qualifying

retrenchments”) - effective date 1 March 2014

Taxable income (R)

2013/14

Rates of tax

Taxable income (R)

2014/15

Rates of tax

R0 – R315 000

R315 001 – R630 000

R630 001 – R945 000

R945 001 +



above R315 000

R56 700 + 27% of


R630 000

R141 750 + 36% of


R945 000

R0 – R500 000

R500 001 – R700 000

R700 001 – R1 050 000

R1 050 001 +


18% of taxable

income above

R500 000

R36 000 + 27% of


R700 000

R130 500 + 36% of


R1 050 000

Retirement vs. Withdrawal

2013/2014 Tax tables 2014/2015 Tax tables

Retirement Tax on R945 000 =

R141 750

Tax on R1 050 000 =

R130 500

Effective rate 15% 12.42%

Withdrawal Tax on R945 000 =

R184 950 + (R45 000 x

36%) = R201 150

Tax on R1 050 000 =

R203 000 + (R60 000 x

36%) = R225 000

Effective rate 21.29% 21.42%

Difference R59 400 R94 500

2014/03/20

54

The Dennis Davis Commission

Three further investigations have commenced

Value-added tax considering: does the present system achieve a justifiable balance

between direct & indirect taxes?

what are its retrogressive effects, is the system efficient &

what challenges are posed by e-commerce?

Review of the current system of mining taxes

Role of wealth taxes: estate duty

broader role of wealth taxes in a system aiming to balance

efficiency and equity

Tax incentivised product in 2015

Tax preferred savings vehicles - units trust &

interest bearing investments

Earnings and capital growth - exempted from

income tax

Contributions will be made from after-tax income,

but capped

Annual limit will be R30 000 and a lifetime limit of

R500 000 per individual

Annual limits will be adjusted over time to take

account of inflation

2014/03/20

55

Policies

Change to rate in Individual policyholders

fund – 30%

Disability policies

Section 11(w)

Foreign policies which are reinsured

Long term risk policies

Taxation Laws Amend... Act

Promulgated on 12 December 2013

Effective 1 March 2015

Alignment of tax treatment of contributions across all types

of funds

27.5% of taxable income / remuneration, subject to

R350 000 cap

Provident funds limited to 1/3 in

cash at retirement

Disability income policies –

premiums will be taxable,

benefit will be tax free

Pension to provident fund

transfers will no longer be

taxable

2014/03/20

56

Financial Services Laws... Act

Promulgated on 14 January 2014

Effective: 28 February, 30 May & 29 August 2014

Heightened governance: Composition of trustee board:

Comply with Rules

Vacancy to be filled within ‘period as prescribed’

Trustees must obtain prescribed skills & training within 6 months

(and maintain throughout term of office)

Requirement to act independently

Extending fiduciary duties

Enabling provision –

communication to members

Personal liability for non-

payment of contributions

Whistle blowing obligations &

protection

Reforms may be viewed in 3 parts

Imminent Changes (TLAA 1 March 2015, FSLGAA 2014)

• Contribution tax regime – TLA Act

• Provident Funds retirement benefits – TLA Act

• Some governance changes – FSLGA Act

• Disability Income policy tax changes

Possible but not yet legislated

• Some governance changes – Retirement Reform papers

• Annuity framework – could become a default

Still requires legislative enablement

• Pre-retirement preservation (P-day?) – retirement reform proposals

• Non-retirement savings product – National Budget Speech 2014

• New “PF130” as directive

2014/03/20

57

Expected changes in the industry

Consolidation of funds

Review of contribution rates

Disability income policies – likely to remain

unchanged

Consideration of default annuities

Engage with your consultant to fully understand

how reform affects your fund’s specific

circumstances

THANK YOU

Documents

HOT TOPICS SEMINAR - Alexander Forbes€¦ · 2014-03-20 · *WEF Global Competitiveness Report 2013/14 ** World Federation of Exchanges Source: JSE, Investment Solutions . 2014/03/20