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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!