insight magazine for seb

Sanlam EmployEE BEnEfitS SEptEmBER 2015

A future worth saving for

Sanlam Benchmark SympoSium 2015

Why can’t consumers stick to a retirement plan?

september 2015 1

Disclaimer Although Sanlam has taken due care to ensure that the views and opinions expressed are based on information that is relevant and accurate at the time of publishing, no representation, warranty or undertaking is given and no responsibility or liability is accepted by any member of Sanlam as to the accuracy of any information contained herein.

please note that this document is intended to assist financial advisers with a view to Sanlam products and does not constitute advice or other services as defined under the Financial Advisory and Intermediary Services Act of 2002. A financial adviser must be consulted as far as the unique needs of the investor are concerned and therefore any parties relying on any view, opinion or model contained herein do so at own risk and Sanlam disclaims all responsibility and liability for positions taken based on such reliance. insight is published by Sanlam Employee Benefits (SEB).

Send your comments or questions to the editorHubre Stripp tel: 021 947 1297email: [email protected]: www.seb.co.za

administrative [email protected]

copyright insight 2015. All rights reserved. No part of this magazine may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording of any information storage or retrieval system, without prior permission from the publisher.

all images and illustrations GettyImages.com and supplied

published on behalf of SeB by New Media Publishing

Saving for your

future selfmayuri Reddy

‘77% of members who withdrew from a fund due to retrenchment or resignation took some or all of their retirement benefits in cash.’

What is the Benchmark

Symposium?Dawie de Villiers

‘We unpacked the consumer space to highlight the all-pervasive issue of debt.’

Why don’t we turn the retirement model on its head?

yegs Ramiah

‘The one thing that engages consumers in choosing a brand or product is simplicity in the decision-making process. The future retirement product must therefore be easy to find, understand, evaluate and buy.’

We need to engage

moreViresh maharaj

‘New employees are under tremendous pressure to make decisions about their lifetime savings goals and investment strategies at a stressful time in their employment – on the first day.’

What can be done

to enhance returns?Cora fernandez

‘One of the most significant trends across the globe is the continuing increase in human longevity, mainly due to ongoing improvements in nutrition, public health and medical technology.’

Reform in action

David Gluckman

‘In my view, there are some significant structural problems associated with group RAs that make them sub-optimal choices for most employer groups.’

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Contents

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sANLAm beNCHmArK sYmpOsIUm 2015

SANLAM BENCHMARK SYMPOSIUM 2015 SANLAM BENCHMARK SYMPOSIUM 2015

SEPtEMBER 2015 insight 32

In May we hosted another successful Benchmark Symposium where we presented insights from our annual Sanlam Benchmark Survey, which focused on current trends in the Employee Benefits industry. We again managed to retain a carbon neutral status for both conferences, held in Sandton and Cape Town.

As always, we provided insights to stimulate conversation and create meaningful opportunities for further engagement with industry stakeholders. With our dedicated focus of improving the retirement outcomes for our members, we aim to provide them with a greater probability of retiring comfortably.

I am especially proud to mention that this year’s Benchmark theme, A future worth saving for, is at the heart of everything we do. At Sanlam Employee Benefits (SEB) we understand that financial resources are a key enabler to realising life goals. We firmly believe that unless we have a deeper level of understanding of the issues which impact retirement funding, we would not able to assist employers effectively in the design of their benefit structures.

In this edition of Insight, mayuri reddy identifies the various life events that play a role in adequate retirement provisions, highlighting a key finding on how a low level of understanding of retirement preservation has a profound effect on adequate retirement outcomes.

yegs ramiah considers the role of the brand of the retirement model and how to change fund members’ perception of their future.

Viresh maharaj takes another view – he suggests the role of the employer as a catalyst in the members’ journey to retirement is pivotal to improve retirement outcomes.

As always, David Gluckman challenges the industry with his thought-provoking analysis of group Retirement Annuities as an alternative offering to umbrella funds, and the fundamental differences between these two products.

Last but not least, we are honoured to have won the 2015 FIA Award for Product Supplier of the year in the Employee Benefits category. It’s the fourth time in five years we’ve won this particular award, and it’s one of our favourites because it is voted for by financial advisors. For you it means extra reassurance that your retirement savings are in good hands.

I am proud of our achievements at Sanlam Employee Benefits and look forward to everyone’s continued efforts and contribution as we race towards the last quarter of 2015 with a renewed and energised commitment to exceeding our own capabilities.

I trust you will find this issue insightful and user-friendly.

Kind regards

Dawie de Villiersceo: Sanlam employee Benefits

Dear reader

insight2 insight2 september 2015



South Africans spend more on bonds, vehicles and groceries than on insured benefits such as life insurance, funeral plans and short-term insurance. Debt is the big culprit, the 2015 Sanlam Employee Benefits Benchmark Survey shows.


september 2015 insight 54

A future worth saving for

The Sanlam Employee Benefits (SEB) Benchmark Survey is South Africa’s most comprehensive annual retirement industry research among retirement fund principal officers, participating employers in umbrella funds, members of retirement or retirement annuity funds and retirees.

The survey’s insights stimulate conversation and create meaningful opportunities for engagement with industry stakeholders. This year’s theme is A future worth saving for.

‘We unpacked the consumer space to highlight the all-pervasive issue of debt,’ says Dawie de Villiers, CEO: SEB.

‘We investigated the extent to which debt has had an impact on the financial and emotional well-being of employees,’ he adds.

Through the qualitative member survey, SEB ex-

plored how indebtedness encourages members to withdraw from their employer-sponsored funds to access retirement benefits prematurely.

how the StuDy waS conDucteDThe respondents in the survey are permanently employed or self-employed, and are either members of their employers’ sponsored retirement funds (75% of the sample) or self-employed and members of a retirement annuity fund (25% of the sample).

A total of 503 randomly selected respondents were interviewed. Telephonic interviews were conduct-ed in English, Afrikaans, isiZulu, isiXhosa and Sesotho, and each lasted about 20 minutes. Field work was conducted between February and March this year.

Turn the page for some of the most interesting findings of the survey.



What did you spend the cash on?(Each respondent could select up to eight options)

Reduced short-term debt, for example car, credit

cards or loans 50,7%

Living expenses 33,3%

Made home improvements

28%

Started own business 26,7%

Education 20%

Settled or reduced mortgage bond 16%

Invested in other non-retirement savings 10,7%

Travel 4%Other 4%

Have you ever withdrawn from a retirement fund through

resignation or retrenchment from a previous employer?

Yes 19,5%

No 80,5%

At the time of the withdrawal did you realise the level of tax

you would be expected to pay?

Yes 50,7%

No 49,3%

Have you ever revisited your original decisions

regarding your retirement and risk benefits?

Yes 27,6%

Would you consider using your retirement savings to reduce your debt?

No, I would not touch it

71,4%Yes, I would use some of it but not all 24,1%

Yes, I would use all of it if I could 4,6%

What is your debt philosophy?

I attempt to pay off my debt

before saving28,2%

I don’t let the amount of debt I have exceed a certain percentage of my income 26%

I use debt only for transactional purposes 7,8%

Prefer cash 2%

Pay off debt irregularly 0,4%

Currently under debt review 0,2%

I access debt only for large purchases

35,4%

Yes 38,7%

No 61,3%

Have you ever regretted the decision to withdraw the cash benefit, bearing in mind the level of tax you had to pay?


insight 76

No 72,4%

Key findings

september 2015

september 2015 insight 98

This year’s Symposium saw MC Maya Fisher-French work closely with millennial Thumi, helping her to negotiate financial pitfalls in her life.

What does the future hold?

Financial journalist Maya Fisher-French, who was the MC at this year’s Symposium, was not alone on the stage. Her ‘co-presenter’ Thumi is a young graduate, just starting out in life.

When Thumi first took to the stage she was full of big hopes and dreams for her future. She shared her milestones with Maya – getting engaged, having a child and coping with financial hardship.

When Thumi got to the point where she had run into financial trouble, Maya turned to the audience for advice on what Thumi should do, based on real-life options. Maya used this information to give Thumi tips on reducing debt and getting her finances in order.

By the end of the symposium Thumi’s future looked secure, thanks to timely advice.

insight 98 september 2015

Participating Employers in Commercial

Umbrella Funds

100

Active Members of Retirement

Funds

503

Stand-alone Trade Union Defined Contribution

Funds

10

thumi turns to maya Fisher-French for support and advice.

Viresh maharaj, chief marketing actuary for Sanlam employee Benefits, speaks about the importance of engaging with employees every step of the journey.

David Gluckman, head: Special projects at Sanlam employee Benefits, explains why he believes umbrella funds offer a viable alternative to the national Social Security System.

maya Fisher-French addresses delegates at the Symposium.inset: maya Fisher-French chats to Dawie de Villiers, ceo: Sanlam employee Benefits.

Stand-alone Defined

Contribution Funds

90




According to the research results of our 2015 Sanlam Benchmark Survey, only a quarter of South African retirees are expected to be able to maintain their standard of living in retirement.

why?The two main reasons for this dismal statistic are:1. Retirement fund members cashing in on their

savings after retrenchment or resignation, and 2. Apathy towards making provision for their own

retirement.Not preserving retirement savings when changing jobs or becoming retrenched is one of the biggest mistake fund members make on their retirement savings journey.


11

By Mayuri Reddy, Marketing Strategist at Sanlam Employee Benefits

insight10

Saving for your future self

Our survey reveals that employees are not fully aware of the impact of their decisions on their

future. Why is this so and what can be done?



The survey results indicate that many people are not aware of the tax implications of non-preservation (49% of members surveyed), nor do they fully understand the impact on their retirement outcomes (45%).

Another big decision which fund members are not engaging with is understanding the investment decisions that are made either by the trustees of the fund, or by the member themselves.

Of the 42% of members invested in their fund’s default investment portfolio:

the majority (70%) did so because they trusted the trustees of the fund to make sound investment choices – but a staggering 87% said they had not voted for the trustees and 75% could not name a fund trustee. the second most common reason members gave for investing in the default portfolio was to achieve growth, and they were not overly concerned with exactly how they were invested to do this. 72% never come back to reconsider their initial decisions regarding their retirement benefit options which they make during their first few days of employment.

The member apathy that is apparent from the reasons given for being invested in the default investment portfolio, together with the fact that few members will revisit their retirement decisions during their working lifetimes, means trustees are taking on huge responsibility for ensuring that members are appropriately invested at various stages of their lives.

As a result, we see many trustees (61%) using life stage investment strategies as the default option to provide younger members with sufficient exposure to growth assets, while ensuring that members closer to retirement are not exposed to excessive risk.

Unfortunately, members also seem to be relying heavily on trustees to ensure that they are on target for a comfortable retirement – for every 10 members, only three know their fund has a stated target amount of savings they should be working towards (typically this amount is capital sufficient generate an income of 70 – 75% of pre-retirement income), and of those

insight12

three only two know what the stated target pension is. One of the key messages that emerged from this

year’s results is the crucial importance of a retirement fund, and the need to consider alternatives to ensure members are not forced to tap into these funds. An outstanding 85% of members would not opt out of compulsory savings through their retirement fund if given the option, and similarly 89% would not reduce their current contribution rates if given the option, indicating an appreciation of this benefit. However, 77% of members who withdrew from a fund due to retrenchment or resignation took some or all of their retirement benefit in cash. Much of this is because 36% of members (moving upward from 25% in 2014 and 21% in 2013) have no other personal savings aside from their retirement savings, and when faced with access to a large lump sum of money, see this as a great windfall.

The non-preservation of retirement funds is having a huge impact on people’s retirement outcomes – however, we can’t just ignore people’s short-term financial needs.

Members should be considering using Tax-Free Savings Vehicles, a new product line launched by various providers in March this year, to fulfill the purpose of savings for emergency situations, rather than viewing their retirement savings as this. Unfortunately, only 31% of members surveyed were aware of the existence of Tax-Free Savings Vehicles, and of those are aware of the product, only two thirds are considering making use of it.

penSioner StuDy reSultSThe behaviours being exhibited by members on preservation and apathy towards their retirement savings choices results in poor outcomes in retirement. We look to our pensioner study for a glimpse into the future for members:

62% of pensioners experienced a reduction in income at the point of retirement, while only 43% believe they have sufficient capital to last for the rest of their lives. On top of that, 66% of pensioners still have either adult or child dependents who rely on them financially.

‘Members must realise that dipping into

their retirement savings – which they are doing by not preserving – is like borrowing from your future self, at a very

high interest rate and with no intention of ever

paying it back.’




15

Regarding non-preservation:• Of the pensioners who had withdrawn from

a retirement fund through resignation or retrenchment from their previous employer, 74% took some or all of their retirement benefit in cash. Only 54% of pensioners indicated that they regretted the decision to withdraw, while 41% said they could have considered an alternative option.

Regarding debt:• 57% of pensioners who did not preserve their

retirement benefits at withdrawal used it to reduce debt, while a concerning 43% of pensioners are still paying off debt in retirement.

Regarding advice:• On average, pensioners first received financial

advice on retirement 10.5 years before retirement.• Only 24% were advised to consider converting

their risk benefits from a group policy to an individual life policy at retirement (in order to benefit from possible preferential rates).

• 44% sought retirement advice from their financial adviser or broker, while 41% turned to their employer or HR officer for advice.

Members must realise that dipping into their retirement savings – which they are effectively doing by not preserving – is like borrowing from your future self, at a very high interest rate and with no intention of ever paying it back. We need to start being more self-disciplined with our finances in order to have a self-sufficient and enjoyable retirement.

The recently introduced Tax-Free Savings Vehicles could go a long way towards creating awareness that there are other ways to address these needs without dipping into retirement savings, but members also need to start saving for the needs of their future selves rather than spending on their current wants – there are other ways to address these needs without dipping into retirement savings.

25% OF SOUTH AFRICAN RETIREES EXPECT TO MAINTAIN THEIR STANDARD OF LIVING IN RETIREMENT.

september 2015 insight14




1716

Sanlam Benchmark research highlights the need for women to focus on female-specific retirement issues in order to build and protect lifetime wealth.

Living longer than men, but saving less When women plan retirement savings:

Women show less financial awareness about retirement savings than men

The approximate number of years women can expect

to live longer, and therefore be in retirement longer,

than men*

The average amount women earn less than men**, often

not considered when deciding what percentage

of salary to save

Revisited decisions made on first day of employment

Know state target of the pension fund

Understood tax implications of taking withdrawal benefit in cash on retrenchment / resignation

Understood implications on retirement monies of taking withdrawal benefit in cash on retrenchment / resignation

Only 11% consider impact of break in

employment due to maternity leave

Only 15% consider difference in salary

levels

Only 10% consider impact of divorce or spouse passing away

before they do

Only 34% consider higher longevity

of women

28%

24%

55%

41%

30%

72%

55%

4 yrs

South African womenand retirement

0 10 20 30 40 50 70

Jane saves a smaller amount, over a shorter career – meaning she has a smaller pot of funds at retirement that she will need to spread over a longer time in retirement

21.7 StartS work

23.5 StartS work

26.1 StartS SaVinG aVeraGe oF r1 838.60

28.8 StartS SaVinG aVeraGe oF r1 569.08

57.9 planS to

retire

55.3 planS to

retire

60.2 actually retireS

60.2 actually retireS

average Joe

average Jane

age 60

41% 60%to avoid having to live longer on less, women should consult a qualified financial advisor.*Stats SA 2014 mid-year population estimates. **Stats SA 2013. All other statistics from Sanlam Benchmark Survey 2015. Information compiled by Sanlam www.sanlam.co.za

september 2015



Why don’t we turn the retirement model on its head?Brand innovation is needed to transform retirement model in South Africa.

The recent 2015 Sanlam Benchmark retirement study has revealed that 84% of respondents dismissed a comfortable retirement as nothing more than a romantic fantasy.

A possible reason for this view is because the retirement industry has so frequently broadcasted the message that fund members won’t have enough money to retire on that many no longer try to save.

The industry will have to rise to the challenge and come up with innovative initiatives to turn this

perception around. Financial services firms will need to adopt unconventional approaches and implement these with a common purpose if they hope to secure the country’s retirement future. One such approach might be to apply the lessons learnt by the world’s leading brands to the local retirement savings industry.

Today’s up-and-comers interact with brands and products differently from the preceding generations. Consider the taxi-substitute Uber as an example: at the touch of a button you can get a vehicle to pick you


insight 1918

By Yegs Ramiah,Chief Executive of Brand at Sanlam

september 2015



up and take you wherever you want to go – there’s no need for a car, no need for cash and no need to make plans before the time. SnapScan is another example: simply install the app, link your credit or debit card and shop at any merchant with a SnapScan scanner.

keep it SimpleSavings products currently don’t offer the simplicity and ease of use that technology-enabled lifestyle solutions such as Uber and SnapScan do. Yet this is the space investment firms should occupy if they want to assist people in suppressing the urge to spend in favour of saving.

The Harvard Business Review has reported a study among 7 000 consumers, which found the one thing that engages consumers in choosing a brand or product is simplicity in the decision-making process. The future retirement product must therefore be easy to find, understand, evaluate and buy.

one queStion, one anSwerThe annual benefit statement is a case in point. Imagine if, instead of a page littered with numbers, the statement provided an answer to one simple question: ‘Will I have enough money to fund my preferred lifestyle in my later years?’

With a bit of planning, the industry could enable savers to benchmark their savings against a lifestyle dream by informing them of the type of lifestyle they are on track for. Their future could then be defined by saving for a certain retirement lifestyle rather

‘With a bit of planning, the industry could enable savers to benchmark their savings against a lifestyle dream by informing

them of the type of lifestyle they are on track for.’

84% OF RESPONDENTS DISMISSED A COMFORTABLE RETIREMENT AS A ROMANTIC FANTASY.

than accumulating a notional capital lump sum.Against this backdrop, financial services brands should investigate how to turn their clients’ money into meaning by showing respect for what went into making this money and sharing with them what can be done with it.

At Sanlam, our measure of success is not solely about how much money we make. It also includes our ability to impact the lives of our clients, our employees, our communities and the country at large. The key is to move from a world of fear to one of optimism by setting aside ‘the orange that will cost you $68’ or the ‘gourmet cabbage dinner’ advertising campaigns in favour of campaigns that reinforce the lifestyle benefits of sensible saving.

How can the industry accomplish this? The lesson from leading brands is to create a movement consisting of individuals whose desires resonate with that of the brand.

millennial GenerationThe retirement industry should identify a market segment that has the potential to influence the generations that precede and follow it. The best group for the retirement industry to focus on is the so-called Millennial Generation – people born between 1982 and the early 2000s who are known to be keen to save and have both the attitude and desire to change the world.

Our challenge is to influence the generations to come – but the real opportunity lies in attaining the nirvana where retirement is bought and not sold.


insight 2120 september 2015

SANLAM BENCHMARK SYMPOSIUM 2015


About 80% of employees in the formal sector in South Africa belong to an employer-sponsored retirement fund. As new employees, they usually have to make important decisions about fund investment strategies shortly after their induction on ‘day one’, but according to the recent 2015 Sanlam Benchmark retirement study, 7 out of 10 employees never review these initial decisions regarding their retirement benefit options.

Such a high number of fund members not engaging with their retirement savings at all after joining an employer-sponsored retirement fund is a matter of serious concern.

In taking a system’s view of the retirement funding challenge, it is clear that employers – who are the critical link between employees and the fund – need to play a much more engaged role in combating member

Employers who engage with employees create an opportunity to improve retirement outcomes for fund members. What does it involve?

We need to engage more

70% of employees never review initial decisions regarding their retirement benefit options.


insight 2322

By Viresh Maharaj, Chief Marketing Actuary for Sanlam Employee Benefits

Are you ready to retire?apathy while influencing better behaviour and

ultimately ensuring superior retirement outcomes.

FirSt-Day preSSureThe entire retirement funding journey – from joining an employer and reviewing investment and insurance options to changing jobs and in the end retirement – needs to be revisited in order to optimise the system to set up employees for success rather than failure.

For instance, new employees are under tremendous pressure to make decisions about their lifetime savings goals and investment strategies at a stressful time in their employment – on the first day.

This practice has negative consequences, since employees typically do not have the financial nous, advice or guidance at this point to make appropriate

september 2015



choices – and 72% do not revisit these decisions. The effect of poor decisions is exacerbated by the

finding that they simply wait too long to materially affect their retirement outcomes positively, with 5 out of every 10 only starting to plan for their retirement within 10 years of retirement.

Crucial decisions are made without proper advice, adequate communication or appropriate guidance, when new employees are on the spot and under pressure. Engaged employerism could therefore make a crucial difference to retirement outcomes.

An area of concern is at benefit review stage as, in the context of poor mathematical and financial literacy, annual benefit statements do not engage employees. This raises the question whether the information contained in such statements actually gets through to employees as they are usually too complex for the average employee to understand.

‘Crucial decisions are made without proper advice, adequate communication or appropriate guidance.’

wealth value, delivered to each fund member by SMS could spark ownership of their respective retirement funding journeys as it creates top-of-mind awareness.

oBStacle to Better outcomeSAnother major obstacle to achieving better retirement outcomes for fund members is the capability of human resources (HR) departments in many corporates.

HR departments are typically focused on procedural commitments and typically do not possess the right skills to provide financial guidance and/or are constrained by FAIS.

Also, retirement fund outcomes are not part of their key performance measures but we believe they should be – HR plays a critical role in moving employees to a better retirement outcome as they are effectively the link between the fund and the members.

In fact, the Benchmark Survey highlighted that 1 in 3 employees view HR as their single port of call for retirement funding matters. What gets measured gets done, and we’re not measuring the employer’s efficacy in moving employees towards better retirement outcomes despite their critical role in the retirement funding system.

motiVateD employerSEmployers have a significant incentive to care for the financial wellbeing of their employees, as research strongly suggests it can be a source of long-term value and a competitive advantage arising from increased productivity and reduced absenteeism.

It is time for employers to take bold steps to improve their financial wellness programmes, of which retirement funding is a core pillar.

The culture of funding under abdication and apathy has to come to an end so we can move towards a win-win situation where employees are better equipped to build lifetime wealth and employers benefit from a more productive workforce arising from reduced financial stress. This requires a shift to engaged employerism, and it can be done pragmatically and professionally.


insight 2524

Simple ViSual cueSWhat about a series of visual cues – such as presenting figures using a traffic robot type format (red, yellow and green) – that provide an immediate visual impact anyone can understand in order to engage employees to take corrective action to build lifetime wealth?

These cues could then be accompanied by recommendations derived via algorithms to mitigate any shortfalls and immediate employer-based access to financial products.

A further improvement would be to communicate the tax consequences of early withdrawal from a fund, as the lack of preservation is one of the leading drivers for the poor retirement outcomes faced by South African fund members. Employees are not aware of the immediate effect of not preserving and are even less aware of the overall impact on their ability to create lifetime wealth.

Employees should be informed when leaving an employer that under current tax laws: • an early withdrawal of, say, R1 million will result in

a tax payment of R207 000, not to mention the loss in growth of these savings over many years.

• for a 45-year-old who earns 10% per annum until retirement, a sacrifice of R207 000 would result in a roughly R1.4-million reduction in their lifetime wealth.

By transparently communicating with and engaging employees at the decision point, employers can influence them towards making more financially responsible decisions.

explore initiatiVeSEmployers should explore multiple initiatives to raise awareness about the retirement savings journey.

People are used to banks sending them SMSs when their salaries are paid in and when their debit orders start going off – so why not leverage employees’ existing familiarity with this platform to engage them on their retirement wealth creation?

A detailed breakdown of their monthly retirement contributions and deductions, plus their retirement



It has been well documented that average retirees have not saved enough to maintain their lifestyles after retirement, and many will exhaust their funds altogether.

A real concern facing trustees therefore is that of members’ retirement outcomes not being achieved. Ensuring members have accumulated enough for retirement and that they have a basic standard of living and sustainable income for life after they retire is a major focus area for industry and pension funds alike.

The key question for trustees is: What can be done to enhance investment returns that will benefit active members to afford them the best chance of success in retirement?

Investing too conservatively before retirement can be dangerous to your members’ financial well-being. As trustees and principal officers, are you confident that the pension plan options you provide for your members will help towards achieving the best possible retirement outcomes? Are you providing aggressive enough growth investment options for younger members with longer time horizons?

One of the most significant trends across the globe is the continuing increase in human longevity, mainly due to ongoing improvements in nutrition, public health and medical technology.

Add to this the reality of an expected low-return environment – coupled with a trend of lower interest rates for longer – and many individuals could find themselves at the mercy of poor returns from their retirement savings.

In this dual context of a low-return environment and increased life expectancy, to ensure the best possible retirement outcomes, we believe it is better to maximise the equity allocations in your pension fund for the best inflation-beating returns over the long term. Provided your members have a long enough investment horizon, equities still yield the best possible returns over the long term.

What can be done to boost returns?Trustees face a situation where members’ retirement outcomes are not being achieved. How can returns be enhanced?

By Cora Fernandez, Chief Executive for the Institutional Business at Sanlam Investments



4 wayS to maximiSe retirement FunD returnSIn South Africa we are controlled by Regulation 28, which prescribes the maximum limits for retirement funds to invest in certain asset classes – no more than 75% in equities (local & offshore); 25% in property (local & offshore); 25% in international assets (excluding African investments); 15% in hedge funds and private equity combined (10% maximum for each of these) and 5% in African investments.

There are a number of levers to increase returns in retirement portfolios within the limits of Regulation 28, and trustees could consider the following:

use the full 75% equity allocation We believe it is important to max out the full 75% allocation to equities to ensure the best possible returns – provided your members have a sufficiently long investment horizon to stomach volatility – as over the long term

a higher allocation to equities can enhance portfolio returns considerably.

Source: INET, December 2014

The graph above illustrates that over the long term, equities (growth assets) have outperformed cash and bonds (income assets) significantly. In the short term, stock markets experience sharp movements and it is this volatility that discourages many members and trustees from investing in equities. In the long run, however, no other asset class produces comparable returns.

Historically we have seen that shorter investment time horizons (up to 5 years) are generally associated with greater volatility and risk of capital losses. As the investment time horizon increases (5 years+), however, the volatility of returns and the probability of losses reduce dramatically. In other words, the longer you remain invested, the lower the risk of losing your invested capital.

We believe that the unpredictability and short-term volatility of the markets is perfectly normal, and as we have seen from the past five decades, equities reward investors over the long term.

add alternative and other investment allocations Alternative investments, specifically fund of hedge funds and fund of private equity funds, offer relatively uncorrelated returns in comparison to traditional asset classes like equity, bonds and cash.

Hedge funds are designed to reduce market volatility for investors by applying specialist strategies and should be considered one of the building blocks of a well-diversified investment portfolio.

add more property There is no maximum on the combined exposure of equity and property, meaning these two asset classes combined could theoretically take up the entire portfolio.

use the africa allocation Additional geographic diversification is allowed through Africa exposure of up to 5% in addition to the 25% exposure to international assets generically. Total foreign exposure can therefore reach 30%.

challenGeS For truSteeSAs trustees, you have challenging goals – above all, ensuring the best possible retirement outcomes for your members and enabling them to save enough for retirement. Ultimately, however, members and trustees alike all share one primary risk: failing to meet their retirement objectives. In attempting to resolve this problem, we have focused on investing wisely before retirement – selecting equities and other growth assets as an effective, long-term, pre-retirement investment strategy.

01

Dec

59

01

Jun

62

01

Dec

64

01

Jun

67

01

Dec

69

01

Jun

72

01

Dec

74

01

Jun

77

01

Dec

79

01

Jun

e 82

01

Dec

84

01

Jun

e 87

01

Dec

89

01

Jun

e 92

01

Dec

94

01

Jun

e 97

01

Dec

99

01

Jun

e 0

20

1 D

ec 0

40

1 Ju

ne

07

01

Dec

09

0

1 Ju

ne

120

1 D

ec 1

4

10 000

1 000

100

10

1

Sa equity

Sa Bonds

Sa cash

Sa cpi

asset class returns:Jan 1960-Dec 2014 (log scale) ‘To ensure the higher

longer-term capital growth necessary to outpace inflation, sufficient exposure to equities and other growth assets in a retirement fund is essential.’



The Umbrella Fund strategy

is a viable alternative to the

National Social Security System.

Reform in actionSouth Africa’s retirement reform debate started in earnest around 2007 when government first unveiled some details regarding a proposed National Social Security System (NSSS).

Our Sanlam Umbrella Fund strategy can be considered a response to these proposals. Our vision as then announced in Insight was: ‘Sanlam’s practical solution going forward is premised on using all of its intellectual capital to build the best multi-employer packaged retirement savings, risk insurance and administration offering in the market’.

In other words, we regard the commercial umbrella fund model as a viable alternative to NSSS – and a model that avoids the very significant transition risks and costs associated with NSSS.

Although South African commercial umbrella funds have been around since the mid-1980s, the early models were often criticised for offering poor value for money and side-stepping many of the governance and representativity features of standalone retirement funds.

But few can dispute that there has been significant improvements in commercial umbrella funds since that time.

cleaneD-up actUmbrella funds have really cleaned up their act, and the major funds are now leading models for good governance and value for money. Industry-leading independent professionals, often elected via members to comprise 50% of the board of trustees, are becoming the norm rather than the exception.

These findings and trends are borne out by our Benchmark Survey results. Cost savings, better administration, less fiduciary responsibility and better investment expertise now rank as the major reasons


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By David Gluckman, Head: Special Projects at Sanlam Employee Benefits

why so many standalone retirement funds have opted to transfer members to leading commercial umbrella funds.

The market has clearly taken to this new model, and we have witnessed massive growth of the commercial umbrella fund market since 2009 when Association for Savings and Investment South Africa (ASISA) research indicated that umbrella funds needed to grow from around 786 000 members to around 1.6 million members to optimise the infrastructure.

The latest available Financial Services Board (FSB) published data shows that this hurdle has recently been achieved, and assets under management in commercial umbrella funds probably now stand at close to R250 billion.

new trenDA new trend we’ve recently witnessed is the emergence of group retirement annuities (group RAs) being promoted as viable alternatives to umbrella funds.

These products are mainly promoted by asset managers who perhaps are concerned about the business threat of the continued success of commercial umbrella funds, and who do not wish to invest in building an employee benefits administration capability.

But there are, in my view, some significant structural problems associated with group RAs that make them sub-optimal choices for most employer groups.

These problems include worse tax deductibility, inaccessibility of savings before age 55, the voluntary nature of such arrangements, and the possible exclusion of many ordinary workers.

But there is a social cohesion aspect to the debate. Solidarity was one of the cornerstone principles behind the government’s NSSS proposals. Group RAs endanger this fundamental principle, and it is not impossible in

september 2015


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the long term that such a trend (if unchallenged) could result in higher savings and insurance costs for many workers plus the erosion of valuable cross-subsidies inherent in the current system, thereby placing many ordinary South Africans in a more vulnerable situation.

In the long term, such developments could even threaten the continued existence of the entire private sector retirement funding system.

alternatiVe pathTherefore we choose an alternative path – one that embraces the solidarity principle but also takes on board and tries to improve on aspects where there might be valid criticism of existing benefit designs in the employee benefits industry, in particular:• Can a more cost-effective governance model be

introduced for small employers?• Can we find simpler ways to charge fees that make

product comparability simpler for consumers and consultants?

• Can we find ways to eliminate unnecessary bells and whistles for ordinary members where cost efficiency is vital, while simultaneously allowing greater flexibility and customisation for the very important but relatively small number of affluent members who have such demands and are prepared to pay for such additional features? I believe we can, and these conversations and

competitive pressures can only be healthy for commercial umbrella funds as these offerings continue to evolve. New-generation umbrella funds that offer the best of both the institutional and retail worlds are the likely result. There is no reason why National Treasury’s call for defaults and lower charges cannot go hand in hand with customisation for the appropriate category of member.

excitinG timeSNow that commercial umbrella funds have achieved the necessary scale, I foresee exciting times ahead as these models continue to evolve and adapt to serve as the instrument to reform the retirements fund industry for the ultimate benefit of members.

‘Let us therefore brace ourselves to our duty, and so bear ourselves that if the British Empire and its Commonwealth last for a thousand years, men will still say, “This was their finest hour”.’ – Winston Churchill, British Statesman and Prime Minister, 1940

Same legal entity as retail RA product offering

Member is contracting party

Worse tax deductibility pre T-Day

No employer-level governance & communication structure

FAIS – retail products

FAIS – employee level advice

No approved risk benefits

+ Unapproved risk benefits

Each employer negotiates own risk rates

basis points pricing• simpler more understandable pricing?• performance fees very common?

No encashment before age 55• Small balances must be administered

Pension Fund retirement pay-out only

LISP administrator

Flexible contributions as determined by employee

Not necessarily a condition of employment – voluntary

Some staff might be excluded

Wide range of collective investment schemes• investment choice under advice• arguably more suitable for executives

Seamless transfer to LISP’s preservation fund and ILLA

Umbrella Fund is legal entity

Employer is contracting party

Better tax deductibility pre T-Day

Joint Forum governance & communication structure

FAIS – pension funds benefit

FAIS – employer level advice

Approved risk benefits

+ Unapproved risk benefits

Umbrella fund economies of scale might help risk rates

% salary & R pmpm & basis points pricing• complicated and hence non-transparent pricing?

• performance fees not as common?

Encashment possible upon withdrawal• Small balances can be encashed

Provident Fund retirement pay-out possibility

Employee benefits administrator

Flexible contributions within employer-agreed limits

Condition of employment – membership compulsory

Must cater for all eligible staff

Limited choice institutional investment options• default option selected by employer

• arguably overly restrictive for executives

Seamless transfer might be possible

new-Generation Group ra

umBrella FunDS

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