insight
NOVEMBER 2012
SAVINGS HEROES
BENCHMARK SYMPOSIUM CONSUMER PERSPECTIVE
PROVIDERS LACK TRANSPARENCY SEB
PROFESSIONAL INTERMEDIARIES FUTILE DEBATE
PRESCRIBED ASSETS
TJDR (CT) 39830/E
When you’re responsible for other people’s futures, you need to know what you’re doing. At Sanlam Investment Management we follow a pragmatic, value-based approach to investing. This means we follow the most rational investment route to grow your wealth over the long-term. To find out how we can charter your way forward visit www.sim.sanlam.com. We’re as ambitious as you are.
www.sim.sanlam.com
LICENSED FINANCIAL SERVICES PROVIDER
Investment Management
Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this. Dave Ramsey
editorial
Note from the CEO
insight is published by the Communication division of Sanlam Investments. Send your comments or questions to the Editor: Thaniah Toefy Insight Sanlam Investments Private Bag X8 Tygervalley 7532 tel: 021 947 1506 fax: 021 950 2955 email: thaniaht@sim.sanlam.com Administrative enquiries: Hubre Stripp tel: 021 947 1297 email: hubre.stripp@sanlam.co.za Published on behalf of SI by: Bespoke Media Tonnea Bradbury www.bespokemedia.co.za COPYRIGHT insight magazine 2012. 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.
02 insight November 2012
THE PAST FEW months spent preparing for our annual Benchmark Symposium have been an exciting time for all of us at Sanlam Employee Benefits. At this year’s Symposium, we focused on both the retirement reform process and the lack of a retirement savings culture in South Africa and whether the former would be able to effectively change the latter. The Symposium delivered an industry-first by presenting different views (including that of the National Treasury and Cosatu) of the roadmap for retirement reform. True to form, it set the benchmark for future industry debates on this topic. In response to the previous Symposium, we decided to search for South Africans who despite unfavourable economic conditions are still managing to save – we appreciated them sharing their heroic stories at this year’s Symposium. One of our regional Managers, Victor Kambule, summed up our challenge rather succinctly when he said, “In the face of a challenging financial environment, most South Africans are not where they thought they’d be financially and struggling to
earn enough money to set aside funds for the future. However, in the face of numerous challenges, there are some rare ‘savings heroes’ who are forgoing instant gratification in favour of longterm gain.” The current retirement reform process was also put under the spotlight and David McCarthy (Retirement Reform Specialist at the National Treasury), Isaac Ramputa (Assistant General Secretary at SASBO) and Independent Financial Journalist Maya Fisher-French put forth their respective views and arguments on the way forward. There is no question that retirement reform is required but there are differences of opinion as to how it should be pursued. Costs are currently a significant stumbling block to create retirement value for members and the industry should work with Government to effectively reduce costs in the system. Sanlam will participate actively in this process, as we believe that our comprehensive industry research provides us with very specific insights into some of the underlying causes. A significant aspect of retirement
reform is the need for financial education to enable members to make informed decisions about their retirement savings. This is part of a much bigger need to educate consumers at large on how to manage their household budgets prudently and how to save for the future. And in this regard Sanlam is already playing a significant role through various programmes and initiatives. Thank you to everyone involved in this year’s Symposium and I hope that the insights from our research will greatly help the employee benefits industry and create more savings heroes for South Africa.
Robert Roux Acting CEO, Sanlam Employee Benefits
NOTE FROM THE EDITOR
WELCOME
to the November issue of insight. Sanlam Employee Benefits (SEB) has had a busy few months with the production of yet another successful annual Benchmark Symposium, themed Savings Heroes. However, we still have a bumper issue in store for our readers, featuring our own experts and guest writers. Maya Fisher-French (Independent Financial Journalist) explores how City Press readers understand investment products, while Simeka continues to offer personalised choice with the help of its outstanding team – read Kobus Hanekom’s article on default annuities. Richard van Dijk (General Manager at SEB) assures us that only the most highly qualified specialists will be available to assist members with their annuities; explore his reasons for absolute confidence in the Sanlam team. In addition, David Gluckman (Head of Future Positioning at SEB) still believes a well-functioning private sector with appropriate governance and cost structures in place offers better value-for-money to working class South Africans than the National Social Security Fund. Precious Buthelezi and Dirk Oosthuizen tackle the futile debate on pensioners paying tax on their prescribed assets; and Viresh Maharaj (Actuary at SEB: Group Risk) stresses the importance of a new outlook and structure for Group Risk. Please email suggestions and comments to insight@sim.sanlam.com; we are grateful for all feedback. Enjoy the read! Thaniah Toefy
DISCLAIMER: While Sanlam has taken due care to ensure that the views and opinions expressed are based on information which is relevant and accurate at the time of printing, 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 advisors with a view to Sanlam products and does not constitute advice or other services as defined under the Financial Advisory and Intermediary Services Act 2002. A financial advisor 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.
November 2012 insight 03
content and news
SANLAM EMPLOYEE BENEFITS’ BENCHMARK SYMPOSIUM Another innovative Symposium where the experts share, discuss and argue their views of the retirement reform, while celebrating our countries ‘Savings Heroes’ – everyday South Africans who show that despite adverse conditions, saving is possible.
10 FOR THE THIRD CONSECUTIVE YEAR, KOKKIE KOOYMAN (FUND MANAGER AT SIM GLOBAL) WINS INVESTMENT WEEK’S FUND MANAGER OF THE YEAR AWARD IN THE FINANCIALS CATEGORY.
06 insight July 2012
SANLAM INVESTMENTS NOW OWNS 100% OF SATRIX AND, TOGETHER WITH SIM.SMARTCORE, WILL OFFER THE MOST COMPREHENSIVE RANGE OF EXCHANGE TRADED FUNDS, INDEX FUNDS AND OTHER PASSIVELY MANAGED INVESTMENT SOLUTIONS IN THE COUNTRY.
12
DEFAULT ANNUITIES OFFER CHOICE
A key component to Simeka’s new Benefit Structure approach.
When time and space and change converge, we find place. We arrive in Place when we resolve things. Place is peace of mind and understanding. Place is knowledge of self. Place is resolution.
17
GABRIEL’S HEART
Even though Gabriel started work at the age of 14 (now 83), he wasn’t able to save for his retirement – but his investment in his children paid off.
Abdullah Ibrahim
14 PROFESSIONAL INTERMEDIARIES
Only the most experienced specialists will consult on retirement funds in the future.
20
EVEN INTELLIGENT CONSUMERS NEED BETTER UNDERSTANDING OF FINANCIAL PRODUCTS.
We are seeing a massive shift from small to large funds, with one quarter of all retirement fund members moving to larger umbrella funds last year. Danie van Zyl, co-Head of Guaranteed Investments, Sanlam Structured Solutions
November 2012 insight 05
22
content and news
An Umbrella Fund response to the retirement reform.
DURING THE BENCHMARK SYMPOSIUM, RESEARCH PROCESS BDRC CONDUCTED FACE-TO-FACE INTERVIEWS WITH 188 PRINCIPAL OFFICERS AND TRUSTEES OF STAND-ALONE RETIREMENT FUNDS AND SIX QUALITATIVE INTERVIEWS WITH KEY DECISION-MAKERS AT SPONSORING UMBRELLA FUNDS. Dr Johan van Zyl, Chief Executive of the Sanlam Group, voted
Die Burger
Business Leader of the Year.
24
KNOW THE NEW WORKFORCE
While the youth are conscientious about saving the planet and dealing with immediate issues in their world, they are not thinking about retirement. It’s up to us to get them motivated about their own future. They will be grateful in the end. 06 insight November 2012
Prescribed assets
26
Investing in State development programmes continues to be of the utmost importance; however, it should not be at the expense of pensioners’ savings and investments. South Africans need to be encouraged to consume less and save more, and Government needs to ensure the continuation of international capital inflow and be more prepared to cushion the blow if foreign investment ceases.
28
A mature group risk industry has its pros and cons. However, it has no future in South Africa’s socio-economic landscape.
19%
According to the Sanlam Benchmark research, among employees earning less than R10 000 per month, any savings put aside rarely lasts more than six months due to present financial difficulties.
The 2012 Sanlam Benchmark Survey of South Africa’s retirement fund industry indicates that only 19% of funds have put an environmental, social and governance (ESG) investment policy in place.
Sanlam’s online trading platform, iTrade, became the first South African platform to offer the world’s most advanced technical analysis tool, autochartist.com. November 2012 insight 07
sanlam benchmark symposium
The search for
heroes
By Danie Scholtz Head of Marketing: Sanlam Employee Benefits
Sanlam Employee Benefits’ (SEB) annual Benchmark Symposium took place in July with the main events held in Johannesburg and Cape Town. The Symposium, which is a prestigious event on the retirement industry’s calendar, showcases Sanlam’s research-based thought leadership and expertise. This year’s events were focused on quality, thought-provoking content presented by external and internal speakers. With more than three decades of industry-leading market research to work from, the message was magnified: poverty in retirement is still a reality for most South Africans. Despite all the efforts of industry role-players most retirement fund members still arrive at retirement with too little money. Some South-Africans still treat their retirement savings as an emergency fund. This was one of the worrying trends highlighted in this year’s Survey. According to the findings, 24% of funds surveyed reported that people resigned in order to access their retirement savings. In some cases, when a couple
08 insight November 2012
gets divorced, the pension is withdrawn as part of the settlement. We went to great lengths to find three ‘ordinary’ South Africans and their heroic savings stories were told at the Symposium. Footage from focus group sessions, where retirement fund members and pensioners told their accounts of struggle and hardship, served as a backdrop for some of the panel discussions. The other hot topic was the way forward for the current retirement reform process. David McCarthy (Retirement Reform Specialist at the National Treasury), Isaac Ramputa (Assistant General Secretary at SASBO) and Maya FisherFrench (Independent Financial Journalist) presented their thought-provoking views
and arguments. David’s presentation, in particular, drew a lot of attention and response from delegates. While internal speakers, Kobus Hanekom, Richard van Dijk and David Gluckman, responded to the retirement reform proposals from the perspective of their respective disciplines within SEB and were met with similar enthusiasm from the audience. Group CEO Johan van Zyl, Acting SEB CEO Robert Roux and Managing Director of Sanlam Investment Management
Cora Fernandez also contributed to the Symposium’s comprehensive programme, which catered for the diverse needs of all the delegates. Our ‘Savings Heroes’ theme permeated all the presentations and discussions, and perhaps the most important question coming from the Symposium is: Will retirement reform become the ultimate savings hero South Africans so desperately need? The time has come to take action, which
is distinctly focused on the future and on the industry and Government requirements to make adequate retirement savings a common reality. We owe it to all retirement fund members. We also owe it to our country. A total of 1 040 delegates attended the Symposium events in Johannesburg and Cape Town. A further 330 delegates attended a live broadcast of the Johannesburg event at six Ster Kinekor Cinemas, countrywide.
The message was magnified: poverty in retirement is still a reality for most South Africans.
November 2012 insight 09
simeka benefit structure
Default Annuity Strategies
By Kobus Hanekom Head of Strategy Governance and Compliance at Simeka
PROVIDING DEFAULT pensions at retirement is a key component of the new Simeka Benefit Structure approach. Member choice is essential in the design of the benefit structure of a typical South African retirement fund, but there is a right and a wrong way to introduce choice. To offer members 20 investment choices and say ‘tick a box’ comes dangerously close to the abdication of fiduciary duties on the part of a board of trustees. The more desirable architecture of choice is a default strategy where: The trustees select the default as the most appropriate alternative for the majority of the members, and offer members the opportunity to select (apply to) another option when the default does not meet their personal needs. The absence of default retirement benefits has been highlighted as a particular concern for National Treasury. In his presentation at the Sanlam Benchmark Survey in July this year, Dr David McCarthy said: “Our retirement system currently protects individuals in many ways – yet this
10 insight November 2012
protection is effectively withdrawn when most people retire.” In the document, ‘Strengthening Retirement Savings: Overview of the 2012 Budget Proposals’ dated May 14, 2012, the proposals seek to address four key priorities, one of them being the low levels of annuitisation. Specific initiatives proposed include the reform of the annuities market and measures to reduce the costs of retirement products.
Specific initiatives proposed include the reform of the annuities market and measures to reduce the costs of retirement products.
POSSIBLE SOLUTIONS THREE LANDING PLATFORMS’ LIFE-STAGES: The flagship default annuitisation arrangement is a life-stage investment portfolio with three landing platforms allowing near seamless transfers to a living annuity, a with-profits annuity or an inflation-linked annuity. In terms of this structure the first and most important part of a member’s annuitisation planning will be done five to six years before the elected retirement date. At this point the consultant can, with a fairly high degree of certainty, direct the member to the most appropriate annuity option. The landing platform / investment will then ensure the most appropriate and effective investment with the most effective migration to the selected annuity. LIVING ANNUITIES: Living annuities are particularly effective for highincome earners with sufficient capital. However, an aspect that requires careful consideration is the cost of these
annuities. Dr David McCarthy points out: “The layered charges can include, broker fees at 1% per annum + VAT, platform fees at 0.5% per annum + VAT and investment management fees at 1% per annum + VAT + performance fees.” It is for this reason many funds (with the appropriate economies of scale) consider providing living annuities from within the fund. In this way the administration and the investment charges can be negotiated at institutional rates. GUARANTEED INFLATION-LINKED ANNUITY: The annuity option indicated for the majority of members with a reasonable net replacement ratio is a guaranteed inflation-linked annuity. Based on research done by insurers, this annuity is also the most underrated. Members who survive past a certain age will do much better in this product than they would be able to do – even in a bull market – managing their own living annuity.
CONCLUSION:
With a basic default annuitisation solution in place, members will not be ‘abandoned’ and left to fend for themselves at retirement. They will be presented with one or more quotes in respect of the most appropriate annuity option at the most competitive prices the trustees could negotiate for them. They will however remain free to consider and secure any other annuity product recommended by their broker.
November 2012 insight 11
consumers seek advice
Engaging with the industry: A consumer’s perspective
By Maya Fisher-French Freelance Financial Journalist
AS A PERSONAL finance columnist for City Press,, there are two questions I receive most often: “How do I get out of debt?” and “Where do I save?” Short-term debt is without a doubt the biggest hurdle when it comes to saving, but even when an individual is in a position to put money away, they often have no idea where to start. There is also a fundamental distrust of both advisers and product providers. The financial industry is for most consumers a frightening experience. General levels of financial literacy are low and, quite frankly, the level of complexity and choice within the industry makes it a challenge even for educated consumers to fully understand the implications of their investment choices. This necessitates consumers to rely heavily on financial advisers, yet we have an industry where the incentives around financial advice create a fundamental conflict of interest.
12 insight November 2012
TAKE CITY PRESS READER JABULANI, for example, who wanted to start a savings plan for R900 a month. He had both short-term and long-term goals that he wished to achieve. In discussing his situation, we discovered that he had a personal loan that was costing him R960 a month with an interest rate of 30%. It made more sense for Jabulani to divert some of his disposable income into fast-tracking his debt repayment than to invest the full R900. What would have happened if Jabulani had approached the local branch of a life insurance company or even his local bank looking for advice? Would the broker have advised him to focus on his debt repayment, or would he have been sold a 10-year policy, locking him into a product that had financial consequences if he could not afford to maintain the monthly payment? Jabulani’s response to the related article in City Press answers the question:
Product providers and credit providers have found ways to tick the regulators’ boxes while still maintaining a lack of transparency. “I cannot believe the overwhelming response I get from my colleagues who read the article, especially considering the fact that from time to time we get sales people coming to our staff room to sell us insurance policies that we then end up signing even though we don’t really need them. “I remember this one guy in particular who came in with food, drinks, umbrellas and soccer balls to sell his insurance policy and everyone just joined in and signed up after their stomachs were full. However, when the deductions began to appear on our salary advices every month and all the food and drinks flushed away, complaints and grumblings were all I could hear.”
Jabulani’s is typical of the many stories we receive from readers about their experiences with the financial industry – like 30-year-old Liziwe who wanted to invest R500 a month into a unit trust as a long-term investment and was told by her bank consultant that this was ‘too risky’ and to opt for a fixed deposit instead. Many of our readers are middle class, they have some form of tertiary education and earn between R10 000 to R40 000 a month, yet their understanding of financial products is low and they seldom know what questions they need to be asking. The cynic in me sees this as a perfect hunting ground for unscrupulous practices where potential clients have the money to save and borrow yet can easily be sold products they don’t necessarily need. What concerns me most, however, is how little protection consumers really have. Despite on paper being among the most protected consumers in the world, the reality is that our regulators are largely underfunded and current legislation makes them ineffective.
Certainly the FAIS act is not stopping the behaviour described by Jabulani and Liziwe and simply creates additional paperwork for ethical advisers who in turn have to increase the amount they charge for their services or leave the profession. Product providers and credit providers have found ways to tick the regulators’ boxes while still maintaining a lack of transparency. Recently, when we raised a concern about the mis-selling of credit insurance by a credit provider, the National Credit Regulator’s response was simply ‘the consumer signed’. The reality is that the more vulnerable consumers are often not aware when they have been ripped-off, let alone know their rights or where to complain. The one hope consumers have is that the industry embraces the concept of Treating the Customer Fairly and that our regulators are able to implement it. It is far better to have a principle in place that demands that customers are treated fairly with full transparency than having a set of rules that are easily circumvented.
November 2012 insight 13
not your trust “inPutmoney, but put
your money in trust. Oliver Wendell Holmes
lifestyle
Invest in
kindness Gabriel*, 83, has never let poverty or apartheid and its legacy get the better of him – or his family. Now, in retirement, he lives earnestly with only love in his heart. BY TONNEA BRADBURY
Apartheid could so easily have left a person disgruntled and with feelings of entitlement but Gabriel is living proof that life is yours to live, despite its obstacles. Gabriel started work at 14. He was smart enough to continue his schooling but as the eldest sibling, it was customary in his culture to find a job and help support the family, enabling younger siblings to go to school. But as a coloured South African his options were limited.
JUST A BOY Gabriel wanted to be a mason, but he was small and his mother advised against it. He began work as a packer, cleaner and delivery boy at a local store, earning a minimal wage of R3 a week. By 21, Gabriel realised this was no life for him, so he move to Cape Town in search of better opportunities and found a job at Garlick’s as a ‘display boy’.
November 2012 insight 15
interview
Throughout his career, Gabriel tried to invest in insurance annuities but could never keep them up. HEART PROBLEMS
Gabriel enjoyed the change and his boss often trusted him to work alone. After three years, his boss advised him to try his hand in another industry, as there was no growth potential for him in window dressing; Gabriel took heed and joined the Golden Arrow bus company as a bus conductor. “Finally, I started to earn a decent wage (R28 a week),” says Gabriel who met the love of his life, Vera*, at about the same time. Thirteen years later, the Group Areas Act was set in place and Gabriel was promoted to inspector. Life was changing and things were looking up – he was well respected in the community and enjoyed a pay increase amounting to R1 350 a month.
16 insight November 2012
But pressure from his bosses, colleagues who resented coloured people for holding high positions, and gangster activities had taken their toll on Gabriel’s health. After 35 years in the business, he was forced to retire early, aged 60. With his payout (a third of his pension), Gabriel bought his house and went on pension – R835 a month. Fortunately, his wife was still working and the family had to adjust to the decrease in income as best as possible. Gabriel has never had the opportunity to save money: when he started working as a young boy, his ‘savings’ were sent home to his parents and siblings, and after he married, he had four children of his own to support. He says: “During those times, there were no bursaries for coloureds and two of my children were at UCT. But I believed that my children deserved a better life than I had had and I was always going to make sure they had as many opportunities as possible available to them.” Gabriel never let life get him down. He
and Vera had “got through” the apartheid years and nothing was going to prevent them from moving forward. Gabriel made his health a priority and started exercising. He joined a gym, participated in all the big walks around the Cape and enjoyed mountaineering. His motto is, “God always helps those who help themselves.”
RETIREMENT Gabriel retired in 1990, a time when the country was beginning to change for the better, but his once good neighbourhood had been taken over by rough youths, flats were being built and crime had moved in. He decided it was time to move back to George, where he had grown up, only to find that retail had gone through the roof and he could not afford to live there. He and Vera moved to Oudtshoorn, a quiet, friendly place where they have built good relationships with neighbours and friends. When Vera eventually retired, she had to fight for her State pension. Because Gabriel owned a house and already received a pension, the State was not willing to support her but she eventually won the battle and Gabriel now also receives a State pension, totalling
R4 000 a month – R1 000 of which goes to medical aid. This does not stretch very far as basic living expenses are high but, thankfully, their children help them through the tough months.
INVESTMENTS Throughout his career, Gabriel tried to invest in insurance annuities but could never keep them up. However, he has been blessed in other ways: he has been a good husband and father and served as an outstanding role model to his children who often tell his grandchildren how fortunate they are thanks to his sacrifices. Now, his children are only too happy to return the favour whenever they can, paying for annual family holidays and visits. Gabriel was surprised to make it to 70, then 80 and now, at 83, he is healthy, strong and remains an inspiration. He could understandably be bitter about the sacrifices and hardships he has endured – but he is grateful for his many blessings and forgiving of his misfortunes. Gabriel hopes to see South Africa continue to progress and learn from its mistakes, creating a country where good relationships are built amongst all people.
November 2012 insight 17
employee benefits
Is there a role for intermediaries in the future? By Richard van Dijk General Manager at Sanlam Employee Benefits
The short answer to this provocative question is an unequivocal yes; however, the profile of tomorrow’s intermediary will be vastly different to what we’ve become accustomed to over the years. EMPLOYEE BENEFITS HAS become a highly regulated and complex field, where only the most skilled and experienced specialists will be equipped to consult and advise on diverse client and fund requirements. Before examining the governance and compliance requirements for intermediaries in the current environment, we need to recognise the very important role that they’ve played in the development and growth of our industry thus far. They have been and will continue to be invaluable contributors towards member financial security planning, education, communication and industry competitiveness in terms of product, pricing and servicing.
18 insight November 2012
Although we are in a growth industry where Sanlam, in particular, is experiencing substantial growth, confusion still abounds regarding proposed pension fund reform, as initially raised by Government more than six years ago. During May this year, National Treasury issued a document for discussion entitled ‘Strengthening Retirement Savings’, which provided an overview of proposals announced in the 2012 Budget. Although welcomed by the industry, the document also created an expectation of a further five technical discussion papers to be released this year. Among the concerns stated in the document are inadequate lifetime savings, low levels of preservation and
portability, high fees and charges and low annuity levels. These concerns are real, acknowledged by the industry and need to be addressed by all stakeholders. The document and National Treasury observations also highlight concerns with commission payments from service providers to intermediaries and potential conflicts of interest between intermediaries and their clients in wholesale and retail markets. I envisage an ever-increasing shift to fee-based income for contracted service delivery and better alignment of annuity purchase pricing. Coupled with proposed regulation, intermediaries now also need to meet the fit and proper requirements in terms of the FAIS Act. These requirements include
The landscape and technical requirements of the employee benefits industry has changed forever, and with the changes, intermediaries have needed to adapt, up-skill and generally lift levels of professionalism.
honesty and integrity, competency, and in respect of Financial Service Providers (FSPs), operational ability requirements. The first deadline for competency requirements has now passed and only representatives who were successful in Regulatory Exam Level 1 may now give advice without supervision. Readers will find it interesting to note that SEB Distribution Employee Benefit Specialists boast a 100% pass rate and are qualified to assist intermediaries in all facets of marketing and sales of our products and services. Already we have seen intermediaries exiting the employee benefits industry for varying reasons, including not being able to cope with regulatory and FAIS
requirements. Yet another set of examinations will need to be passed next year. Regulatory Exam Level 2 will be product specific and test the knowledge and skills required of a representative. It is a generally held view that the industry will experience a further exiting of intermediaries at that juncture. Long gone are the days when employee benefits business was sold on relationships alone, devoid of any structured needs analysis, suitability assessment and appropriate recorded advice. The landscape and technical requirements of the employee benefits industry has changed forever, and with the changes, intermediaries have needed to adapt, up-skill and generally lift levels of professionalism. We welcome these developments and will continue to educate and support our intermediaries to operate competently and effectively in a very challenging environment. Given the complexities of our industry, the role of professional intermediaries is now more important than ever. Following global trends, we are likely to have fewer, more highly skilled intermediaries in the future and the real specialists will thrive, as clients and members will be clambering for guidance, service and support, whether the National Social Security Plan sees the light of day or not.
November 2012 insight 19
retirement reform
Retirement Fund Reform – the Umbrella Fund Response By David Gluckman Head: SEB’s Future Positioning and Research
ALTHOUGH A NATIONAL Social Security Fund (NSSF) is still very much on the Government agenda – refer to my article in the previous edition of insight – there is, in my view, a better alternative that could work for our country being a wellfunctioning private sector with appropriate governance and cost structures truly working to deliver value-for-money to working class South Africans. This vision underlies the future of the private sector umbrella fund market. Sanlam research leads us to conclude that this vision is the best solution to the protracted and complex retirement fund reform debate. The umbrella fund model not only delivers value for members via economies of scale, but also fits perfectly within a competitive environment by incentivising providers to deliver good service, and can be implemented with minimal transition risk and costs versus the NSSF alternative. National Treasury, in its recently published ‘Strengthening Retirement Savings’
20 insight November 2012
document, acknowledges that “costs on umbrella funds may fall as the sector matures” – in other words, that privately sponsored commercial umbrella funds can be a model that holds the promise of a better retirement proposition for South Africans. Perhaps (and more importantly) the market appears to also accept the argument, and the numbers indicate that the industry consolidation argument appears to have gathered an almost unstoppable momentum. In an umbrella fund study released as part of its 2012 Benchmark Survey, Sanlam reports that umbrella funds now comprise some 1 500 000 members and an asset base well in excess of R100bn. Furthermore, the major umbrella funds comprise some 80% of industry assets, and “it is becoming increasingly apparent that the market is dominated by five major umbrella funds sponsors” with Sanlam being amongst these via its Sanlam Umbrella Fund offering. The 2012 Benchmark Survey included the first ever published study of the major commercial umbrella fund sponsors with interviews of the business heads of six major sponsoring companies covering a very substantial portion of the industry
(almost 800 000 members covering more than 14 000 employers with an asset base in excess of R75bn). The study aimed to establish the sponsoring companies’ major business challenges and views on the retirement fund reform process. The study makes for fascinating reading! All six sponsoring companies predict continuing massive industry consolidation over the next three to five years. When quizzed on the minimum size for a standalone fund to be considered a viable entity, the median response was that there should be a minimum of 2 225 members. In an ideal world, the median response was that the South African retirement funds industry should comprise only 12 large commercial umbrella funds – this statistic is consistent with a predicted more than 20-fold contraction in the number of active commercial umbrella funds over the next five years; only the biggest and best umbrella funds are likely to survive!
Companies predict continuing massive industry consolidation over the next few years. THE STUDY INDICATES THAT LIKELY OUTCOMES OF THE RETIREMENT FUND REFORM PROCESS THAT IS BEING DRIVEN BY MARKET FORCES INCLUDE: Reduced revenues Necessity for cost cutting Product simplification (investments and risk) Consolidation of umbrella funds Reduction in number of intermediaries Although this does mean that sponsoring companies could be under pressure to balance these market pressures with the necessity to remain commercially viable and profit making, these outcomes translate to
good news from the viewpoint of members who are the direct beneficiaries of a lower cost environment. A highlight of Sanlam’s 2012 Benchmark Symposium was the Sanlam Umbrella Fund’s publication of its umbrella fund charges analysis for the third consecutive year. This analysis is now established as South Africa’s leading insight into sector charges and results were quoted by National Treasury in its ‘Strengthening Retirement Savings’ document. The 2012 analysis again showed cause for optimism with the average reduction-in-yield quoted as 1.7% per annum for the average member falling to 1.3% per annum over a full 40-year term. It can be expected that the reduction-in-yields will continue to fall driven by market forces as more and more larger employers join commercially sponsored umbrella funds, thereby not only aiding their own members’ retirement funds, but also contributing to the wider benefit of all umbrella fund members.
November 2012 insight 21
generation y
The next
For the up-and-coming generation, Generation Y, retirement poses many challenges. Let’s get them thinking and talking realistically. BY TONNEA BRADBURY
Generation Y – aka the Millenials – were born in the mid ’80s and now in their 20s serve as the new workforce.
Tech savvy This generation has grown up with technology and relies on it, greatly. They’re permanently plugged in and use tech as their preferred communication. They may believe nothing is impossible and hold the purchasing power to buy designer labels and iPads, but the reality is many don’t have the capacity to finance tertiary education or have the motivation to invest in their retirement. Now, more than ever, it’s up to individuals to provide for themselves in their golden years, but is Generation Y thinking of the future? Nicola*, 26, a post grad teaching student working as
28 insight July 2012
a hostess and part-time tutor, says: “I need a permanent teaching position to help me start retirement and medical funds. Now, I’m only concerned about getting through the month.”
Job satisfaction Perhaps Generation Y has been pampered by their parents and their expectations are unrealistic. Sindele*, 24, a psychology student and part-time medical receptionist, says: “I want to be fulfilled by my work and feel like I’m growing and making a difference.” For this reason, many switch jobs frequently and are predicted to have up to 14 jobs in the first 10 years of employment. This job-hopping obliterates any potential for company pension assistance (which is also a fading trend). Mentoring this generation will set them in good stead as positive attention propels them forward. Keeping lines
g
generation The biggest advantage Gen Y has is time. The younger you are, the longer your money can compound.
of communication open, talking about retirement and investments, and learning from others’ experiences is key. To close the gap between Millenials and older employees it might be worth big corporations considering programmes that will increase relationships of reciprocal understanding, while empowering the new generation and offering ease to older staff.
In it together This generation has grown up with play dates and various group activities including competitive sports – as well as the 2000 recession along with the bear economy. Unemployment is high and has resulted in conservative ideas about investing. Because teamwork is important to them, Gen Y doesn’t believe anyone should be ‘left behind’. They are therefore wary of Wall Street at a time when they should be investing aggressively and reaping high
returns in stocks. Lebo*, 29, a freelance writer, says: “I’d rather conservatively save money to buy a house one day, rather than take risks with stocks I don’t really understand. My later years won’t mean much if I don’t have any assets.”
TIPS FOR MILLENIALS: If you get on a budget, spend less than you make, and get out and stay out of debt, you will be set
Take advantage
for retirement. Think big:
The biggest advantage Gen Y has is time. A Forbes article, What young people need to know about retirement, July 25, 2012, emphasised that the younger you are, the longer your money can compound. The youth shouldn’t focus on short-term losses, rather on the year they retire. For example, if you save R2 500 a month for 45 years at 5% per annum, you will create a nest egg of R5 066 093. This doesn’t consider the effects of inflation – still, not bad. Now is the time to turn knowledge into action and set our youth (our future) on to the path of sound investment choices.
aim for a few million in the bank, it’s better than a fixed income of R3 000 a month. Consult a financial adviser and learn the basic strategies and techniques for investing and building a portfolio. In today’s global economy, Gen Y needs to diversify stocks, bonds and global investments.
November 2012 insight 23
prescribed assets
Prescribed assets a futile debate By Precious Buthelezi (Monitoring specialist at Simeka) and Dirk Oosthuizen (Investment Consultant)
The debate on prescribed assets has resurfaced as a means to address social and economic inequality in SA. UNFORTUNATELY, RETIREMENT FUND members and pensioners who will be most affected feature the least in this debate. Expected benefits of prescribed assets are two-fold: to raise cheap and guaranteed funding and the use of this funding for developmental projects managed by the State. The irony is that the cost of borrowing is at historic lows. Domestic bonds have been attractive to investors in recent years and overseas investors have been significant buyers of such debt. There is an efficient tax collection system to back these bonds and the fact that SA bonds have been included in Citigroup’s influential World Government Bond Index shows a vote of confidence in the sustainability of our Government’s finances. South African Treasury has regularly oversubscribed bond issuances and is planning to increase the average term of Government lending from just over
24 insight November 2012
10 years to in excess of 12 years by, amongst others, issuing a bond with a term of 36 years – whilst some European countries are struggling to fund weekly roll-over of debt! Recently, the Treasury department reported that Government’s cash balance as of the end of June 2012 amounted to R206bn – some R10bn below the record high achieved earlier in 2012. The first major Government borrowing to be repaid is due only in March 2013 and the outstanding amount on that loan is but 10% of this cash balance! Nevertheless, we have relatively low economic growth; partly explained by a low fixed investment to gross domestic product ratio compared to other emerging markets, suggesting a great need to develop infrastructure in order to be competitive in the world economy. Government institutions, largely municipalities and provincial Governments, are unable to spend their infrastructure
Investing in development programmes remains critical, but not at the expense of poor pension payouts - a lesson seemingly not learned from the 1960s to 1980s.
budget allocation efficiently. The actual spending of budget allocated to Government infrastructure projects was 68% in 2010/11. In reality, what has happened is that Government’s remuneration bill has increased at much higher rates (17.6% in 2009/10) than economic growth. Investing in development programmes remains critical and is beneficial. That said, it should not be at the expense of poor pension payouts – a lesson seemingly not learned from the 1960s to 1980s. An unintended consequence could be that members contribute less to pension funds as they may be forced to invest in non-market related investments by prescribing investments. Prescribed assets could crowd out private sector investment, as Government diverts more available savings to pet projects. Furthermore, the market mechanism can be distorted because funds would have to be invested in Government bonds, even when other investment instruments are yielding relatively higher returns. Moreover, Government will have less of an incentive to manage the fiscal prudently. This country relies on foreign investment to fund our current account. In this regard, Government’s active role should be to protect the integrity of Government spending and encourage savings with an intention to cushion the financial system in the event of a sudden stop in overseas capital inflow. A further focus should rather be on fixing the governance of public corporations and a poor education system, as well as improving infrastructure spending with current unspent budgets rather than taxing pensioners with prescribed assets.
November 2012 insight 25
group risk
Is the private sector, group insurance industry future-proof? By Viresh Maharaj Actuary at Sanlam Employee Benefits: Group Risk
26 insight November 2012
The South African group risk industry displays the classic characteristics of a mature industry, namely strong price competition, low-profit margins and a high degree of market penetration.
Much of the responsibility for the lack of attention paid to improving benefits has to lie at the foot of trustees. THERE ARE A number of advantages that come with maturity, including: Risk being annually reviewed and typically placed with the most price efficient insurer. The incumbent insurers have developed significant intellectual capital in the administration of risk cover. The majority of formally employed South Africans enjoy cover, for instance the industry pays out about R11bn of claims each year. Worryingly, the industry life cycle model suggests that a mature industry will eventually fall into decline. This may be due to the entry of a substitute product (think NSSF), external shocks or, most commonly, a lack of innovation and adaption in the face of the changing needs of consumers (think Kodak, VHS, etc). I believe our industry is at a crossroads and needs to reconsider its role in South
Time
Decline
Maturity
Growth
Introduction
Development
Profits
Industry Life Cycles
Africa’s socio-economic landscape, not just to avoid a decline in profits or maintain the status quo, but to create greater value for South African families. To do so, we need to identify and question implicit assumptions, debate long-held practices and challenge our structure of interpretation in order to reinvent ourselves and future-proof our industry. I want to use this opportunity to spark debate on what needs to change in order to rise to this task. While our industry is quite price efficient, it has not been as successful in rolling out products to meet the changing needs of employed South Africans. Given the sharp focus on price competition, insurance companies tend to shy away from significant product development. Much of the responsibility for the lack
of attention paid to improving benefits has to lie at the foot of trustees. The 2012 Benchmark indicates only one out of 20 trustees considers better risk benefits to be the primary burning issue in their space and only one in 10 considers this to be an issue at all. This is despite ASISA’s findings that employed South Africans are underinsured to the tune of about R18.4 trillion. An average South African employee is underinsured by about R600 000 for death and R900 000 for disability. While this seems grim, the status quo presents our industry with an opportunity for greatness especially considering the vital role that an appropriate insurance benefit may serve in wealth creation and protection, particularly amongst lower income earners. We, the
November 2012 insight 27
group risk
We have an opportunity and the moral responsibility to challenge ourselves to create a system that better meets the needs of South Africans. group risk industry, are beautifully poised to provide these appropriate benefits as the wholesale nature of group risk provides greater access to these insurance benefits in an efficient manner due to price competition between group risk insurers, lower commissions payable on group business and the wholesale distribution infrastructure. Lower income earners also benefit from the cross subsidies gained by virtue of being part of a wider risk pool that contains those of a higher socio-economic status. As such, the rates they pay are less than what they could typically get if rated on their own risk factors due to the effect of this cross-subsidy. This of course speaks to the principle of solidarity that may be achieved particularly when funds
28 insight November 2012
are comprised of members from across the socio-economic spectrum, which is generally the case amongst South African schemes. Innovation may also be enacted by questioning your assumptions, for instance the current thinking behind much product design is that younger members require higher multiples of cover due to their lack of savings due to a shorter time in the market and greater financial pressures as they may have very young families with children to support over a longer period than older members. Employed people are having children later (particularly amongst professionals). Insured members do not have the
assumed savings built up at later ages due to low-savings rates and a dire lack of preservation. Breadwinners now have to increasingly take care of grandchildren, particularly at lower socio-economic levels. The interaction between these factors suggest that the current age based paradigm is not aligned with the reality of a large proportion of South Africans in that they still require large sums assured even as they approach retirement. A forward thinking industry needs to understand these changes and adapt to stay relevant into the future. A possible way to do so is to reduce the extent to which cover scales reduce at older ages thereby providing higher benefits to meet the changed needs of South Africans. As an industry, we have an opportunity and the moral responsibility to challenge ourselves to create a system that better meets the needs of South Africans. It is not good enough to cling to the status quo as what got us here will not get us to where we want to be, where we need to be and where we have to be. What will get us to where we need to be is reflection, the courage to question ourselves as well as the creativity needed to engineer a future-proof system.
When I was young I thought that money was the most important thing in life; now that I am old I know that it is. Oscar Wilde
TJDR (CT) 38979/E
4 new awards for us. Many more rewards for our clients. Sanlam Employee Benefits are the proud winners of another 4 of the major retirement fund industry awards, bringing our total to 7 in just 2 years. The awards include: • The FIA Award for Employee Benefits Suppliers of the Year 2011 & 2012. • The POA Imbasa Yegolida Award for the Umbrella Fund of the year 2010 & 2011. • The POA Imbasa Yegolide Award for Actuarial Firm of the year 2012 won by our consulting business, Simeka Consultants & Actuaries. • The IRF Communication Challenge Award in the Umbrella Funds category. • PMR Golden Arrow Award for excellent retirement fund administration in the City of Cape Town and Cape Peninsula Survey. • PMR Golden Arrow Award for excellent retirement fund administration in the Boland Survey. This is another first in the industry and we are honoured by the acknowledgement of the efforts we make on behalf of our clients. We will never forget that they have placed their life savings in our hands, and we will continue to work hard for them so they can rest easy. Sanlam Employee Benefits. As ambitious as you are.
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