FPI Oct - Nov 2011

The

Financial Planner Supporting Excellence in Financial Planning

The Effective Investor: Bubbles and Crashes Regulation 28 – as it pertains to Pension/Provident Funds, Retirement Annuities and Preservation Funds The Role of the Healthcare Broker in anticipation of NHI Vital Statistics of the Medical Scheme Industry (2000-2010)

FPI

Official Journal of the Financial Planning Institute of Southern Africa The Financial Planner

Fpi Members Can Claim 2 CPD Points For This Issue October/November 2011 R 30.002011 (incl. VAT) October / November 1

Foreword

Setting the Standard... streamlining the disciplinary process and case administration.

In addition to the aforegoing I hope to add value, not only to the FPI’s operations, but also to the business of each and every member through the provision of sound and relevant input on standards and discipline related matters.

One of the key functions of the Standards Department is the protection of, among others, the CFPŽ mark. The purpose of a mark is to distinguish one’s services from those of another’s and also to certify that the services rendered will be of notable quality and standard. In short, a mark provides a distinctive identity in the market.

The CFP mark is the globally recognised mark of professionalism IRU ÀQDQFLDO SODQQHUV 7KH PDUN VLJQLÀHV WKH SURYLVLRQ RI REMHFWLYH FRPSUHKHQVLYH DQG H[SHUW ÀQDQFLDO SODQQLQJ services by a professional who has undertaken to render such distinguished service in a responsible and ethical manner.

Unauthorised use of the mark is a matter of great concern since it strips the mark of its exclusivity and leads to unrestricted FRPSHWLWLRQ DPRQJ ÀQDQFLDO SODQQHUV &)3 SURIHVVLRQDOV should ideally only be competing amongst themselves for PDUNHW VKDUH DQG QRW ZLWK HYHU\ ZRXOG EH ÀQDQFLDO SODQQHU misleading the public into believing they too are part of the elite, a CFP professional.

Jacqui GrovĂŠ )3, 67$1'$5'6 0$1$*(5

â€œâ€Śâ€Ś[a mark] is not simply a trademark, a design, a slogan or an easily remembered picture. ,t is a studiously craIted personality proĂ€le oI an individual, institution, corporation, product or service.â€? – Daniel J. Boorstin It is with enthusiasm and excitement that I recently joined the FPI as Standards Manager.

In the short time that I have been here I have already been rewarded with invaluable support and guidance by our CEO, *RGIUH\ 1WL DQG +HDG RI &HUWLĂ€FDWLRQ DQG 0embership Services, Anthony Campher and I am sincerely grateful for the opportunity to further develop the Standards Department.

In the coming weeks and months I will be focussing on the SURWHFWLRQ RI )3, PDUNV WKH ÀQDOLVDWLRQ DQG LPSOHPHQWDWLRQ of a new Code of Ethics and Professional Responsibility and

The Financial Planner

I therefore urge all members to assist the FPI in safeguarding the mark’s exclusivity by reporting alleged unauthorised use of the mark. It is in each and every CFP professional’s own interest to ensure that the use of the mark and the competitiveness of the CFP designation remains reserved for the few who have legitimately obtained their exclusive status.

A further concern relating to the mark is the frequency with which members incorrectly use and apply the mark to their stationery, electronic signatures, promotional literature and websites. The numerous examples of incorrect use are too many to illustrate here but it generally relates to the use of the CFPŽ / CERTIFIED FINANCIAL PLANNERŽ mark without the appropriate Ž superscript. Please visit the FPI’s website for WKH 8VH RI 0DUNV 3ROLF\ GHWDLOLQJ WKH FRUUHFW XVH RI WKH PDUN or contact the Standards Department who will gladly assist in ensuring the correct use of the mark.

Shoulder to the wheel‌.

Best wishes Jacqui GrovĂŠ )3, 67$1'$5'6 0$1$*(5

October / November 2011

3

Magazine Feedback As a result of delivery problems experienced with the member magazine,The Financial Planner, this year, we decided to conduct a detailed review of the magazine with input from our members. A survey was run from 30 August to 9 September to gauge members’ views and suggestions regarding the magazine. 449 members participated in the survey which represented a sample of approximately 7% of the total membership. A summary of the main items surveyed is below: Question Is the magazine a valuable PHPEHU EHQHÀW" Is the content valuable WHFKQLFDO LQIRUPDWLRQ" What is the preferred IUHTXHQF\ RI WKH PDJD]LQH" What is the preferred method RI GHOLYHU\"

Production of the Magazine The current basis of distribution of the magazine is on a full risk, outsourced basis through an external publisher. The total production cost (editorial, printing and postage) is in the order of R150 000 per issue, which is just under R1 million p.a. for six issues.

The full production costs are funded by the publisher and offset with advertising revenue. No production costs are funded from FPI membership revenue. Since the publisher has experienced reduced advertising support over the last two years for a QXPEHU RI UHDVRQV LW KDV EHFRPH LQFUHDVLQJO\ GLIĂ€FXOW WR FRYHU the full production costs.

Future of the Magazine You would have recently received your August/September copy of the magazine. This October/November issue will be the fourth and last issue for 2011.

Results 89,5% - Yes 93.3% - Yes

As a temporary measure, during 2012, a printed version of the magazine will be made available to you FREE OF CHARGE but this will be based on a subscription basis. A digital copy will be sent to all members and all current and future issues made available on the FPI website.

42.5% every alternate month, quarterly 32.3% and monthly 25.2% 38.8% electronic only, 34.5% electronic and printed and 26.7% printed only 54.1% - Yes

In addition, based on the feedback received from members, the magazine will continue to be produced on an alternate monthly basis. We will however be reviewing the content to SURYLGH \RX ZLWK VSHFLDOLVHG FRQWHQW LQ WKH YDULRXV ÀQDQFLDO planning disciplines and other topics. We will also be investigating reduced subscriptions to a number of other magazines in 2012 and will communicate further in this regard.

If the magazine is electronic, would you like an option to VXEVFULEH WR D SULQWHG YHUVLRQ" What would you pay for a 81,2% - R25, 18.2% - R50 subscription-based printed and 0.6% - R75 YHUVLRQ" Is a reduced/negotiated 86.2% - Yes subscription rate to other magazines a valuable EHQHILW WR \RX"

Survey Winners Thank you to everyone who participated in the survey and for providing us with your views and suggestions. The prize winners, who were randomly selected, were:

The overwhelming response was that the magazine is of value to our members and as your professional body, we remain committed to providing you with a high quality magazine as a YDOXDEOH PHPEHU EHQHÀW ZLWK WHFKQLFDO FRQWHQW WR NHHS \RX XS WR GDWH ZLWK GHYHORSPHQWV LQ WKH ÀQDQFLDO SODQQLQJ LQGXVWU\

‡ ‡

0U $OEHUW )ULW] IURP &HQWXULRQ ZLQQHU RI DQ $SSOH L3DG (64GB) with Wi-Fi plus 3G valued at R7 600.

0U +HLQVWXG 6KDUS IURP 9HUZRHUGSDUN ZLQQHU RI RQH \HDU¡V DQQXDO VXEVFULSWLRQ WR )LQDQFLDO 0DLO YDOXHG DW approximately R1 000.

Subscribe free of charge to a printed copy of The Financial Planner Please complete and email to tsholo@fpimail.co.za, fax to 086 633 7723 or complete the online subscription request (link on the home page of the FPI website www.fpi.co.za). <(6 , :28/' /,.( 72 &217,18( 5(&(,9,1* $ )5(( 35,17(' &23< 2) 7+( 0$*$=,1( ,1 Full names: 0HPEHU 1R Postal address: Postal code:

Contact no:

Contents

Foreword Jacqui Grové

The

Financial Planner Publisher Financial Planning Institute of Southern Africa (FPI) Street Address Palms Office Court, Kudu Avenue, Allens Nek Johannesburg Postal Address PO Box 6493, Weltevredenpark, 1715 Contact Tsholofelo Dihutso tsholo@fpimail.co.za (011) 470 6050 Layout & Graphic Design Remata Communications and Printing Editorial Board Mersey Booysen, Jenny Gordon, Jennifer Grefen, Harry Joffe, Leon Jordaan, Paul Kantor, Almo Lubowski, Johann Maree, Paul Rabenowitz, Jeffrey Wiseman.

The Editorial Board serves in a voluntary and independent advisory/technical capacity. Members do not in any way represent their employer companies.

The views expressed in this magazine do not necessarily represent those of its owners, publishers or editorial staff.

Editorial comments sent to THE FINANCIAL PLANNER are subject to editorial change to suit the style of the magazine.

All manuscripts, photographs and other similar matter are accepted on the understanding that no loss or damage is borne by the publisher, the editor or their personnel.

Subscription rate: R165 per annum for six copies (bi-monthly), in South Africa. Over border and overseas rates on application. © 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers. Any unathorised reproduction of this work will constitute a copyright infringement, rendering liability both under civil and criminal law.

ISN 1013-1507

The Financial Planning Institute

The Financial Planner

03

Financial Planning Life Planning is simply Financial Planning done well Kim Potgieter, CFP®

06

Administration Reports – What Trustees need to know Jennifer Grefen, CFP®

10

Effective communication to fund members Mentje Larney

13

Regulation 28 – as it pertains to Pension/Provident Funds, Retirement Annuities and Preservation Funds Dan Berglund, CFP®

16

Estate duty - practical problems Berrie Botha

18

Intervivos trusts in SA David Thomson, CFP®

19

Vital Statistics of the Medical Scheme Industry (2000-2010) Anthea Towert, CFP®

21

The Role of the Healthcare Broker in Anticipation of NHI Andre Jacobs, CFP®

30

The Effective Investor - Chapter 25: Bubbles and Crashes Franco Busetti

32

The RAFI five year scorecard Marc Green, CFP®

34

Time Daniel Clifford, CFP®

37

Industry Sector Group News

39

FPI News

41

Tel: 086 1000 374

October / November 2011

5

Client Engagement

Financial Life Planning is simply Financial Planning done well According to George Kinder (founder of the Kinder Institute RI /LIH 3ODQQLQJ WUDGLWLRQDOO\ Ă&#x20AC;QDQFLDO SODQQHUV KDYH IRFXVHG on the numbers - budgeting, investments, taxes, or insurance - without exploring the broader context. Rarely did they ask questions like: ´,I \RX KDG PRUH WLPH RU PRQH\ ZKDW ZRXOG \RX GR"Âľ RU â&#x20AC;&#x153;What do you want to accomplish or attain in order to feel WKDW \RX¡YH KDYH KDG D OLIH ZHOO OLYHG"Âľ It is these types of questions that are at the heart of Financial Life Planning. Financial Life Planning is all about creating a VRXQG Ă&#x20AC;QDQFLDO SODQ EDVHG RQ \RXU LQGLYLGXDO FOLHQW¡V SHUVRQDO goals, dreams and values around money.

In reality highly competent planners who possess great LQWHJULW\ KDYH EHHQ SUDFWLFLQJ WKLV W\SH RI Ă&#x20AC;QDQFLDO SODQQLQJ for years, albeit in some cases unconsciously. They take the time to truly get to know their clients current life situation while at the same time they make the effort to discover their clientâ&#x20AC;&#x2122;s deepest held, and often not expressed, life goals and dreams.

7KH\ WKHQ FUHDWH D Ă&#x20AC;QDQFLDO SODQ WKDW ZLOO HQDEOH WKH IXOĂ&#x20AC;OPHQW of these dreams.

Kim Potgieter, CFPÂŽ| Director, Chartered Wealth Solutions

Financial Life Planning is often viewed with suspicion by Ă&#x20AC;nancial planners and clients alike who assume it is some sort of New Age touchy-feely approach to Ă&#x20AC;nancial planning. 2f course the irony is that really good Ă&#x20AC;nancial planners are in fact, often without them even being aware of it, actually Financial Life Planners.

What exactly is Financial Life Planning? )LQDQFLDO /LIH 3ODQQLQJ LV Ă&#x20AC;QDQFLDO SODQQLQJ EDVHG RQ WKH SUHPLVH WKDW SODQQHUV VKRXOG Ă&#x20AC;UVW GLVFRYHU D FOLHQW¡V PRVW HVVHQWLDO JRDOV LQ OLIH EHIRUH IRUPXODWLQJ D Ă&#x20AC;QDQFLDO SODQ VR WKDW D FOLHQW¡V Ă&#x20AC;QDQFHV FDQ EH VWUXFWXUHG LQ VXFK D ZD\ DV WR fully support and enable these goals.

While this may sound simple it is amazing how few people actually spend any real time thinking about their deepest and most enduring values and goals and how these relate to their Ă&#x20AC;QDQFLDO SODQQLQJ

The Financial Planner

Resistance to Financial Life Planning thinking in SA So if Financial Life Planning is so simple and worthwhile why LV WKHUH UHVLVWDQFH WR LW ZLWKLQ WKH 6RXWK $IULFDQ Ă&#x20AC;QDQFLDO SODQQLQJ LQGXVWU\" 7KH Ă&#x20AC;QDQFLDO SODQQLQJ LQGXVWU\ LV E\ LWV YHU\ QDWXUH D traditional, conservative environment. Established business practices are often well entrenched, with many ascribing to WKH PRWWR ´,I LW DLQ¡W EURNH GRQ¡W Ă&#x20AC;[ LWÂľ However by introducing Financial Life Planning principles into your practice you are guaranteed to deepen your client interactions. Clients who feel that they are understood as individuals rather than as manifestations of their bank account will be contented and loyal - after all, what is more appealing to a client than working with a planner who sees them as the LQGLYLGXDO WKDW WKH\ DUH" 7KLV W\SH RI GHHS FOLHQW FRQQHFWLRQ invariably leads to the development of that all important asset IRU \RX DV D Ă&#x20AC;QDQFLDO SODQQHU ² D FOLHQW IRU OLIH Secondly it often comes down to a skills incompatibility. *HQHUDOO\ VSHDNLQJ Ă&#x20AC;QDQFLDO SODQQLQJ WHQGV WR DWWUDFW SHRSOH with analytical and mathematical minds whereas Financial Life Planning attracts people who have strong people skills. It WDNHV D FRQFHUWHG HIIRUW IRU Ă&#x20AC;QDQFLDO SODQQHUV WR PHUJH ERWK left and right brain thinking but the rewards are enormous and well worth the effort.

October / November 2011

6

Client Engagement

Lastly there is a broad lack of understanding amongst professionals and consumers alike. Planners, who themselves do not fully understand the concept, often feel threatened by Financial Life Planning and therefore do not promote it to their FOLHQWV /DUJH LQVWLWXWLRQDO Ă&#x20AC;QDQFLDO FRPSDQLHV LPSO\ LW WKHLU advertising but do not actually practice it on the ground. And unfortunately most of the thinking and writing about Financial Life Planning has remained within industry circles resulting LQ FRQVXPHUV EHHQ ODUJHO\ XQDZDUH WKDW KROLVWLF Ă&#x20AC;QDQFLDO planning exists, so they do not even ask for it.

A case study showing how Financial Life Planning can HQULFK D Ă&#x20AC;QDQFLDO SODQ Potgieter shares the story of a veterinarian who came to see her. He had come in for advice on how to invest his retirement savings as he was 65 and thought he needed to close his practice and retire. â&#x20AC;&#x153;I could have simply invested his money and sent him off to retire but after speaking with him in-depth I realised that this solution would lead to great unhappiness on his part. His passion was being a vet and although he also expressed a desire to grow plants to sell, and to spend more time with his wife and looking after his birds, I knew that these activities would not full the 168 hours he would have available each week in retirement.

We went through various scenarios and together came up with a plan where he would hire a locum to give himself more Ă H[LELOLW\ +H ZRXOG DOVR QRW ZRUN RQ D )ULGD\ WKHUHE\ JLYLQJ him time to grow his plants and tend to his birds. Although he would be earning less he would still be doing what he

The Financial Planner

loves, which was caring for animals, but his life would have more balance as he had freed up his time to enjoy his other LQWHUHVWV 7KLV LV D JRRG H[DPSOH RI D Ă&#x20AC;QDQFLDO SODQ WKDW ZRUNV not only for a clientâ&#x20AC;&#x2122;s money but also for his life.

Conclusion Financial Planning and Financial Life Planning are inextricably intertwined. Financial Planning without the broader context of Life Planning may enable a client to become rich or old, but not richly old. Life Planning on the other hand, removed from a Ă&#x20AC;QDQFLDO FRQWH[W FDQ SURGXFH JRDOV WKDW ODFN WKH UHVRXUFHV WR be realised.

5HWLUHPHQW H[SHUW 0LWFK $QWKRQ\ LQ KLV EHVWVHOOLQJ ERRN 7KH New Retirementality sums it up when he says, â&#x20AC;&#x153;The tacit DQG XQZLWWLQJ DVVXPSWLRQ FRPPXQLFDWHG E\ PDQ\ Ă&#x20AC;QDQFLDO SURIHVVLRQDOV LQ GHYHORSLQJ D Ă&#x20AC;QDQFLDO SODQ LV WKDW HYHU\RQH is essentially the same, and the only thing that really needs to changes from one person to the next is which numbers get plugged into the formula. Is this an assumption you would want VRPHRQH WR PDNH DERXW \RX"Âľ Probably not. Your clients undoubtedly feel the same way so why not apply some Financial Life Planning thinking to your next client interaction and see for yourself the difference it makes.

For more information and deeper insights into Financial Life Planning go to www.mitchanthony.com or ZZZ NLQGHULQVWLWXWH FRP

October / November 2011

7

Employee Benefits

Administration Reports â&#x20AC;&#x201C; What Trustees need to know

Trustees are ultimately accountable for the operations of the fund.Trustees have a Ă&#x20AC;duciary responsibility towards the fund, and need to take all reasonable steps to ensure that the interests of members are protected at all times, and trustees must act with due care, diligence and in good faith.

Introduction 0DQ\ DGPLQLVWUDWRUV SURYLGH WKHLU WUXVWHHV ZLWK WKHLU ÂśVWDQGDUG administration reportsâ&#x20AC;&#x2122;, and I have been asked by several 7UXVWHHV ZKHWKHU WKLV LV VXIĂ&#x20AC;FLHQW , ZLOO EULHĂ \ KLJKOLJKW WKH

The Financial Planner

information that I think Trustees require from their administrator to satisfy themselves that their Fund is being appropriately administered, paying special attention to their administration reports. Trustees can then ensure that their current DGPLQLVWUDWLRQ UHSRUWV SURYLGH WKHP ZLWK VXIĂ&#x20AC;FLHQW GHWDLO WR ensure that their Fund is being appropriately managed.

Before we get into the detail, lets sketch the environment in which we are operating: Trustee role Trustees are ultimately accountable for the operations of the IXQG 7UXVWHHV KDYH D Ă&#x20AC;GXFLDU\ UHVSRQVLELOLW\ WRZDUGV WKH fund, and need to take all reasonable steps to ensure that the interests of members are protected at all times, and trustees must act with due care, diligence and in good faith.

October / November 2011

10

Employee Benefits

The duty of the board of trustees can be compared to that of a board of directors of a company. A company director QHHGV WR HQVXUH WKDW D FRPSDQ\ RSHUDWHV HIĂ&#x20AC;FLHQWO\ DQG WR do this, directors must put governance structures in place, set JRDOV DQG WDUJHWV IRU WKH Ă&#x20AC;UP DQG HQVXUH WKDW WKH\ KDYH WKH right people in place to achieve those goals. Directors are accountable to their stakeholders. Similarly, Trustees manage the business of the fund, and are ultimately accountable IRU WKH RSHUDWLRQV EHQHĂ&#x20AC;WV LQYHVWPHQWV JRYHUQDQFH DQG performance of the fundâ&#x20AC;&#x2122;s service providers and the running of a fund as a whole. The Trustees are also accountable to their stakeholders.

So in a nut shell, when it comes to the operations of the fund, the buck stops with the Trustees, as they are ultimately accountable for the operations of the fund, and that includes the fund administration.

6R KRZ GR ZH JHW WR WKH SRLQW ZKHQ ZH DUH WU\LQJ WR monitor our administrator?

First the board needs to select an appropriate administrator.

The trustees would analyse the needs of the Fund and the Employer, and set out the criteria for appointment, and document this in the service provider policy. Once the appropriate provider has been selected, the Board would need to set up a carefully considered Service Level Agreement, which highlights all activities that the administrator is required to perform.

Jennifer Grefen, CFPÂŽ _ )3, (PSOR\HH %HQHĂ&#x20AC;WV ISG Chairperson

So now the Board has their S13 B administrator in place, how do you monitor your administrator, and ensure that your fund LV EHLQJ DGPLQLVWHUHG DSSURSULDWHO\" How to monitor your administrator?

Good questions I think that putting together a couple of good questions, and popping them through to your administrator on a regular basis, may save you a lot of time in the long run, as their responses will give you an insight as to how your administrator manages their business.

Typically, you would request information regarding their DGPLQLVWUDWLRQ V\VWHP HJ WKH VSHFLĂ&#x20AC;FDWLRQV LQ UHVSHFW RI the administration system, the security levels and how these are applied, the stress testing, maintenance performed on the system, disaster recovery measures, as well as current and proposed system enhancements. I would also ask your administrator for information as to the administration business DV D ZKROH HJ WKH VWDWXV RI WKH DGPLQLVWUDWRU¡V Ă&#x20AC;QDQFLDO statement submissions and SARB reporting, and statistics as to how many funds monthly updates are with in the current month.

Your administrators responses to these questions will generally act as a good barometer of the administratorâ&#x20AC;&#x2122;s overall HIĂ&#x20AC;FLHQF\ DQG HIIHFWLYHQHVV ,W LV DOVR JHQHUDOO\ DGYLVDEOH to meet with your fund auditors, and discuss their impressions RI \RXU DGPLQLVWUDWRU DV WKH\ KDYH EHHQ LQ WKHLU RIĂ&#x20AC;FHV IRU D couple of weeks, they may have some interesting insights.

The Financial Planner

5HJXODU $GPLQLVWUDWLRQ UHSRUWLQJ Your regular reporting from your administrator will be in the form of administration reports, and I will highlight what I think that Trustees need to get from their administrators, and whatâ&#x20AC;&#x2122;s reasonable for Trustees to check on a regular basis.

Iâ&#x20AC;&#x2122;m not suggesting that Trustees need to replicate the work of the administrator to ensure that they are doing their job, but rather the trustees need regular, relevant reports from their administrator, which are reviewed on a regular basis. If the appropriate processes are set up, and appropriate checks put in place by the fund, this will give the trustees insight into the administration process, and also give them the comfort to sign RII WKH $)6 EHFDXVH WKH\ XQGHUVWDQG WKH XQGHUO\LQJ Ă&#x20AC;JXUHV The review processes doesnâ&#x20AC;&#x2122;t all need to performed by WKH SULQFLSDO RIĂ&#x20AC;FHU LQ IDFW , WKLQN LW¡V PRUH HIIHFWLYH LI WKH different levels of reporting get reviewed by different parties.

I would suggest that your regular reporting be made up of both statistical reporting ( your conventional administration reports), DV ZHOO DV Ă&#x20AC;QDQFLDO UHSRUWLQJ ZKLFK SURYLGHV DQ LQVLJKW LQWR WKH fund accounting, and allows Trustees to cross check the statistical information provided, which the accounts. Its important that your administrator has an integrated accounting system, which will allow monthly accounting reporting.

October / November 2011

11

6WDWLVWLFDO $GPLQLVWUDWLRQ UHSRUWV For a reasonably sized fund, I think that you should be getting a couple of different reports from your administrator on a regular basis.

Weekly/monthly outstanding claims report It is reasonable to expect a detailed claims reports every week or month, depending on the volume of claims, on your fund. This report would typically be sent to the company HR delegate on a weekly basis, and this would normally be the person who completes the claim forms, and deals with exiting members on a daily basis.

This would provide them with an overview of the claims activity which has taken place over the week. Being provided with this information weekly often results in the speedy resolution of member queries, rather than requiring the HR person to log onto the administrators site. This also enables people at the coal face to monitor the claims process on a day to day basis.

Detailed monthly admin report Ideally this report should be dealt with by someone slightly more removed from the coal face, to enable them to assess whether the processes and procedures put in place by the Employer, as well as by the administrator are effective.

The report highlights the monthly disciplines with an emphasis on the monthly update process, and an overview of the claims process. This report would typically be reviewed by the 3ULQFLSDO 2IĂ&#x20AC;FHU DQG RU WKH PRQLWRULQJ SHUVRQ WRJHWKHU ZLWK the administration subcommittee.

Appropriate reporting will enable them to pick up anomalies, and areas where their intervention may be required.

When looking at the reporting in respect of the monthly update process, you need to know not only when the schedules were received, and the monies banked, but also when the queries were resolved and the monies deposited. It might also useful to understand any anomalies experienced, and ensure that the treatment is consistent, eg members on maternity leave, or who KDYH EHHQ GLVPLVVHG EXW WKH &&0$ VXEVHTXHQWO\ UXOHG WKDW WKH\ need to be retrospectively reinstated.

In respect of the claims reporting, the focus moves away from the daily member claims interaction, to a higher level of reporting to enable you to assess whether the time frames that claims are being processed are reasonable, and if not, identify problems, or bottle necks and rectify them.

You would also need reporting regarding S37D, divorce and fraud cases, adjudicator complaints, the status of S14â&#x20AC;&#x2122;s, as well as pensioner reporting.

The Financial Planner

Trustees report Should the correct disciplines be in place to review the weekly and monthly administration reports, the Trustees ZLOO KDYH FRQĂ&#x20AC;GHQFH LQ WKH XQGHUO\LQJ VWUXFWXUHV DQG ZLOO generally value high level reporting, with a representative RI WKH DGPLQLVWUDWLRQ VXEFRPPLWWHH RU WKH 3ULQFLSDO 2IĂ&#x20AC;FHU reporting to the Trustees regarding the weekly and monthly disciplines, and highlighting any issues which require the Trustees attention. The Trustees need a broad overview of the entire monthly update process over a period, with an indication of the problem areas, and what corrective action has been put in place.

0RQWKO\ Ă&#x20AC;QDQFLDO UHSRUWLQJ The statistical administration information that we have looked at is very useful in ensuring that the various processes work effectively but to truly get an insight into your funds DGPLQLVWUDWLRQ \RX DOVR QHHG D IHHO IRU WKH Ă&#x20AC;QDQFLDO VLGH RI WKH HTXDWLRQ , ZRXOG VXJJHVW WKDW \RX QHHG D FDVK Ă RZ income statement, and balance sheet on a monthly basis.

7KLV FRXOG EH UHYLHZHG E\ SULQFLSDO RIĂ&#x20AC;FHU RU RQH RI WKH WUXVWHHV ZLWK D Ă&#x20AC;QDQFLDO EDFNJURXQG RQ D PRQWKO\ EDVLV 7KLV should enable you to effectively match the totals of the asset VWDWHPHQWV WR WKH WRWDO IXQG FUHGLWV WDNLQJ LQWR DFFRXQW EHQHĂ&#x20AC;WV due and the debtors and creditors. This will also enable the WUXVWHHV WR HIIHFWLYHO\ PDQDJH WKH Ă&#x20AC;QDQFLDO KHDOWK RI WKHLU Fund, and to deal with any issues that may arise in the month LQ ZKLFK LW RFFXUV UDWKHU WKDQ ZKHQ WKH Ă&#x20AC;QDQFLDO VWDWHPHQWV DUH produced annually. This also ensures that assets and liabilities are effectively matched on a monthly basis. :LWK WKLV SURFHVV LQ SODFH WKH DQQXDO Ă&#x20AC;QDQFLDO VWDWHPHQW process becomes nothing more than a culmination of the monthly checks that you have already done.

In summary You donâ&#x20AC;&#x2122;t need to redo the fund admin to make sure the administrator is getting things right, but I think itâ&#x20AC;&#x2122;s SUXGHQW WR SXW DQ DSSURSULDWH DGPLQLVWUDWLRQ UHSRUWLQJ IUDPHZRUN LQ SODFH WKDW ZRUNV IRU \RX DQG \RXU IXQG Basic checks donâ&#x20AC;&#x2122;t need to be a time consuming SURFHVV EXW WKH\ GR QHHG WR EH VXIĂ&#x20AC;FLHQW WR JLYH \RX DQG \RXU %RDUG SLHFH RI PLQG WKDW \RXU IXQG LV EHLQJ DGPLQLVWHUHG DSSURSULDWHO\ %DVLF DGPLQLVWUDWLRQ ULVN PDQDJHPHQW SURFHGXUHV will save a lot of heartache and drama into the future, EHFDXVH NHHSLQJ D IXQG¡V DGPLQLVWUDWLRQ ZRUNLQJ VPRRWKO\ LV D ORW HDVLHU WKDW WU\LQJ WR Ă&#x20AC;[ XS PLVWDNHV that have gone horribly wrong.

October / November 2011

12

Employee Benefits

Effective communication to fund members

â&#x20AC;&#x153;Communications without intelligence is noise; Intelligence without communications is irrelevantâ&#x20AC;? â&#x20AC;&#x201C;Gen Alfred Gray, USMC ,Q RXU FXUUHQW HQYLURQPHQW RI GHĂ&#x20AC;QHG FRQWULEXWLRQ SHQVLRQ schemes, many of the important decisions which ultimately DIIHFW PHPEHUV¡ EHQHĂ&#x20AC;WV DUH PDGH E\ WKH PHPEHUV themselves. If members have a lack of understanding of their pension arrangements they may well make poor decisions or take no action at all.

For the past ten years, the Institute of Retirement Funds has run a communication challenge encouraging pension fund trustees in South Africa to communicate more effectively to its members. The aim of this challenge is to pool different fund communication strategies and to highlight good strategies to the industry and their trustees. A number of retirement funds participate in this challenge on an annual basis and these funds strive to constantly improve the communication strategies to their members, but unfortunately this is not law and most pension funds will only do the minimum when it comes to communicating to their members.

0HQWMH /DUQH\ _ %HQHĂ&#x20AC;WV &RQVXOWDQW Axiomatic Consultants CC

The Financial Planner

October / November 2011

13

Employee Benefits

Pension Fund Circular 86 sets out these minimum disclosure requirements for pension funds. This includes certain documents that should be provided to fund members, for example annual EHQHĂ&#x20AC;W VWDWHPHQWV OHWWHUV RQ H[LWLQJ WKH IXQG HWF EXW IHZ if any, of these prescribed communications are intended to LQFUHDVH WKH Ă&#x20AC;QDQFLDO OLWHUDF\ RI PHPEHUV Given the lack of clear communication within the majority of pension funds, it is not surprising that members are not happy with the communication they are receiving. This is clear in terms of the results of some of the pension fund surveys in 6RXWK $IULFD 2OG 0XWXDO $FWXDULHV &RQVXOWDQWV 20$&

UHOHDVHG WKH UHVXOWV RI WKHLU 0HPEHU 5HWLUHPHQW &RQĂ&#x20AC;GHQFH Index for 2011 earlier this year and Craig Aitchison, the 0' RI 20$& ZDV TXRWHG DV VD\LQJ WKDW PHPEHUV KDG indicated a growing dissatisfaction with communication. â&#x20AC;&#x153;The areas of decline indicate a growing gap in communication which seems to be leading to a dwindling desire among our members to engage with their funds. While we cannot tell if WKLV LV D GRZQZDUG VSLUDO RI FRQĂ&#x20AC;GHQFH OHYHOV LW LV FOHDU WKDW member engagement, understanding and satisfaction with communication remain challenges for the retirement industry as D ZKROH Âľ But how do funds overcome these challenges and start FRPPXQLFDWLQJ HIIHFWLYHO\ ZLWK WKHLU PHPEHUV" )LUVWO\ communications should be made with a clear plan in mind and everyone involved in a communication exercise should understand its objectives. The following areas must form the basis of any communication strategy: Â&#x2021; 6HWWLQJ D FOHDU FRPPXQLFDWLRQ SODQ Â&#x2021; .QRZLQJ \RXU DXGLHQFH Â&#x2021; ,GHQWLI\ WKH EHVW ZD\V WR FRPPXQLFDWH WR \RXU PHPEHUV Â&#x2021; .HHS LW VLPSOH Â&#x2021; *HW \RXU PHPEHUV WR HQJDJH 7KH LPSRUWDQFH RI VHWWLQJ D FOHDU FRPPXQLFDWLRQ SODQ Before you can start communicating to your members, it is important to set your objectives. Who do you want to reach by your communication and what is the message that you ZDQW WR JHW DFURVV" ,I \RX KDYH D FKRLFH DERXW WKH WLPLQJ RI a communication, make sure that you choose a time when members are likely to be receptive to communication, in other words it is important to keep the schedule of the rest of the employerâ&#x20AC;&#x2122;s activities in mind. Also, try to avoid overburdening members with too many communications in a short time. The aim should always be quality rather than quantity.

0RVW LPSRUWDQWO\ LQ VHWWLQJ WKH IXQG¡V FRPPXQLFDWLRQ SODQ LV probably to determine the fundâ&#x20AC;&#x2122;s communication budget. It is concerning to note that in terms of Sanlamâ&#x20AC;&#x2122;s 2010 Benchmark Survey on stand-alone funds, 67% of the funds surveyed, did not allocate any budget towards a communication strategy.

The majority of these funds also had no plan to allocate funds towards a communication strategy in future.

The Financial Planner

The most effective distribution channel to EH XVHG IRU \RXU VSHFLĂ&#x20AC;F IXQG ZLOO GHSHQG largely on your fund PHPEHUVKLS SURĂ&#x20AC;OH The reality is that if you plan properly and make use of many of the communication mediums already in use by the fundâ&#x20AC;&#x2122;s sponsoring employer, you do not need break the bank to communicate effectively to members. For example, if the employer distributes payslips electronically to its employees, the pension fund could potentially include a quarterly newsletter to members giving feedback on the decisions and discussions from their most recent trustee meeting. This goes D ORQJ ZD\ LQ HQVXULQJ WKDW PHPEHUV DUH FRQĂ&#x20AC;GHQW WKDW WKH SHRSOH UHVSRQVLEOH IRU PDQDJLQJ WKHLU EHQHĂ&#x20AC;WV LQ WKH IXQG have their best interests at heart. Alternatively, having a short TXHVWLRQ DQG DQVZHU TXL] UHJDUGLQJ SHQVLRQ IXQG EHQHĂ&#x20AC;WV on the companyâ&#x20AC;&#x2122;s intranet is a cheap and effective way of creating awareness.

Knowing your audience Dennis List in his book Know Your Audience stated â&#x20AC;&#x153;You canâ&#x20AC;&#x2122;t persuade your listeners if you donâ&#x20AC;&#x2122;t know much about them.

Knowing your listeners helps you to shape your message in a way thatâ&#x20AC;&#x2122;s most likely to gain their acceptance. Thatâ&#x20AC;&#x2122;s all the more important when your goal is to persuade, and not simply to inform, your audience.â&#x20AC;?

Some research is necessary in an attempt to identify the ´DYHUDJH SURĂ&#x20AC;OHÂľ RI \RXU PHPEHUV )RU WKH PDMRULW\ RI pension funds in South Africa, members will be from a culturally diverse population with a wide range of education levels. This presents a unique challenge to pension fund trustees. Not only are you communicating with members with different sociological backgrounds, but you are also FRPPXQLFDWLQJ WR PHPEHUV ZLWK YHU\ GLIIHUHQW DJH SURĂ&#x20AC;OHV and education levels.

One of the objectives of your communication strategy might EH WR DGGUHVV WKH FRQFHUQV RI D VSHFLĂ&#x20AC;F VHJPHQW RI PHPEHUV IRU H[DPSOH WKH ´'LJLWDO 1DWLYHVÂľ ZKR ZRXOG EH LQFOXGHG amongst your Generation X and Generation Y members. Any attempt to instil a savings mentality in these members must be preceeded by an understanding that these are generally dynamic, carefree and creatively talented individuals. This group thus requires instantaneous, concise, funky and snazzy electronic information about the Fund in order for them to actively engage. It might therefore be appropriate to use technology to ensure that you match these membersâ&#x20AC;&#x2122; expectations. The characteristics and the optimum approach to adopt with each Generation of member is vital and should form part of the Communication Strategy of the Fund.

October / November 2011

14

Employee Benefits

Identify the best ways to communicate to your members Effective communication does not have to be elaborate, glossy or costly. A simple poster or e-mail, if it makes the point well, may be all that is needed to get your message across.

The most effective distribution channel to be used for your VSHFLĂ&#x20AC;F IXQG ZLOO GHSHQG ODUJHO\ RQ \RXU IXQG PHPEHUVKLS SURĂ&#x20AC;OH DV GLVFXVVHG DERYH )RU D QXPEHU RI IXQGV DQ electronic medium is the preferred method of communication.

Fundsâ&#x20AC;&#x2122; younger members would not only embrace this medium but are also more inclined to read communications in electronic format. Further, this methodology is cost effective, secure, FRQĂ&#x20AC;GHQWLDO DQG TXLFN 7KXV ZKLOH \RX PLJKW ZDQW WR HPEUDFH other mediums and always attempt to employ as many mediums as possible, electronic distribution may be proven to be the channel of choice.

Trustees should however be cognisant and mindful of the electronic information overload to which members are often subjected to. This should not detract from the advantages inherent with electronic communication but must be managed.

Too often researchers and communication analysts illustrate the IDFW WKDW H PDLO GLVWULEXWLRQV KDYH D ORZ ´KLW UDWLR¾ :KDW WKH\ fail to examine however is the content of the communication ² ERULQJ LUUHOHYDQW DQG YLVXDOO\ XQDSSHDOLQJ LQIRUPDWLRQ ZLOO fail to attract attention irrespective of whether it is an e-mail, D SRVWHU D à \HU RU DQ DXGLR SUHVHQWDWLRQ If the communication is interesting, funky, snazzy, visually eyeFDWFKLQJ à DPER\DQW DQG FRQYH\V D UHOHYDQW PHVVDJH WKHQ WKH distribution channel will never be an inhibiting factor irrespective of the medium used. And the electronic channel does lend itself to the design of vivid but clean communications.

Furthermore, the electronic channel is cheap and a cost effective medium by which to deliver the message. What is important to keep in mind if you want to communicate electronically to your members, is that they should be FRPSXWHU OLWHUDWH DQG KDYH DFFHVV WR H PDLO 0HPEHUV VKRXOG further embrace the electronic medium, otherwise the message will get lost.

Trustees might also want to embrace other electronic initiatives like a WIKI site where members can interact and address their concerns directly with the Trustees. The employerâ&#x20AC;&#x2122;s intranet as well as service providersâ&#x20AC;&#x2122; websites are other effective ways for the fund trustees to communicate to members.

Trustees need to be cognisant of the fact that the ease of communicating via electronic media often leads to abuse where one has the tendency of communicating with members too frequently. This results in members feeling inundated with communication and as such communications become boring and members will no longer read them. Your communication frequency should therefore be controlled to ensure that all members immediately read any communication from the fund as it must be important. .HHS LW VLPSOH &ODULW\ RI FRPPXQLFDWLRQ KDV IRU WKH Ă&#x20AC;UVW WLPH EHHQ HQWUHQFKHG into legislation and Trustees in South Africa now also have to take cognisance of the Consumer Protection Act (CPA), 68 of 7KH IROORZLQJ VHFWLRQ SURYLGHV D YDOXDEOH GHĂ&#x20AC;QLWLRQ RI plain language:

The Financial Planner

â&#x20AC;&#x153;Section 22. Right to information in plain and understandable language (2) For the purposes of this Act, a notice, document or visual representation is in plain language if it is reasonable to conclude that an ordinary consumer of the class of persons for whom the notice, document or visual representation is intended, with average literacy skills and minimal experience as a consumer of the relevant goods or services, could be expected to understand the content, signiĂ&#x20AC;cance, and import of the notice, document or visual representation without undue effort...â&#x20AC;?

Financial communications abound with a plethora of jargon, acronyms and complex terminology. JSE SWIX, BRIC countries, &3, DQG 0&6, :RUOG ,QGH[ OLWWHU FRPPXQLFDWLRQV DQG VHUYH no purpose other than a vain attempt to prove how clever the writer is and subsequently, to confuse the reader. The Trustees VKRXOG WDNH D YHU\ GHĂ&#x20AC;QLWH GHFLVLRQ WR NHHS DOO FRPPXQLFDWLRQ to members simple and jargon-free.

Get your members to engage Research has shown that when one is able to engage with members and make the communication a two-way process, it is likely to generate higher levels of interest than if the communication makes no provision for feedback. An annual member survey furnishes a useful measurement tool or benchmark. An engagement style survey proves valuable in measuring the success of a fundâ&#x20AC;&#x2122;s communication strategy DQG HQDEOHV 7UXVWHHV WR LQWHUSUHW WKH UHVXOWV LQ D VFLHQWLĂ&#x20AC;F and meaningful manner. It also presents Trustees with a basis to measure their success and improve on into the future. It is important to constantly improve, review and audit the communication process - as John Powell said: â&#x20AC;&#x153;Communication ZRUNV IRU WKRVH ZKR ZRUN DW LW Âľ Conclusion One of the salient dangers when considering communication within a retirement fund context is the tendency to adopt a SDWHUQDOLVWLF RU GLFWDWRULDO VWDQFH RQH ZKHUH WKH 7UXVWHHV and the Communication Committee decide what content the members should receive rather than what the members want or need.

A novel approach and one that will certainly improve any Ă&#x20AC;QG¡V FRPPXQLFDWLRQ LV WR FRQVLGHU PHPEHUV WR EH FOLHQWV RI the Trustees. This philosophy immediately changes the thought process in that it introduces a service delivery ethic into the equation. The approach is thus to elevate the importance of the member to that of a customer which immediately changes the communication strategy.

This report is provided to our client solely for its use, for the VSHFLĂ&#x20AC;F SXUSRVH LQGLFDWHG ,W PD\ QRW EH GLVFORVHG WR DQ\ RWKHU party without Axiomatic Consultantsâ&#x20AC;&#x2122; prior written permission, except as may be required by law. No other party may rely on any advice contained in this report, and Axiomatic Consultants does not accept any responsibility to any other party in respect of this report.

October / November 2011

15

Employee Benefits

Regulation 28 â&#x20AC;&#x201C; as it pertains to Pension/Provident Funds, Retirement Annuities and Preservation Funds 5HJ XQOHVV \RX PDNH D ´PDWHULDO FKDQJHÂľ WR WKH FRQWUDFW e.g. increase regular contributions outside contractually agreed upon increases, topping up with a lump sum, changing asset DOORFDWLRQ WKHVH EHLQJ DPRQJVW WKH PRUH VLJQLĂ&#x20AC;FDQW DQG common changes. So, if the protected right works for your client perhaps best to leave alone and for any top-ups or increases to UDWKHU GR WKLV LQ D QHZ FRQWUDFW ² RQO\ DSSOLHV WR 5$V %HZDUH WKHQ RI PDNLQJ DQ\ ´PDWHULDO FKDQJHVÂľ WR H[LVWLQJ contracts which may trigger Reg. 28 compliance, although reporting only commences for quarter one 2012. I should add that guaranteed portfolios are exempted from Reg. 28 reporting.

Everything is about to change New Regulation 28 Pension/Provident Funds where there is no individual member FKRLFH QHHG WR FRPSO\ ZLWK Ă&#x20AC;UVW UHSRUWLQJ SHULRG EHLQJ quarter one 2012, at fund level. Where there is member choice, each memberâ&#x20AC;&#x2122;s share of fund needs to comply LQGLYLGXDOO\ 0RQLWRULQJ DQG HQVXULQJ FRPSOLDQFH ZLWK PHPEHU choice is a huge task.

Dan Berglund, CFPÂŽ _ )3, (PSOR\HH %HQHĂ&#x20AC;WV &RPPLWWHH 0HPEHU

What should advisors be doing & what will institutions be doing ?Will it be good for clients ?

Current scenario At fund level, i.e. at Retirement Annuity (RA), Preservation Fund and Pension/Provident Fund levels Regulation 28, as it was, had to be complied with. Individual pension/provident fund members and retirement annuity/preservation fund holders do not individually have to comply since itâ&#x20AC;&#x2122;s the board of trustees who are accountable for Regulation 28 for the whole fund, whether it be an umbrella or stand-alone fund.

The effect of the above is that there are members and RA/ Preserver policyholders who are way outside the new Reg. 28 limits. For instance, itâ&#x20AC;&#x2122;s currently possible for a member to have 100% equity or property exposure.

Protected rights Retirement Annuities and Preservation Funds commenced prior to 1 April 2011 are exempt from complying with the revised

The Financial Planner

:KDW ZLOO WUXVWHHV DVVHW PDQDJHPHQW FRPSDQLHV DQG OLIH DVVXUHUV GR WR HQVXUH FRPSOLDQFH" They will have no choice but to comply with the letter of the law to ensure theyâ&#x20AC;&#x2122;re not wrapped over the knuckles and to ensure continued approval from the authorities. Ideally theyâ&#x20AC;&#x2122;d engage with each intermediary or direct with members/ policyholders to ensure a transition or switch to suit each member/policyholder under the new limits and be compliant at the same time. This, however, is obviously unrealistic considering the hundreds of thousands of people requiring advice and guidance. Therefore, failing timeous switches to fall in line with the new Reg. 28 theyâ&#x20AC;&#x2122;ll be forced to do mass switches on each member and fund which/who remains non-compliant, post 31 Dec 2011 (2 months away). What they will switch to and how much remains to be seen. It will inevitably differ by provider/board. They cannot switch your client/member to a risk-adjusted portfolio which meets that client/memberâ&#x20AC;&#x2122;s needs since they wouldnâ&#x20AC;&#x2122;t know the client, time horizon, tolerance for risk, manager/fund preference or anything else of the sort.

This is not a criticism, simply reality. An unsubstantiated guess is that local cash (money market) will be the obvious choice since this can be invested in at 100%, although the limit is 25% per issuer. SA government bonds can also be invested in at 100% but my guess is that the bodies forced to do the switching will think twice about bonds since they do carry some capital risk.

Please note that Iâ&#x20AC;&#x2122;m not suggesting you move to panic stations but I can only imagine what a young client will think about his/ KHU HTXLW\ KROGLQJ EHLQJ ´UHGXFHGÂľ WR PRQH\ PDUNHW

October / November 2011

16

Employee Benefits

just after a market correction or an older investor invested 100% in a stable unlisted property portfolio being moved to cash. I know of one provider which will only switch any excess above the allowable limits to money market. This is likely to be the case for a few providers but probably not all. However, read the section below.

now manage to engage or not weâ&#x20AC;&#x2122;ll need to monitor our clientsâ&#x20AC;&#x2122; asset allocations in the future since their asset allocations will, in almost all cases, change from quarter one 2012 and WILL, failing our intervention, be different to what it is now.

What should advisors be doing ?

7KH Ă&#x20AC;UVW TXHVWLRQ LV SHUKDSV ´:LOO DQ\ DXWRPDWLF VZLWFK EH JRRG IRU P\ FOLHQW "Âľ ,I WKH DQVZHU LV ´12Âľ WKHQ WKH QH[W step is to engage with our clients ASAP. Bearing in mind that weâ&#x20AC;&#x2122;re hastily approaching the end of year, festive season and traditional holiday time. NOW is the best time to begin the process of switching our clients/members to Reg. 28 compliant portfolios or a combination of portfolios the result of which will be compliance.

One good thing about all this is that it gives us one more reason to stay in touch with our client base. Iâ&#x20AC;&#x2122;d go as far to say WKDW WKRVH DGYLVRUV ZKR GR QRW HQJDJH ZLOO Ă&#x20AC;QG WKHLU FOLHQWV migrating to advisors who have the tools and management systems which will facilitate compliance whilst also aligning the clientâ&#x20AC;&#x2122;s full portfolio for optimum outcomes. I think weâ&#x20AC;&#x2122;ll see a plethora of communications to members/policyholders very soon to say that unless they make the necessary changes the default switch will be X.

Some asset managers/assurers have developed some calculators to assist advisors and clients in this regard. In most cases, though, these merely take Reg. 28 into account and nothing else about our clients. So, itâ&#x20AC;&#x2122;s imperative that we engage with our client-base invested in these products so that neither they nor we are caught unawares by a forced switch, possibly not suiting our clients or being ill-timed. Whether we

I found it interesting while â&#x20AC;&#x153;googlingâ&#x20AC;? Regulation 28 that $6,6$ KDV SXEOLVKHG D OLVW RI 5HJ FRPSOLDQW IXQGV numbering 64, which are not that many considering the investable universe of collective investments, numbering RGG IXQGV DGPLWWHGO\ WKHUH¡V VRPH GXSOLFDWLRQ KHUH 1HYHUWKHOHVV LW RIIHUV RQH SHUVSHFWLYH

Estate Planning

Estate Duty â&#x20AC;&#x201C; Practical Problems Practical problems may occur in terms of the Estate Duty Act when transferable deductions are claimed in the estate of a surviving spouse. Berrie Botha, chief executive: Sanlam Trust, scrutinises this matter.

Since 1 January 2010 a maximum deduction of R7 million may be claimed against the taxable amount for estate GXW\ SXUSRVHV LQ WKH HVWDWH RI WKH VXUYLYLQJ VSRXVH subject to certain conditions (sec. 4A of the Estate Duty Act).

One of these conditions is that the executor in the estate of the surviving spouse must submit to the Commissioner of the South African Revenue Service a copy of a return that was submitted to the Commissioner in the estate of the predeceased spouse(s).

(Predeceased spouses who died on or after 1 April 1971.)

3HRSOH ZKR KDYH QRW GRQH VR EHIRUH PD\ Ă&#x20AC;QG WKLV IRUP WKH HVWDWH GXW\ UHWXUQ 5HY GLIĂ&#x20AC;FXOW WR FRPSOHWH FRUUHFWO\ In every estate where it is required that a liquidation and GLVWULEXWLRQ DFFRXQW VKRXOG EH VXEPLWWHG WR WKH 0DVWHU RI the High Court, this form must also be submitted. Part of the liquidation and distribution account is the estate duty addendum, for calculations of estate duty.

In spite of this addendum, it is still compulsory for the executor to complete and submit the return.

When an estate that consists of no assets or gross assets of no more than R 125 000 (with or without a valid will) is lodged ZLWK WKH 0DVWHU LW ZLOO QRW EH QHFHVVDU\ WR VXEPLW D OLTXLGDWLRQ and distribution account. This includes an estate in community RI SURSHUW\ XQOHVV WKH 0DVWHU UHTXLUHV LW IRU HVWDWHV XQGHU WKLV value. In both these cases it will also be unnecessary to submit an estate duty return.

In most cases of estates with a maximum value of R 125 000 QR H[HFXWRU LV DSSRLQWHG EXW D 0DVWHU¡V UHSUHVHQWDWLYH ZLWK OLPLWHG SRZHUV 7KHUHIRUH HYHQ LI WKH 0DVWHU¡V UHSUHVHQWDWLYH wishes to submit a return in order to transfer and claim the transferable rebate of the surviving spouse with submission of the return, it may not be possible to do so. Only an executor may sign the declaration.

An estate planner often wishes to keep the estate or the joint estate as small as possible and nominates the surviving spouse WKH EHQHĂ&#x20AC;FLDU\ RQ DOO SROLFLHV SD\DEOH RQ WKH HVWDWH SODQQHU¡V demise. In this way there can be a saving on executorâ&#x20AC;&#x2122;s fees and policy proceeds can be paid to the survivor directly, E\SDVVLQJ WKH HVWDWH $OO EHQHĂ&#x20AC;WV UHFHLYHG E\ D VXUYLYLQJ spouse from the estate and deemed property accruing to the spouse, are exempt from estate duty (sec. 4 (q) of the Estate Duty Act).

The problem is that when the estate, or joint estate, of the Ă&#x20AC;UVW GHFHDVHG DPRXQWV WR OHVV WKDQ 5 DQG QR UHWXUQ is submitted, a return in the estate of the survivor cannot be VXEPLWWHG LQ RUGHU WR FODLP WKH DGGLWLRQDO ÂśSRUWDEOH¡ 5 million abatement.

The policies and other amounts paid directly to the survivor outside the estate, may amount to R7 million and more.

However only the basic rebate of R3,5 million may be deducted when the surviving spouse dies as the Commissioner FXUUHQWO\ UHTXLUHV D FRS\ RI WKH UHWXUQ IURP WKH HVWDWH Ă&#x20AC;OH RI WKH SUHGHFHDVHG VSRXVH V FHUWLĂ&#x20AC;HG E\ WKH 0DVWHU ,W FDQ DOVR KDSSHQ WKDW D UHWXUQ ZDV Ă&#x20AC;OHG LQ WKH HVWDWH RI WKH SUHGHFHDVHG VSRXVH EXW WKDW WKH Ă&#x20AC;OH FDQQRW EH WUDFHG DW WKH 0DVWHU¡V RIĂ&#x20AC;FH FRQFHUQHG ,I WKH HVWDWH LV OHVV WKDQ 5 WKH 0DVWHU FDQ EH UHTXHVWHG WR DFFHSW Ă&#x20AC;OLQJ RI D HVWDWH GXW\ UHWXUQ :KHQ LW KDV EHHQ Ă&#x20AC;OHG D FHUWLĂ&#x20AC;HG FRS\ PD\ EH UHTXHVWHG GXULQJ RU DIWHU WKH DGPLQLVWUDWLRQ RI WKH HVWDWH RI WKH Ă&#x20AC;UVW GHFHDVHG

%HUULH %RWKD _ &KLHI ([HFXWLYH 2IĂ&#x20AC;FH 6DQODP 7UXVW The Financial Planner

,W ZRXOG EH SUXGHQW WR Ă&#x20AC;OH D FRS\ RI WKH UHWXUQ WRJHWKHU ZLWK WKH ZLOO RI WKH VXUYLYLQJ VSRXVH IRU VDIHNHHSLQJ ZLWK KLV KHU LQWHUPHGLDU\ DWWRUQH\ RU DXGLWRU 7KH ULVN LV WKDW VKRXOG WKH surviving spouseâ&#x20AC;&#x2122;s will be revised elsewhere and the previous will QRW EH REWDLQHG WKH UHWXUQ ZLOO UHPDLQ RQ Ă&#x20AC;OH ZLWK WKH LQDFWLYH ZLOO

October / November 2011

18

Estate Planning

Inter vivos Trusts in South Africa

The term â&#x20AC;&#x2DC;inter vivosâ&#x20AC;&#x2122; means amongst the living. So this is a Trust set up during oneâ&#x20AC;&#x2122;s own lifetime as opposed to a Testamentary Trust set up in a Will, which only comes into being on death.

An inter vivos Trust is really a contractual arrangement ZKHUHE\ RQH RU PRUH SHUVRQV JLYH RYHU DVVHWV WR 7UXVWHHV WR PDQDJH RQ WKHLU EHKDOI IRU WKH EHQHĂ&#x20AC;W RI WKLUG SDUWLHV EHQHĂ&#x20AC;FLDULHV $OWHUQDWLYHO\ WKH DVVHWV DUH YHVWHG LQ WKH EHQHĂ&#x20AC;FLDULHV DQG PDQDJHG E\ 7UXVWHHV RQ WKHLU EHKDOI 0RVW VXFK 7UXVWV FDQ EH FDWHJRULVHG DV GLVFUHWLRQDU\ RU non-discretionary.

The Financial Planner

<RX JHQHUDOO\ KDYH SDUWLHV 1. Donor / settler - generally an elderly family relative or the estate planner client.

2. Trustee JHQHUDOO\ WKH FOLHQW KLV KHU VSRXVH and a third party (you are required to have DW OHDVW RQH ÂśLQGHSHQGHQW¡ SHUVRQ ZKR LV QRW UHODWHG WR WKH EHQHĂ&#x20AC;FLDULHV

3. %HQHĂ&#x20AC;FLDULHV JHQHUDOO\ WKH FOLHQWV¡ FKLOGUHQ grandchildren, etc and him/herself. They are either vested with certain rights to trust capital and income, or not.

October / November 2011

19

Estate Planning

pegged at the value at the time (with the growth taking place LQ WKH 7UXVW DQG œVWULSSLQJ¡ ZHDOWK ZRXOG KDSSHQ E\ H J outright donation (giving away).

However one can only donate assets up to a max. of R 100 000 p.a. without attracting Donations Tax of 20%.

Transferring assets on loan account to a Trust does not require one to charge interest, but if that asset generates taxable income the income can be deemed taxable in the lenderâ&#x20AC;&#x2122;s hands. The same deeming rule can apply to a donor of trust assets as well.

Estate duty is charged at 20% on net assets on death in excess of R 3 500 000. Therefore it is attractive to wealthy clients to reduce their estate. A generation or more of further estate duty tax is also eliminated.

David Thomson, CFPÂŽ | FPI Estates and Trusts ISG Chairperson

The Trust Deed is signed by the Donor and Trustees and UHJLVWHUHG ZLWK WKH 0DVWHU RI WKH +LJK &RXUW KDYLQJ jurisdiction. An accountantâ&#x20AC;&#x2122;s consent to act is required. The 0DVWHU¡V IHH LV RQO\ 5 /HWWHUV RI $XWKRULW\ DUH LVVXHG to the Trustees. They then open a trust bank account.

A Trust can, in general, administer any type of asset. It can, depending on the powers given to the Trustees in the Deed, contract widely.

A Trust is treated as a seperate legal entity for tax purposes and asset registration purposes in South Africa DQG PDQ\ RWKHU MXULVGLFWLRQV 7KLV VLJQLĂ&#x20AC;FDQWO\ DGYDQFHV WKHLU commercial viability. ,W KROGV HVWDWH SODQQLQJ EHQHĂ&#x20AC;WV IRU ZHDOWK\ FOLHQWV 7KLV LV GXH in part, to its asset protection potential. Assets held in Trust do not belong to a natural person. Rather the planner either donates the asset or transfers it on loan account to the Trust.

Therefore a Trust can also afford protection on divorce and insolvency of the planner.

7KH SODQQHU FDQ ÂśSHJ¡ WKH YDOXH RI KLV KHU DVVHWV E\ WUDQVIHUULQJ DVVHWV WR 7UXVW RU HYHQ ÂśVWULS¡ WKH YDOXH RI KLV KHU HVWDWH LQ WKLV ZD\ Âś3HJJLQJ¡ ZRXOG WDNH SODFH E\ OHQGLQJ assets to a Trust where effectively the lenderâ&#x20AC;&#x2122;s wealth is

The Financial Planner

A Trust can also protect minor and unsophisticated EHQHĂ&#x20AC;FLDULHV IURP WKHPVHOYHV DQG XQVFUXSXORXV WKLUG SDUWLHV The planner is also able, where appropriate, to access monies he/she has put in the Trust by taking a loan or redeeming a credit loan account. Giving monies directly to oneâ&#x20AC;&#x2122;s children is not always wise! What if they get married in community of SURSHUW\ RU EHFRPH LQVROYHQW" A Trust also holds certain advantages over usufructs when it comes to Wills and estate planning. In particular, bequeathing ones estate to a Trust where the trustees are required to provide the surviving spouse with the net income may be preferable to bequeathing the estate to oneâ&#x20AC;&#x2122;s children with a usufruct for the surviving spouse. $ 7UXVW LV D Ă H[LEOH YHKLFOH ZKLFK FDQ EH DPHQGHG VXEMHFW WR the terms of the Deed) to suit changing circumstances. However it is very important not to treat the Trust as the alter ego of the planner. It does not have to be audited, unless SARS VSHFLĂ&#x20AC;FDOO\ FDOOV IRU LW The name of the Trust does not have to be reserved and does not need to contain the clientâ&#x20AC;&#x2122;s name at all. ,W LV QRW WD[ HIIHFWLYH IRU D 7UXVW WR KROG FDVK RU D ÂśSULPDU\ residenceâ&#x20AC;&#x2122; in every case, because of a relatively high income tax rate (40%) and effective CGT (20%). Rather hold taxexempt or geared investments in Trust.

The fact that Trusts now pay the same rates of transfer duty on Ă&#x20AC;[HG SURSHUW\ DV LQGLYLGXDOV LV D SRVLWLve development.

7KLV LV D YHU\ EULHI VXPPDU\ RI D FRPSOH[ Ă&#x20AC;HOG RI ODZ 7KHUH DUH a number of stipulations of, inter alia, the Trust Property Control $FW RI ,QFRPH 7D[ $FW DQG &ORVH &RUSRUDWLRQV $FW that must be borne in mind before putting assets into Trust.

October / November 2011

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Healthcare

Vital Statistics of the Medical Scheme Industry (2000-2010) The long-awaited and highly anticipated policy paper on National Health Insurance (NHI), published in August this year for public comment spells out governmentâ&#x20AC;&#x2122;s approach to the transformation of South Africaâ&#x20AC;&#x2122;s healthcare system over the next 14-year period, through the adoption of a National Health Insurance (NHI) model.

The transition of South Africaâ&#x20AC;&#x2122;s entrenched two-tiered health V\VWHP ² SXEOLF DQG SULYDWH WR D QDWLRQDO KHDOWK LQVXUDQFH system where all citizens are provided with essential healthcare, regardless of their employment status and ability to pay, will be achieved through the complete transformation of the provision and delivery of healthcare services. This will QHFHVVLWDWH D WRWDO RYHUKDXO RI WKH Ă DJJLQJ SXEOLF KHDOWKFDUH system and further regulation of the private healthcare system focused on healthcare pricing.

While many of the important components of the NHI model DUH PHQWLRQHG LQ WKH SROLF\ SDSHU LQFOXGLQJ WKH EHQHĂ&#x20AC;W

SDFNDJH DQG GHOLYHU\ PRGHO WKH Ă&#x20AC;QHU GHWDLOV VSHFLĂ&#x20AC;FDOO\ around the expected costs and funding for NHI are still to be FODULĂ&#x20AC;HG ,W LV HQFRXUDJLQJ WR QRWH WKDW WKH SROLF\ SDSHU PDNHV VSHFLĂ&#x20AC;F SURYLVLRQ IRU WKH UROH RI WKH SULYDWH VHFWRU DQG IRU WKH continued existence of medical schemes, while acknowledging that the exact form of services offered by medical schemes is YHU\ OLNHO\ WR FKDQJH XQGHU D IXOO\ Ă HGJHG 1+, V\VWHP *RYHUQPHQW¡V SULRULW\ LQ WKH Ă&#x20AC;UVW Ă&#x20AC;YH \HDUV RI WKH SURJUDPPH which starts next year, involves the rehabilitation and restructure of the public health sector, and therefore it is most likely business as usual for medical schemes in the short to medium term.

It is against this backdrop that Alexander Forbes Health SUHVHQWV LWV DQDO\VLV RI WKH Ă&#x20AC;QDQFLDO SHUIRUPDQFH RI medical schemes based on the recently released 2010/2011 &RXQFLO IRU 0HGLFDO 6FKHPHV $QQXDO 5HSRUW ,Q RXU analysis, we focus on key statistics and trends and show the consolidated results for all registered medical schemes, as well as the individual results for the ten largest open medical schemes (determined by the number of principal members) DQG WKH Ă&#x20AC;YH ODUJHVW UHVWULFWHG PHPEHUVKLS VFKHPHV RYHU WKH 11-year period from 2000 to 2010.

Size of the medical scheme industry

Trend in Number of Medical Schemes 160

Number of medical schemes

140 120 100 80 60 40 20 0 2000

2001

2002

Open Medical Schemes

The Financial Planner

2003

2004

2005

2006

Restricted Medical Schemes

2007

2008

2009

2010

All Medical Schemes

October / November 2011

21

Healthcare

Size of the Medical Scheme Industry The number of registered medical schemes has dropped from 144 in 2000 to 100 at the end of 2010. This downward trend is largely due to increased activity in medical scheme amalgamations and liquidations.

'XULQJ WKH 5HJLVWUDU IRU 0HGLFDO 6FKHPHV FRQĂ&#x20AC;UPHG the liquidation of Gen-Health, Stocksmed and Purehealth 0HGLFDO 6FKHPH $IULVDP 6$ 0HGLFDO 6FKHPH ,QJZH +HDOWK 3ODQ 0HGFRU 0HGLFRYHU 2[\JHQ 7HOHPHG DQG Umed amalgamated with other schemes during 2010. The DPDOJDPDWLRQ RI %(30('6 ZLWK 7RS0HG 0RUHPHG ZLWK &OLFNV *URXS 0HGLFDO 6FKHPH WR IRUP +RUL]RQ 0HGLFDO 6FKHPH DQG WKH OLTXLGDWLRQ RI 3URWHD 0HGLFDO 6FKHPH ZHUH FRQFOXGHG LQ ,Q DGGLWLRQ WKH DPDOJDPDWLRQ RI (GFRQ 0HGLFDO 6FKHPH with Discovery will be effective on 01 January 2012.

0HGLFDO 6FKHPH 0HPEHUVKLS Despite the decrease in the number of registered medical schemes, membership increased by a net 124,053 (3.6%) principal members in 2010. Of the 3,612,062 total principal members in 2010, 2,172,723 (60.2%) were members of open schemes and 1,439,339 (39.8%) belonged to restricted medical schemes. The 3.6% rate of increase in 2010 is slightly higher than the 2009 growth rate of 2.9%. Open scheme membership increased marginally by 1.3% while membership of restricted schemes increased by 7.1%.

The 2010 market growth was largely driven by the *RYHUQPHQW (PSOR\HHV 0HGLFDO 6FKHPH *(06 ZKLFK JUHZ E\ D QHW SULQFLSDO PHPEHUV 7KH JURZWK LQ *(06 includes the transfer of eligible government employees from RWKHU RSHQ VFKHPHV WKH WUDQVIHU RI 0HGFRU WR *(06 DQG QHZ

member growth stimulated by an attractive employer subsidy.

The minimum membership requirement set by the Council for 0HGLFDO 6FKHPHV IRU UHJLVWUDWLRQ RI D QHZ PHGLFDO VFKHPH LV 6,000 principal members. As at the end of 2010, there were 4 open schemes and 37 restricted schemes with fewer than 6,000 principal members. The low membership open schemes FRPSULVH RI *RRG +RSH 0HGLFDO $LG 6RFLHW\ 0HGLPHG 0HGLFDO 6FKHPH 3URWHD 0HGLFDO $LG 6RFLHW\ OLTXLGDWHG in 2011) and Suremed Health. A small membership base increases a schemeâ&#x20AC;&#x2122;s claims volatility thus threatening the future sustainability of these schemes.

7KH Ă&#x20AC;QDQFLDO SHUIRUPDQFH RI PHGLFDO VFKHPHV LPSURYHG VLJQLĂ&#x20AC;FDQWO\ IURP DQ RSHUDWLQJ GHĂ&#x20AC;FLW RI 5 PLOOLRQ IRU DOO VFKHPHV LQ WR D GHĂ&#x20AC;FLW RI 5 PLOOLRQ LQ $ VFKHPH¡V RSHUDWLQJ UHVXOW LV DQ LQGLFDWLRQ RI LWV Ă&#x20AC;QDQFLDO soundness after claims and non-healthcare expenditure are deducted from contribution income and shows the surplus/ GHĂ&#x20AC;FLW EHIRUH LQYHVWPHQW LQFRPH ,Q RSHQ VFKHPHV LQFXUUHG DQ RYHUDOO RSHUDWLQJ GHĂ&#x20AC;FLW RI 5 PLOOLRQ 5 PLOOLRQ GHĂ&#x20AC;FLW DQG UHVWULFWHG VFKHPHV LQFXUUHG D GHĂ&#x20AC;FLW RI 5 PLOOLRQ 5 PLOOLRQ GHĂ&#x20AC;FLW

The addition of investment and other income resulted in schemes making an overall net surplus of R 2,852.2 million in 2010. Open schemes made a R 1,290.2 million net surplus (2009: R290.3 million surplus) and restricted schemes made a net surplus of R 1,562 million (2009: R 688.9 million surplus).

'HVSLWH WKH RYHUDOO LPSURYHPHQW LQ Ă&#x20AC;QDQFLDO SHUIRUPDQFH of medical schemes it is important to note that a number of schemes are increasingly relying on investment income to balance their books.

Trend in Medical Scheme Membership 4,000,000

Number of principal members

3,500,000 3,000,000 2,500,000 2,000,000 1,500,000

1,000,000 500,000 0 2000

The Financial Planner

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

All Medical Schemes

All Medical Schemes (excl. DHMS & GEMS)

Open Medical Schemes

Open Medical Schemes (excl. DHMS)

Restricted Medical Schemes

Restricted Medical Schemes (excl. GEMS)

October / November 2011

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Healthcare

2010 Membership by Scheme All Restricted Medical Schemes (incl. GEMS)

1,439,339

All Restricted Medical Schemes (excl. GEMS)

918,862

Other Restricted Medical Schemes

539,591 520,477

GEMS Polmed

171,167 101,446 73,652 33,006

Bankmed Transmed Platinum Health All Open Medical Schemes (incl. DHMS)

2,172,723

All Open Medical Schemes (excl. DHMS)

1,153,304 1,019,419

Discovery

Bonitas

268,359 236,038 123,797 113,364 88,861 77,737 72,186 66,313 66,199 40,450

Other Open Medical Schemes Medihelp Medshield Momentum Fedhealth Liberty Bestmed Sizwe Spectramed

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Number of principal members

Financial Performance of Medical Schemes

Trend in Financial Performance R6,000,000 R5,000,000 R4,000,000 R3,000,000 R2,000,000 R1,000,000 R0 -R1,000,000 -R2,000,000 -R3,000,000 2000

2001

2002

2003

2004

Operating Result (R'000)

The Financial Planner

2005

2006

2007

2008

2009

2010

Net Result (R'000)

October / November 2011

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Healthcare

Solvency levels A medical schemeâ&#x20AC;&#x2122;s solvency ratio is calculated as the accumulated funds of the Scheme at any point in time as a percentage of the gross annualised contributions. Solvency is required to cover the schemeâ&#x20AC;&#x2122;s liabilities. Regulation 29 of the 0HGLFDO 6FKHPHV $FW UHTXLUHV DOO PHGLFDO VFKHPHV WR PDLQWDLQ a minimum solvency level of 25%. Since 2000, restricted medical schemes have maintained higher solvency levels compared to their counterparts in the open market.

In 2010 the average solvency for all medical schemes declined to 31.6% (2009: 32.9%). The solvency ratio of open medical schemes remained unchanged at 27.4% while that of restricted schemes declined to 38.4% in 2010 (2009: 42.5%).

This drop in overall solvency for restricted schemes is mainly GXH WR UDSLG PHPEHUVKLS JURZWK LQ *(06 FRXSOHG ZLWK WKH VFKHPH¡V RSHUDWLQJ GHĂ&#x20AC;FLW RI 5 PLOOLRQ LQ The graph below illustrates the change in solvency levels from 2009 to 2010 for the top 10 open and top 5 restricted medical schemes in terms of membership.

Medical scheme contribution increases The graph below illustrates two measures of health care FRVW LQĂ DWLRQ RYHU UHFHQW \HDUV UHODWLYH WR &3, LQĂ DWLRQ DV PHDVXUHG E\ 6WDWLVWLFV 6RXWK $IULFD DQG UHĂ HFWV LQFUHDVHV LQ the average CPI each year): Â&#x2021; 0HGLFDO &DUH DQG +HDOWK ([SHQVH ,QĂ DWLRQ LV PHDVXUHG

by Statistics South Africa and is based on that component of the CPI which relates to â&#x20AC;&#x153;doctorsâ&#x20AC;&#x2122; fees, nursesâ&#x20AC;&#x2122; fees and fees for related services, hospital fees, nursing home fees and fees for related services, medical and pharmaceutical SURGXFWV WKHUDSHXWLF DSSOLDQFHV Âľ Â&#x2021; 0HGLFDO 6FKHPHV¡ &RQWULEXWLRQ ,QĂ DWLRQ LV FDOFXODWHG IRU DOO PHGLFDO VFKHPHV SURYLGLQJ DQQXDO Ă&#x20AC;QDQFLDO UHWXUQV WR WKH 5HJLVWUDU RI 0HGLFDO 6FKHPHV 3HUFHQWDJH LQFUHDVHV are based on the average contribution per principal member per month, and allows for normal medical scheme contribution increases, as well as buy-up and buy downs to other medical scheme options.

7KH DQQXDOLVHG FRPSRXQG UDWHV RI LQFUHDVH IRU WKH HOHYHQ \HDU SHULRG WR DUH JLYHQ EHORZ Description &RQVXPHU 3ULFH ,QĂ DWLRQ 0HGLFDO &DUH DQG +HDOWK ([SHQVH ,QĂ DWLRQ 5HJLVWHUHG 0HGLFDO 6FKHPHV &RQWULEXWLRQ ,QĂ DWLRQ (Allowing for Buy Downs)

Assumption 6.50% 9.70% 8.50%

Solvency levels

Trend in solvency levels 70.0% 60.0%

% Solvency

50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

All Medical Schemes

All Medical Schemes (excl. DHMS & GEMS)

All Open Medical Schemes

Open Medical Schemes (excl. DHMS)

All Restricted Medical Schemes

Restricted Medical Schemes (excl. GEMS)

Prescribed Solvency

The Financial Planner

October / November 2011

24

Healthcare

Solvency Levels Other Restricted Medical Schemes All Restricted Medical Schemes (excl. GEMS) Medshield Bankmed All Restricted Medical Schemes (incl. GEMS) Bonitas Polmed Bestmed Sizwe All Medical Schemes Fedhealth All Open Medical Schemes (excl. DHMS) All Open Medical Schemes (incl. DHMS) Medihelp Platinum Health Liberty Discovery Other Open Medical Schemes Momentum Spectramed Transmed GEMS

0%

10%

20%

30%

40%

50%

60%

70%

80%

% Solvency 2010

2009

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-5.0%

Registered Medical Scheme Contribution Inflation

The Financial Planner

Rebased CPI Inflation

October / November 2011

25

Healthcare

7KH Ă&#x20AC;JXUHV DQG JUDSK DERYH VKRZ WKDW WKH LQFUHDVH LQ WKH 0HGLFDO &DUH DQG +HDOWK ([SHQVH ,QGH[ RYHU WKH WHQ \HDU SHULRG H[FHHGHG &3, LQĂ DWLRQ E\ DQ DYHUDJH RI SHU annum. It also shows that actual increases in medical scheme FRQWULEXWLRQV SHU SULQFLSDO PHPEHU H[FHHGHG &3, LQĂ DWLRQ over the same period by 2.0% per annum, primarily due to PHPEHU EX\ GRZQV WR OHVV FRPSUHKHQVLYH EHQHĂ&#x20AC;W RSWLRQV We expect these historical trends to continue in future, despite focused effort by medical schemes on cost containment and fraud prevention, as these interventions are offset against the increasing burden of disease in the general population and the cost of technological advances in medical treatment.

be seen from the above graph, there was a general increase in utilisation of professional services (GPâ&#x20AC;&#x2122;s, Specialists and Dentists). This increase ranged from 1.0% to 8.1% per 1000 EHQHĂ&#x20AC;FLDULHV GHSHQGLQJ RQ WKH W\SH RI VHUYLFH XWLOLVHG However, hospital admissions and allied health professionals decreased by 6.6% and 4.2% respectively.

Circular 29 of 2011 provided guidelines in respect of medical scheme utilisation allowances for 2012. The guidelines stated that no allowance should be made for increased utilisation of medical services.

Based on the above analysis, only hospital admissions and allied health professionals utilisation have reduced from 2009 to 2010.

2Q -XO\ WKH &RXQFLO IRU 0HGLFDO 6FKHPH LVVXHG Circular 29 of 2011 which provided guidance to medical schemes in terms of 2012 contribution increases. The Circular recommends to medical schemes that contribution increases should be contained to within a range of 4.3% and 5.3%.

However, in practice the 2012 contribution increases announced to date by open medical schemes have ranged between 7.1% and 12.3%.

+HDOWKFDUH H[SHQGLWXUH In 2010, medical schemes spent 11.3% more on healthcare EHQHĂ&#x20AC;WV DQG FROOHFWHG PRUH LQ FRQWULEXWLRQV FRPSDUHG to 2009. Contributions increased to R96.5 billion from R84.9 billion in 2009. Total gross relevant healthcare expenditure increased to R84.7 billion from R76.3 billion in 2009.

Utilisation of healthcare services The graph below shows the change in utilisation of healthcare VHUYLFHV SHU EHQHĂ&#x20AC;FLDULHV IURP WR $V FDQ

The risk claims ratio (excluding medical savings account claims) for all schemes decreased to 87.3% in 2010 from 89.3% in

Utilisation of Private Healthcare Services 800 + 2.8%

700

+ 1.0%

- 4.2%

Number of beneficiaries

600 500

+ 2.6%

400

300

- 6.6% + 1.9%

200

100

+ 8.1%

0

General Practioner Clinical Support Specialists

Allied Health Professionals

Medical Specialists 2009

The Financial Planner

Hospital Admissions

Dentists

Dental Specialists

2010

October / November 2011

26

Healthcare

2009. The claims ratio is the proportion of healthcare costs as a percentage of risk contributions (excluding medical savings DFFRXQW FRQWULEXWLRQV 0HGLFDO VFKHPHV ZLWK D ULVN FODLPV UDWLR RI DERYH IDFH WKH GLIĂ&#x20AC;FXOW FKDOOHQJH RI DFKLHYLQJ DQ operating surplus whilst containing non-healthcare expenses below the benchmark guideline of 10% of contributions and building reserves to a sustainable level.

The graph below illustrates the 2010 risk claims ratio for the Top 10 open and Top 5 restricted medical schemes in terms of size.

1RQ KHDOWKFDUH H[SHQGLWXUH Non-healthcare expenditure (NHE) includes administration, managed care costs, broker fees, distribution costs, bad debts and reinsurance costs. In 2010, total non-healthcare expenditure rose by 6.9% to R11.6 billion (R10.8 billion in 2009).

7KH &RXQFLO IRU 0HGLFDO 6FKHPH KDV VHW D JXLGHOLQH IRU medical schemes of maintaining non-healthcare expenditure below 10% of gross contribution income.

In 2010, NHE as a proportion of gross contribution income was 14.3% (2009: 15.0%) for open schemes and 8.2% (2009:

8.8%) for restricted schemes. Restricted schemes exhibit lower non-healthcare costs primarily because they have lower or no distribution expenses and certain operating expenses may be subsidised by the participating employer(s).

On the assumption that NHE increases with CPI, whereas contribution increases are usually in excess of CPI, on average each year, we would expect NHE to decrease over time irrespective of whether additional cost control measures are introduced.

Conclusion $OWKRXJK WKHUH ZDV DQ LPSURYHPHQW LQ WKH Ă&#x20AC;QDQFLDO SHUIRUPDQFH of medical schemes in 2010 (compared to 2009), the industry still faces considerable challenges, particularly around how to PDQDJH WKH LQFUHDVHG XWLOLVDWLRQ RI EHQHĂ&#x20AC;WV LQFUHDVLQJ GLVHDVH EXUGHQ DJLQJ SURĂ&#x20AC;OH QHZ PHGLFDO WHFKQRORJ\ DQG WKH H[SRVXUH to high cost claims and claims volatility.

We therefore expect consolidation in the industry to continue in the form of scheme amalgamations and liquidations. In general though, it appears to be business as usual for medical schemes in the short to medium term, despite the intended rollout of NHI.

Risk Claims Ratio Discovery Fedhealth Momentum Polmed All Open Medical Schemes (incl. DHMS) Bonitas Bestmed Bankmed All Open Medical Schemes (excl. DHMS) All Medical Schemes Spectramed Other Open Medical Schemes All Restricted Medical Schemes (excl. GEMS) Other Restricted Medical Schemes Medshield Medihelp All Restricted Medical Schemes (incl. GEMS) Liberty Platinum Health Sizwe GEMS Transmed

0%

20%

40%

60%

80%

100%

120%

Risk Claims as % of Risk Contributions

The Financial Planner

October / November 2011

27

Healthcare

Trend in Non-Healthcare Expenditure 18.0%

NHE as a % of Gross Contributions

16.0% 14.0%

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2000

2001

2002

2003

Open Schemes

2004

2005

2006

Closed Schemes

2007

2008

2009

2010

All Schemes

Anthea Towert, CFP速 | Head: Scheme Consulting, Technical and Actuarial Consulting Solutions (TACS), Alexander Forbes Health

The Financial Planner

October / November 2011

28

Healthcare

The Role of the Healthcare Broker in anticipation of NHI The Financial Planning Institute of Southern Africa (FPI) supports the principle of providing affordable quality healthcare to all the citizens of South Africa.

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he focus and priority on NHI often elevates NHI as the solution for the South African healthcare problems. However, such a view is misplaced. Government has adopted a 10-point plan and this 10-point plan under legislative reform has one action point namely the implementation of NHI. In order for JRYHUQPHQW WR IXOĂ&#x20AC;OO LWV FRQVWLWXWLRQDO REOLJDWLRQ LQ WHUPV RI Section 27 (1) and (2) of the constitution, to provide all citizens with access to quality healthcare, the total healthcare system needs to be overhauled. This means that we need to address amongst others the quadruple burden of disease, the quality of care, the supply of healthcare professionals and the cost RI KHDOWKFDUH 0HPEHUV RI )3, VKRXOG HQVXUH WKDW WKHLU FOLHQWV understand that healthcare is a public good and that we cannot have change by retaining the status quo.

0LQLVWHUV RI +HDOWK JOREDOO\ VWUXJJOH ZLWK ULVLQJ KHDOWKFDUH costs. The World Health Organisation (WHO) attributes the spiralling healthcare costs to three factors namely healthcare systems that are hospital centric instead of being curative and SUHYHQWDWLYH IUDJPHQWHG ULVN SRROV DQG DOVR XQFRQWUROODEOH commercialism which undermines the principal of health as a public good. In order to remain relevant, healthcare intermediaries should position themselves to play an active role in reducing healthcare costs due to the three systemic

The Financial Planner

Andre Jacobs, CFPÂŽ | FPI Healthcare ISG Chairperson IDFWRUV LGHQWLĂ&#x20AC;HG E\ WKH :+2 ZKLOVW DW WKH VDPH WLPH HQVXULQJ WKDW WKHLU FOLHQWV DUH SURWHFWHG IURP Ă&#x20AC;QDQFLDO UXLQ GXH to the onset of poor health.

Healthcare intermediaries often bear the brunt of criticism due to the more than R1 billion that is paid to intermediaries.

The reason for the criticism is based on the notion that if that money is kept within medical schemes then more money can EH VSHQW RQ KHDOWKFDUH EHQHĂ&#x20AC;WV IRU PHPEHUV 7KLV FULWLFLVP is at best popular but not true. Prior to 2003 intermediaries received substantially more than the current commission levels from administrators and medical schemes whilst advising substantially less members of medical schemes than today. However, although administrators are not allowed

October / November 2011

30

Healthcare

to remunerate brokers any more, the cost of administration did not decline with the removal of commission. Research conducted by the WHO indicates that healthcare expenses are cited in 10% of cases as a reason for sequestrations.

Therefore, it can categorically be stated that healthcare LQWHUPHGLDULHV LQ 6RXWK $IULFD DUH IXOĂ&#x20AC;OOLQJ D YLWDO UROH LQ HQVXULQJ WKDW WKHLU FOLHQWV DUH SURWHFWHG IURP Ă&#x20AC;QDQFLDO UXLQ due to the onset of poor health.

Healthcare intermediaries currently participate in reducing healthcare costs in the private sector in the following four ways. Firstly, healthcare intermediaries are often consulted RQ EHQHĂ&#x20AC;W GHVLJQ DQG HQVXUH WKDW EHQHĂ&#x20AC;WV RIIHUHG E\ medical schemes are not only hospital centric but also SURYLGH SUHYHQWDWLYH DQG SULPDU\ FDUH EHQHĂ&#x20AC;WV +RZHYHU WKH UROH WKDW +HDOWKFDUH LQWHUPHGLDULHV IXOĂ&#x20AC;O LV FRQVWUDLQHG E\ WKH 0HGLFDO 6FKHPHV $FW 6HFRQGO\ KHDOWKFDUH LQWHUPHGLDULHV engage their clients, individual members, employees and employers, to participate in health improvement activities and preventative actions. These two actions of healthcare intermediaries assist in curbing the hospital centric cost drivers. Thirdly healthcare intermediaries contribute to members remaining in the private medical scheme

BROKER OPPORTUNITIES

environment and also actively grow the number of members covered by medical schemes. Healthcare intermediaries have actively participated, free of charge, in the Low Income Task 7HDP HVWDEOLVKHG E\ WKH 0LQLVWHU RI +HDOWK WR Ă&#x20AC;QG VROXWLRQV to cover lower income earners. These actions assist in improving and stabilising the risk pools that are fragmented.

Fourthly, medical scheme contributions and out-of-pocket expenditure makes up one of the largest household expenses.

Healthcare intermediaries ensure that their clients are not exposed to uncontrolled commercialisation by ensuring that clients are advised of alternative medical schemes, particularly if a medical scheme does not offer value to their members any more. In addition healthcare intermediaries DOVR LQIRUP WKHLU FOLHQWV RI WKH Ă&#x20AC;QDQFLDO VWDELOLW\ RI PHGLFDO schemes and the impact of non healthcare expenses. All of this ensures that consumers of private healthcare are protected against uncontrollable commercialisation.

Healthcare intermediaries need to harness the value they add, and need to ensure that they participate actively in WKH 1+, GHEDWH 7KH\ QHHG WR UHPDLQ UHOHYDQW LQ D FKDQJLQJ healthcare dispensation.

Helping you protect others Assupol Life has become synonymous with its unparalleled service and understanding of the low to middle income sectors of the insurance market. After almost 100 years of serving our clients, Assupol Life invites you to consider a market that holds a promise for massive upside in sales and new business.

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Employee Benefits

The Effective Investor, Bubbles and Crashes

By Franco Busetti Summary commissioned by the FPI Investment ISG A loss of diversity of opinions can lead to a bubble situation.

Therefore a prime cause of bubbles is herding behaviour, which is driven by imitation. As prices rise, the resulting high returns attract more buyers. This drives prices even higher, encouraging yet more speculators. $W VRPH FULWLFDO SRLQW D VXIĂ&#x20AC;FLHQW QXPEHU RI VSHFXODWRUV acknowledge that the upward trend cannot continue and they decide to sell, initiating panic, which usually triggers a crash.

Bubbles in all asset classes share common characteristics including easy credit, leveraging, participation by the general public and abuse of the sceptical.

How to identify a bubble +\PDQ 0LQVN\¡V XQLYHUVDO EXEEOH DQG FUDVK VFHQDULR LGHQWLĂ&#x20AC;HV seven stages to qualitatively judge when an assetâ&#x20AC;&#x2122;s price is showing bubble-like behaviour: 1. 'LVSODFHPHQW Ă&#x20AC;QDQFLDO FULVHV DUH LQLWLDWHG E\ D disturbance or external shift that creates new opportunities.

Bubbles begin smoothly, with increasing production and sales in a relatively optimistic market, often encouraged by surges in technology. The dot-com bubble was a good example.

Franco Busetti

â&#x20AC;&#x153;Insanity in individuals is rare â&#x20AC;&#x201C; but in groups, parties, nations and epochs, it is the rule.â&#x20AC;? â&#x20AC;&#x201C; Friedrich Nietzche 7KLV VXPPDU\ LGHQWLĂ&#x20AC;HV ZK\ EXEEOHV RFFXU ZKDW FDXVHV WKHP DQG ZKDW LPSDFW WKH\ KDYH RQ LQYHVWRUV DQG markets. You will learn how to identify bubbles and use WKHP DV JUHDW RSSRUWXQLWLHV WR LPSOHPHQW WKH IXQGDPHQWDO LQYHVWPHQW SULQFLSOHV What causes a bubble and subsequent crash?

Bubbles can occur in a large variety of assets and develop when asset prices do four things in succession: increase VLJQLĂ&#x20AC;FDQWO\ GR VR UDSLGO\ DQG FRQWLQXRXVO\ DQG DUH considerably higher than intrinsic value. They are usually fuelled by investorsâ&#x20AC;&#x2122; expectations of further price increases and are accompanied by high trading volumes.

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2. Prices start to increase.

3. (DV\ FUHGLW DQG ORZ LQWHUHVW UDWHV this encourages increasing investment and leverage from new sources (often international investors).

4. 2YHUWUDGLQJ market demand increases, leading to high volumes, and then prices rise. This leads to attractive returns, which entice less sophisticated investors and speculators. Small down payments (low margins) lead to the demand for stock rising faster than the rate at which real money is put into the market.

5. (XSKRULD SULFHV DUH QR ORQJHU OLQNHG WR WKH IXQGDPHQWDOV activity is purely momentum-driven and speculative. Some participants are aware that they are in a bubble. Some are pressured to be participants, others subscribe to the greater fool theory, all believing wrongly that they will get out ahead of the rest.

6. &ULWLFDO VWDJH the eventual cause of the crash can be anything. Crashes have internal origins and external shocks are not the cause but only the trigger. Clever insiders begin WR WDNH SURĂ&#x20AC;WV DQG OHDYH WKH PDUNHW XQWLO WKH LQVWDELOLW\ LV eventually revealed and the market collapses.

October / November 2011

32

Investments

7. 5HYXOVLRQ HYHU\RQH Ă HHV IRU WKH H[LW DW WKH VDPH WLPH The easy credit dries up, buyers disappear, sellers panic and prices collapse. This stage only ends when prices have fallen so low that some investors are tempted to re-enter the market or a saviour of last resort appears. The bailout RI VRPH KLJK SURĂ&#x20AC;OH FDVXDOWLHV LV VRPHWLPHV VXIĂ&#x20AC;FLHQW WR change investor sentiment and halt panic and pessimism.

'LGLHU 6RUQHWWH D OHDGLQJ H[SHUW RQ Ă&#x20AC;QDQFLDO EXEEOHV DQG FUDVKHV SRLQWV RXW WKDW Â&#x2021; $ Ă&#x20AC;QDQFLDO FROODSVH KDV QHYHU KDSSHQHG ZKHQ WKLQJV looked bad. Â&#x2021; %HIRUH HYHU\ FROODSVH HFRQRPLVWV VD\ WKH HFRQRP\ LV WKH best of all worlds. Â&#x2021; (YHU\WKLQJ ORRNV URV\ VWRFN PDUNHWV JR XS DQG VHQWLPHQW is optimistic. Â&#x2021; 0DFURHFRQRPLF Ă RZV DQG GDWD RXWSXW HPSOR\PHQW HWF

appear to be improving more and more. Â&#x2021; 7KH JRRG WLPHV DUH H[WUDSRODWHG OLQHDUO\ LQWR WKH IXWXUH Â&#x2021; ,W LV SHUFHLYHG DV VHQVHOHVV LQ WKLV WLPH RI JHQHUDO HXSKRULD to talk about crashes and depression. Â&#x2021; 7KH FUDVK FDWFKHV PRVW SHRSOH HVSHFLDOO\ HFRQRPLVWV by surprise.

CDWFKSKUDVHV DORQJ WKH OLQHV RI ÂśWKLV WLPH LV GLIIHUHQW¡ ÂśQHZ SDUDGLJP¡ ÂśD GLIIHUHQW EDOO JDPH¡ ÂśD QHZ HUD¡ DQG ÂśLW¡V D structural changeâ&#x20AC;&#x2122; should get the warning bells going as they are usually associated with a bubble.

7KH SULFH SDWWHUQ RI EXEEOHV The price pattern of all bubbles and crashes is amazingly VLPLODU DQG LV HDVLO\ LGHQWLĂ&#x20AC;HG E\ VXSHU H[SRQHQWLDO SULFH growth in the bubble phase. Exponential growth is when a quantity increases by a constant percentage in each period (e.g. 10% per year). Super-exponential growth is even faster, with the percentage growth itself increasing in every period H J SHU \HDU LQ WKH Ă&#x20AC;UVW \HDU SHU \HDU LQ WKH second year etc.). This is unsustainable and will eventually end.

Not all bubbles end in crashes We cannot forecast crashes, but we can forecast the end of bubbles. This is not a contradiction, since not all bubbles end in crashes. Instead of a crash, the super-exponential bubble phase can also end in continuing, but lower and more VXVWDLQDEOH JURZWK D VLGHZD\V PRYHPHQW RU D SURORQJHG decline. Only two-thirds of bubbles end in crashes.

Crises are become more frequent Historically, the average interval between crises was around seven years, which is consistent with research that shows markets have a memory of four to eight years. However there has been an increase in the frequency of crises since 1960, with a crisis somewhere in the world every year or two in recent years.

This could be the result of a combination of factors, including WKH HPHUJHQFH RI Ă H[LEOH H[FKDQJH UDWHV WKH LQFUHDVHG number of stock exchanges available to crash compared to the past, stronger global integration, faster communication and greater wealth and therefore access to new markets.

Become used to the fact that crises have become a regular occurrence. Donâ&#x20AC;&#x2122;t let them rattle you and remain steadfast in your investment approach. Next time there is a bubble use it as a golden opportunity to pick up stocks at deep discounts, since the largest mispricings occur in crises when emotions overwhelm fundamentals.

Lastly, let long-term history be your guide. The best SUHSDUDWLRQ WR LGHQWLI\ DQG EHQHĂ&#x20AC;W IURP EXEEOHV DQG FUDVKHV is a study of previous bubbles. Remember that history is one of your most powerful weapons in investing.

The next summary in this series will discuss the frailties of IRUHFDVWV ,QGLYLGXDO LQYHVWRUV ZLOO OHDUQ WR WDNH IRUHFDVWV ZLWK D SLQFK RI VDOW DQG SUDFWLWLRQHUV ZLOO EHQHĂ&#x20AC;W IURP WKH VXJJHVWHG correction of these methodologies and their errors.

The increasing frequency of financial crises

The Financial Planner

October / November 2011

33

Investment Planning

The RAFIŽ Five-year Scorecard Fundamental Index approach generated excess returns over cap weighting in 22 of the 23 developed market applications over a 21-year period. The average outperformance in developed large company markets was 2.7%. With these results in hand, we concluded that an investor could achieve D UHWXUQ RI ² RYHU FDS ZHLJKWHG LQGH[HV LQ GHYHORSHG markets, over a complete market cycle.

Since FTSE launched its FTSE RAFI family of indexes in November 2005, weâ&#x20AC;&#x2122;ve lived through two bull markets sandwiched around the biggest global bear market since the 1930s. If this isnâ&#x20AC;&#x2122;t a full market cycle, we are not sure ZKDW LV 9DOXH VWRFNV ZRQ KDQGLO\ LQ DQG WKH PLGGOH TXDUWHUV RI Ă DQNHG E\ \HDUV RI PRVWO\ JURZWK HTXLW\ outperformance. So how has the Fundamental Index approach IDUHG RYHU WKLV VWUHWFK"

0DUF *UHHQ &)3ÂŽ _ 0DQDJLQJ 'LUHFWRU RI Cidel (Pty) Ltd

When the Fundamental IndexÂŽ concept was introduced, it was met with Ă&#x20AC;erce attacks. Critics decried its backtested results as data-mining or said the approach was just a repackaged value investment process. Five years after the Ă&#x20AC;rst 5AFI indices went live, the proof is in:The methodology has generated superior performance during a period when value has lagged growth all over the world.

In a relatively short span of time, the Fundamental Index approach has revolutionised passive investing and has served as an important milestone in the evolution of our investment WKLQNLQJ KHOSLQJ VSDZQ D QHZ Ă&#x20AC;HOG RI LQYHVWLQJÂłWKDW RI Alternative Beta or Strategy Indices. In this issue we show that live RAFI results support our earlier research and the robustness of the Fundamental Index methodology.

RAFIâ&#x20AC;&#x2122;s Better Beta We published our initial research on the Fundamental Index FRQFHSW LQ WKH 0DUFK $SULO LVVXH RI WKH )LQDQFLDO Analysts Journal, showing how the methodology outperformed in U.S. markets during a 43-year span ending December 2004, based on a simulation.1 That initial research was extended by Nomura Securities to cover the 23 developed markets in the FTSE Developed Index.2 The results are summarised in Table 1. Impressively, the

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Using live results, 19 of 23 countries added value via the Fundamental Index methodology. The average excess return per country has been 2.0%, as shown in Table 2. The FTSE RAFI US 1000 Index produced an excess return of 2.3% per annum, just a bit better than our original study showed.3 7KH OLYH UHVXOWV IDOO LQWR LQ WKH ² UDQJH ZH GLVFRYHUHG LQ our initial research. But admittedly they are at the lower end.

While an excess return of 2% is respectable, why didnâ&#x20AC;&#x2122;t we IXOO\ PDWFK WKH ORQJ WHUP EDFNWHVWHG UHVXOWV" )RU WKDW OHW¡V WXUQ our attention to the other major criticism of the Fundamental ,QGH[ DSSURDFKÂłWKH YDOXH HIIHFW 3RVLWLYH 5HVXOWV LQ D *URZWK 2ULHQWHG 0DUNHW Critics have contended that the Fundamental Index PHWKRGRORJ\ GHULYHV LWV EHQHĂ&#x20AC;W IURP D YDOXH WLOW :H GRQ¡W disagree with that view as theyâ&#x20AC;&#x2122;re half right. Letâ&#x20AC;&#x2122;s explain.

Suppose there are two stocks with identical sales, book values, FDVK Ă RZ DQG GLYLGHQGV 7KH Ă&#x20AC;UVW VWRFN *URZWK\ 6KDUHV ,QF trades at twice the market multiple due to its outstanding recent operating results and the investorsâ&#x20AC;&#x2122; resultant high H[SHFWDWLRQV IRU IXWXUH JURZWK 0HDQZKLOH 8QORYHG 9DOXH Co., with a stream of recent bad news, sells at half the market multiple. Cap weighting doubles the weight of Growthy 6KDUHV DQG KDOYHV WKH ZHLJKW LQ 8QORYHG 9DOXH &R UHODWLYH to their economic scale, despite the companies being the exact same size. Repeat this exercise across the whole market and the result is a strong growth tilt for a cap-weighted LQGH[ SRUWIROLR 0HDQZKLOH D IXQGDPHQWDOO\ ZHLJKWHG LQGH[ SRUWIROLR GRHVQ¡W VKDUH WKDW WLOW WR JURZWK LW PDWFKHV WKH look and composition of the economy. From a cap-centric point of view, the Fundamental Index portfolio does have

October / November 2011

34

Investment Planning Table 1 23 Country Returns (Ranked by Value Added) Country

RAFI Return

Ireland Austria France Singapore Norway Spain Canada Portugal Greece United Kingdom Japan Hong Kong Germany Australia Italy United States Denmark Sweden Finland Netherlands Belgium 1HZ =HDODQG Switzerland 23-Country Average

19.6% 16.6% 16.3% 11.1% 15.0% 15.9% 13.2% 10.7% 21.3% 14.9% 6.4% 20.5% 12.0% 15.5% 15.6% 15.1% 11.3% 16.7% 13.9% 13.4% 15.8% 6.5% 10.8% 15.9%

MSCI Return Value Added

10.9% 11.7% 12.4% 7.2% 11.2% 12.3% 9.7% 7.4% 18.1% 11.8% 3.3% 17.6% 9.1% 13.0% 13.3% 12.9% 9.1% 14.8% 12.3% 11.9% 14.4% 6.6% 11.3% 13.3%

8.6% 4.9% 3.9% 3.9% 3.8% 3.6% 3.5% 3.3% 3.2% 3.1% 3.1% 2.9% 2.9% 2.6% 2.2% 2.2% 2.1% 1.9% 1.6% 1.5% 1.4% -0.1% -0.6% 2.7%

Risk Adjusted $OSKD 9.5% 5.8% 4.3% 4.0% 3.9% 4.6% 4.6% 3.7% 2.9% 3.2% 3.0% 2.9% 3.6% 3.3% 2.3% 2.9% 2.8% 2.9% 4.6% 1.7% 2.3% -0.1% -0.4% 3.1%

Tracking Error

Info Ratio

$OSKD W VWDWLVWLF

Start Date

9.5% 10.1% 7.4% 6.9% 6.5% 5.3% 6.9% 8.8% 8.9% 4.6% 5.6% 6.6% 6.0% 5.4% 6.0% 5.0% 8.4% 10.9% 21.7% 6.5% 5.9% 9.2% 4.4% 3.0%

0.91 0.48 0.53 0.57 0.59 0.69 0.50 0.38 0.35 0.67 0.55 0.44 0.48 0.48 0.38 0.44 0.25 0.18 0.07 0.23 0.24 -0.01 -0.13 0.89

4.31 2.77 2.71 2.38 2.79 4.22 3.70 1.82 1.30 3.18 2.47 2.01 3.64 3.00 1.76 2.83 1.68 1.26 1.23 1.22 1.90 -0.06 -0.45 5.01

1988 1984 1984 1988 1984 1988 1984 1989 1989 1984 1984 1984 1984 1984 1984 1984 1984 1984 1988 1984 1984 1988 1984 1984

Table 2 23 Country Returns (Ranked by Value Added) Country Austria Hong Kong Germany Greece Belgium Sweden Finland Singapore United States Italy Portugal France Japan Canada Spain Switzerland Norway Australia 1HZ =HDODQG United Kingdom Netherlands Denmark Ireland 23-Country Average

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RAFI Return 4.9% 17.5% 11.7% -11.1% -1.8% 15.0% 6.2% 19.2% 4.7% -1.1% 5.5% 4.9% 0.2% 11.8% 6.3% 7.5% 9.7% 12.5% 0.0% 2.8% 1.8% 7.5% -24.1% 6.0%

MSCI Return -5.2% 12.1% 7.8% -14.3% -4.8% 12.1% 3.4% 16.8% 2.4% -3.3% 3.9% 3.4% -0.7% 10.9% 5.5% 6.7% 9.1% 12.2% -0.1% 3.2% 5.1% 12.1% -19.2% 4.0%

Value Added 10.1% 5.4% 3.9% 3.2% 2.9% 2.9% 2.7% 2.4% 2.3% 2.2% 1.6% 1.5% 0.9% 0.9% 0.9% 0.7% 0.6% 0.4% 0.1% -0.4% -3.3% -4.6% -4.9% 2.0%

October / November 2011

35

Investment Planning

D YDOXH WLOW EXW LW¡V D VSHFLDO YDOXH WLOWÂłDQ H[DFW PLUURU image of the marketâ&#x20AC;&#x2122;s willingness to pay up for perceived future growth opportunities.

It is well documented that value has historically outperformed growth.4 Our own analysis has found roughly one-fourth of the RAFI methodâ&#x20AC;&#x2122;s excess return is attributed to a static value tilt as outlined above. A majority of the excess return stems from contra-trading against the fads, bubbles, crashes, and constantly shifting expectations and speculations at work in the capital markets.

For the 21-year period ending December 2004, the global developed equity market witnessed a value premium of 1.3%, thus acting as a tailwind for the typically valueoriented RAFI performance. 5 In opposite fashion, value acted as a headwind during the live period. In the United States, large-cap value stocks returned +1.4% from November 30, 2005, through December 31, 2010, while their growth counterparts were up +3.6%.6 Thus, the negative premium for value stocks has been about half of this 2.2% difference per year in the United States. Similarly, in developed markets, the value SUHPLXP ZDV ² SHU \HDU IRU WKH SDVW Ă&#x20AC;YH SOXV \HDUV Our simulated results showed an average RAFI excess return of 2.7% per year vis-Ă -vis cap weighting in a period of 1.3% value outperformance, so clearly RAFI performance is more than just value. The RAFI live index results have been even more impressive, achieving 2.0% excess returns during a time when value indexes lagged the broad markets by more than 1% per year! The RAFI approach beat the capweighted value benchmark by well over 300 bps, winning ZKLOH YDOXH ZDV ORVLQJ FRPSRXQGHG RYHU Ă&#x20AC;YH \HDUV +RZ LV WKDW SRVVLEOH" 2QH RI WKH LPSRUWDQW IHDWXUHV RI the RAFI investment process is the annual reconstitution EDFN WR D FRPSDQ\¡V IXQGDPHQWDO VFDOH DV GHĂ&#x20AC;QHG E\ D FRPSRVLWH RI VDOHV FDVK Ă RZ ERRN YDOXH DQG GLYLGHQGV 7KLV rebalancing, a key differentiator of RAFI indices, forces the portfolio to trim stocks whose prices recently outperformed their fundamentals and add to those stocks whose prices have underperformed the businessesâ&#x20AC;&#x2122; economic footprints.

The market is constantly changing its mind as to which companies are growth stocks and which ones are value stocks, and how much premium or discount each company deserves. A conventional value index responds by adding and dropping companies as they fall in or out of the value FDPS EXW WKH ZHLJKW LV DOZD\V WKH FDS ZHLJKW LI LW¡V LQ WKH index. A Fundamental Index portfolio will adjust over- or XQGHUZHLJKWV UHODWLYH WR WKH FDS ZHLJKWHG PDUNHW WR UHà HFW WKH FRQVWDQWO\ FKDQJLQJ SUHPLXP RU GLVFRXQW UHà HFWHG LQ WKH share price. The size of the business is merely a convenient, and economically meaningful, anchor to use for rebalancing.

On a style basis, the RAFI approach increases its value exposure when value has recently underperformed and is

The Financial Planner

cheap (i.e., investors are rewarded with a high forwardlooking value premium). This phenomenon was vividly seen LQ ZKHQ WKH 5$), VWUDWHJLHV Âł REOLYLRXV WR LPPLQHQW $UPDJHGGRQ Âł UHEDODQFHG LQWR WKH YHU\ Ă&#x20AC;QDQFH LQGXVWULDO and consumer discretionary stocks that were ostensibly SRLVHG IRU H[WLQFWLRQ 0HDQZKLOH WKH 5$), DSSURDFK UHGXFHV its value exposure when value has recently outperformed and is expensive. This contra-trading process is the reason ZK\ D YDOXH WLOWHG SRUWIROLR FDQ ZLQÂłHYHQ KDQGLO\ÂłLQ D secular growth led market.

Conclusion The Fundamental Index methodology does not work DOO WKH WLPH QR LQYHVWPHQW SURFHVV GRHV +RZHYHU RXU research found that, over full market cycles, the RAFI methodology is strikingly effective at adding value over WKH FDS ZHLJKWHG EHQFKPDUNV $ OLYH Ă&#x20AC;YH \HDU ZLQ UDWH RI LQ GHYHORSHG PDUNHWVÂłGXULQJ D VSDQ RI VXEVWDQWLDO YDOXH XQGHUSHUIRUPDQFH ZKHQ FULWLFV VDLG WKH )XQGDPHQWDO ,QGH[ PHWKRGRORJ\ VKRXOG KDYH ORVWÂłLV SRZHUIXO HYLGHQFH $Q\ QHZ VFLHQWLĂ&#x20AC;F K\SRWKHVLV ² RU EDFNWHVWHG DQDO\VLV ² ZDUUDQWV D VNHSWLFDO ORRN 7KH )XQGDPHQWDO ,QGH[ LGHD LV QR H[FHSWLRQ :H WKLQN WKH OLYH UHVXOWV KRZHYHU SURYLGH VWURQJ HPSLULFDO HYLGHQFH WKDW WKH 5$), LGHD KROGV PHULW DQG ZLOO EHJLQ WR RSHQ WKH PLQGV RI PDQ\ RI WKH HDUO\ disbelievers. Further, these results suggest that RAFI VWUDWHJLHV FDQ SOD\ DQ LPSRUWDQW UROH DV D ORZ FRVW ´FRUHÂľ SDUW RI \RXU HTXLW\ SRUWIROLRÂłD EHWWHU EHWD DFKLHYHG ZLWK DOO RI WKH DGYDQWDJHV RI WUDGLWLRQDO FDS ZHLJKWHG LQGH[HV

Endnotes 5REHUW ' $UQRWW -DVRQ +VX DQG 3KLOLS 0RRUH ´)XQGDPHQWDO ,QGH[DWLRQ Âľ )LQDQFLDO $QDO\VWV -RXUQDO YRO QR 0DUFK $SULO ² 2. H. Tamura and Y. Shimizu, 2005, â&#x20AC;&#x153;Global Fundamental Indices: Do They Outperform 0DUNHW &DS :HLJKWHG ,QGLFHV RQ D *OREDO %DVLV"Âľ 1RPXUD *OREDO 4XDQWLWDWLYH Research (October 28).

3. The statistician in me must admit this is fortuitous. While it is dead on with our KLVWRULFDO DYHUDJH WKH UDQJH RI DOO Ă&#x20AC;YH \HDU H[FHVV UHWXUQV IURP WKH V LV FRQVLGHUDEO\ ZLGHU DQG LQYHVWRUV VKRXOG QRW DVVXPH DOO RU HYHQ PRVW Ă&#x20AC;YH \HDU holding periods would produce such a similar outcome.

4. Eugene F. Fama and Kenneth R. French, 1992, â&#x20AC;&#x153;The Cross-Section of Expected Stock 5HWXUQV Âľ -RXUQDO RI )LQDQFH YRO QR ² &DOFXODWHG E\ 06&, :RUOG 9DOXH ,QGH[ ² 06&, :RUOG ,QGH[ IURP January 1984 through December 2004. $V PHDVXUHG E\ WKH 5XVVHOO 9DOXH DQG *URZWK LQGH[HV

October / November 2011

36

Retirement Planning

Time...

Many of us save for retirement but upon reaching the golden period, Ă&#x20AC;nd that our accumulated savings are inadequate to support a relatively Ă&#x20AC;nancially independent retirement.There are numerous reasons for this and for those people who belonged to retirement funds and retired with insufĂ&#x20AC;cient savings, these reasons can be narrowed to four important factors viz, tax, guantum of contributions, term of investing and the investment return.

In South Africa, it is common practice for members of retirement funds, when leaving employment, to opt for a cash ZLWKGUDZDO EHQHĂ&#x20AC;W LQVWHDG RI RSWLQJ IRU WKH SUHVHUYDWLRQ RI WKHLU ZLWKGUDZDO EHQHĂ&#x20AC;WV IRU UHWLUHPHQW SXUSRVHV ,PPHGLDWHO\ IRXU SRWHQWLDO LVVXHV DULVH ZKHQ RSWLQJ IRU D FDVK EHQHĂ&#x20AC;W Firstly, the savings are taxed. Secondly, the savings will be consumed. Thirdly, the return on the savings could be low at that point in time. Finally, the potential term for saving WR UHWLUHPHQW ZLOO VKRUWHQ 5HWLUHPHQW IXQGV DUH HIĂ&#x20AC;FLHQW retirement saving vehicles, and many people realise too late in life that they did not fully utilise the advantages that retirement funds offer.

I give numerous presentations to members of retirement funds on the need to save for retirement and without fail, members close to retirement will lament on why they had not sought out these lessons decades ago. The younger members tend to accost me for advice on future retirement saving strategies. This gives me FRQĂ&#x20AC;GHQFH WKDW ZKHQ SHRSOH DUH DUPHG ZLWK NQRZOHGJH DQG given some form of guidance and encouragement, most will start to make appropriate retirement planning.

Daniel Clifford, CFPÂŽ _ )3, (PSOR\HH %HQHĂ&#x20AC;WV ,6* &RPPLWWHH 0HPEHU

The Financial Planner

This guidance, as mentioned above, can be reduced to four factors and the effect of each factor has in contributing to the ZKROH , FDOO WKLV 7$57 )DFWRUV ² 7D[ $PRXQW RI &RQWULEXWLRQV Return on investments and Term of investing. Whether investing or borrowing, always remember that the TART Factors will GUDVWLFDOO\ LQà XHQFH WKH RXWFRPH

October / November 2011

37

Retirement Planning

For how long must I save to provide an appropriate retirement benefit?

30.25

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AussumpĆ&#x;ons: salary escalates with inĹ&#x2021;aĆ&#x;on, Need 15 Ć&#x;mes annual salary at reĆ&#x;rement

/HW XV H[DPLQH WKHVH IDFWRUV ZLWK WKH JUDSKLF LOOXVWUDWLRQ DERYH , KDYH PDGH WKH IROORZLQJ DVVXPSWLRQV 1. An amount of 15 times annual salary at date of retirement is required on retirement to purchase an annuity. 15 times DQQXDO VDODU\ LV QRUPDOO\ VXIĂ&#x20AC;FLHQW WR SXUFKDVH DQ DQQXLW\ RI RI VDODU\ ZKLFK LQFUHDVHV ZLWK LQĂ DWLRQ HDFK \HDU and is payable for life.

7KH PHPEHUV¡ VDODU\ HVFDODWHV ZLWK LQĂ DWLRQ HDFK \HDU The horizontal axis represents time in years. The vertical axis represents the net retirement funding contribution (expressed as a percentage of a personâ&#x20AC;&#x2122;s total salary) made to a fund over the entire period. The net retirement funding contribution is the total contributions less any and all costs. The rate of return on the right hand side of the graph is a rate in excess of LQĂ DWLRQ UHDO UDWH DQG , XVHG DQG IRU LOOXVWUDWLYH SXUSRVHV 5HDO UDWH PHDQV WKDW LI LQĂ DWLRQ LV WKHQ WKH DERYH LQĂ DWLRQ DVVXPSWLRQ PHDQV WKDW D UHWXUQ RYHU WKH HQWLUH period of 9% per annum is required.

From the graph it can be seen that a person needs to save for 30.25 years if he/she makes net retirement funding contributions of 15% to the fund over the entire period and if VXFK SHUVRQ HDUQV D UHWXUQ RI LQĂ DWLRQ SOXV RYHU WKH HQWLUH period. If the assumptions are borne out then such a person will be able to retire from his/her fund after a period of \HDUV ZLWK DQ DFFXPXODWHG EHQHĂ&#x20AC;W RI WLPHV KLV KHU DQQXDO VDODU\ 7KLV VKRXOG EH VXIĂ&#x20AC;FLHQW WR SXUFKDVH D SHQVLRQ equal to 75% of his/her salary at retirement. However, the person saving 10% net retirement funding contributions and HDUQLQJ DQ LQYHVWPHQW UHWXUQ RI LQĂ DWLRQ SOXV RYHU WKH entire period will have to save for 57.25 years before such SHUVRQ FDQ UHWLUH ZLWK D VLPLODU EHQHĂ&#x20AC;W The graph indicates that there are 3 factors (call them ART) LQĂ XHQFLQJ WKH DFFXPXODWHG EHQHĂ&#x20AC;W DW UHWLUHPHQW 7KHVH are the net retirement funding contributions (amount of contributions), the return on investment and the term of saving.

All 3 these factors should be reviewed regularly to ensure that the required objective is achieved at the end of the period. I discuss a basic review programme below.

Net retirement funding contributions is probably the easiest of the 3 to review and control. The target is that a certain percentage of a personâ&#x20AC;&#x2122;s salary should be invested for retirement funding. Normally an employer sponsored scheme has a certain total contribution to the fund from which costs

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are deducted and the balance paid towards retirement funding. The costs are typically administration costs, actuarial fees, audit fees, consultancy fees, risk premiums and various other charges. These should be reviewed regularly and if one of the costs escalates to an unacceptable level where it reduces the net retirement funding contributions to a level less than required then a full investigation should be performed to establish if a more cost effective option can be obtained.

The investment return target should be monitored on a regular basis against the target set as well as against other providers to ensure that the most appropriate investment PDQDJHU V DUH DSSRLQWHG 7KH SURFHVV RI VHOHFWLRQ Ă&#x20AC;ULQJ hiring, monitoring of the managers should be clearly set out in an investment strategy.

Once a time period is set, it is the level of contributions and the quantum of the investment return that will determine whether the target will be met.

It is thus possible to use an employer sponsored retirement IXQG WR PDNH VXIĂ&#x20AC;FLHQW UHWLUHPHQW VDYLQJV SURYLGHG WKH IDFWRUV FRQWULEXWLQJ WR WKH DFFXPXODWLRQ RI WKH EHQHĂ&#x20AC;W LV EDODQFHG DQG VHOHFWHG WR SURYLGH D VSHFLĂ&#x20AC;F WDUJHWHG EHQHĂ&#x20AC;W This however is easier said than done. It requires vigilance to ensure that the net retirement funding contributions are maintained at the highest possible level. In order to do this every person or fund needs a professional to assist him/her to set these benchmarks and to monitor them.

The conclusion is that the biggest contributor to a successful UHWLUHPHQW LV WLPH 7KH WULFN LV WR QRW ZDVWH WKH WLPH :DVWH FRPHV in the form of early withdrawal and then spending the monies on non retirement funding as well as inappropriate monitoring. The second biggest contributor is the investment returns earned over WKH WLPH WKDW \RX VDYH ,W LV FOHDU WKDW D FRQVHUYDWLYH LQYHVWPHQW WKH LQà DWLRQ SOXV DVVXPSWLRQ WDNHV D PXFK ORQJHU WLPH to accumulate to an acceptable level of savings. The other big factor is the amount of contributions. All in all the message is VWDUW VDYLQJ ZKHQ \RX VWDUW ZRUNLQJ DQG GRQ¡W VWRS XQWLO \RX VWRS ZRUNLQJ 7KHUH LV QR HDV\ ZD\ RXW

October / November 2011

38

Industry Sector Group News

Industry Sector Group News GLIĂ&#x20AC;FXOWLHV 7KH HIIHFWLYH GDWH ZLOO DFFRUGLQJO\ EH GHIHUUHG VR HPSOR\HUV DUH QRW OHIW LQ D GLIĂ&#x20AC;FXOW SRVLWLRQÂľ 7KHUHIRUH LW is believed that a further 2011 Taxation Laws Amendment Bill will defer the effective date but this is of concern to companies ZKR DUH DOUHDG\ SDVW WKHLU Ă&#x20AC;QDQFLDO \HDU HQG GDWH EHFDXVH the reversal of the unintended change to the Act has not yet been Gazetted.

The practical solution for PHI policies appears to be in the way payroll administration companies are addressing the problem.

They are including the premium in salary and then linking a premium deduction to a line on the IRP5 (code 4018) providing for a tax deduction for income replacement policies. The view of the payroll administrators seems to be that the PHI premium is to be added to income and then immediately included as a GHGXFWLRQ ZLWKRXW DGGLQJ IULQJH EHQHĂ&#x20AC;W WD[

Until Gazetted, there is no absolute clarity on this.

1DWLRQDO 6RFLDO 6HFXULW\ 6\VWHP 1666

0LQLPXP 5LVN %HQHĂ&#x20AC;WV Over the past several months representatives from the Department of Social Development have been making presentations around the country updating stakeholders on social security reform principles that can be expected once the Inter-Departmental Task Team (IDTT) releases the paper detailing Governmentâ&#x20AC;&#x2122;s consolidated position. Indications are that they will propose a mandatory contribution of 4% of salary towards the NSSS to fund a universal minimum level RI GHDWK DQG GLVDELOLW\ EHQHĂ&#x20AC;WV ,QGLFDWLRQV DUH WKDW WKH FRQWULEXWLRQ ZLOO EH RQ WKH Ă&#x20AC;UVW 5 RI HDUQLQJV It needs to be understood that consultation is at an early stage and further discussion is expected before the intimated implementation of the NSSS in 2014 is progressed. This is an update to advise you on current thinking.

Section 11 (w) of the Income Tax Act and PHI Policies 0RVW DGYLVRUV ZLOO EH DZDUH WKDW WKH ,QFRPH 7D[ $FW ZDV changed in 2010 and the treatment of premiums relating to company owned policies changed. From the companyâ&#x20AC;&#x2122;s yearend following 1 January 2010 (e.g. a 30 June 2010 year end will mean from 1 July 2010), the premiums paid by an employer in respect of an employer owned policy is subject WR IULQJH EHQHĂ&#x20AC;W WD[ LQ WKH KDQGV RI WKH HPSOR\HH 7KLV would mean a further deduction on the employeeâ&#x20AC;&#x2122;s payslip and a reduction in take home pay. There have been several meetings with National Treasury to clarify the intention of this change and, amongst other things, it was acknowledged that change was not intended to be applicable to income disability / PHI policies.

It has been stated â&#x20AC;&#x153;it is recognised that the various implementation dates are causing confusion and administrative

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&RGH IRU 5HVSRQVLEOH ,QYHVWLQJ LQ 6RXWK $IULFD &5,6$

&5,6$ ZDV RIĂ&#x20AC;FLDOO\ ODXQFKHG LQ -XO\ E\ WKH ,QVWLWXWH RI Directors (IoD). The IoD describes the code as providing the local investor community with the guidance needed to give effect to the King 111 report on corporate governance.

The code is directed at institutional investors such as pension funds and insurance companies as well as asset managers and consultants. It hopes to encourage shareholders and companies to operate in accordance with practice standards.

According to CRISA institutional investors are expected to: Â&#x2021; ,QFRUSRUDWH VXVWDLQDELOLW\ FRQVLGHUDWLRQV LQWR LQYHVWPHQWV Â&#x2021; $FFHSW RZQHUVKLS UHVSRQVLELOLWLHV LQ LQYHVWPHQWV Â&#x2021; $GRSW D FROODERUDWLYH DSSURDFK WR WKH FRGH Â&#x2021; (IIHFWLYHO\ PDQDJH SRWHQWLDO FRQĂ LFWV RI LQWHUHVW Â&#x2021; 3URPRWH WUDQVSDUHQF\ DERXW WKH FRGH DQG LWV DSSOLFDWLRQ The code is to be applied on a volunteer basis. *XLGH WR WKH 'LVSRVDO RI D 5HVLGHQFH IURP D &RPSDQ\ RU Trust (1 October 2010 to 31 December 2012) This guide deals with the window of opportunity covering the period 1 October 2010 to 31 December 2012 for the disposal of a residence from a company or trust into the hands of individuals free of transfer duty, capital gains tax, secondary tax on companies and the dividends tax to be implemented on 1 April 2012.

7KH JXLGH UHĂ HFWV WKH ODZV DV DPHQGHG E\ WKH 7D[DWLRQ /DZV Amendment Act 7 of 2010, which was promulgated on 2 November 2010.

Paragraph 45 provides that only a natural person (individual) or special trust is entitled to disregard the whole or a portion of the capital gain or loss on disposal or that personâ&#x20AC;&#x2122;s primary UHVLGHQFH VXEMHFW WR FHUWDLQ H[FHSWLRQV 7KLV H[FOXVLRQ GRHV not apply when the residence is owned by a company, close corporation or trust (whether discretionary or vesting).

October / November 2011

39

Industry Sector Group News

Historically many individuals purchased their residence in companies or trusts for a variety of reasons, including protection from creditors, avoidance of transfer duty and estate duty and circumvention of the Group Areas Act 36 of 1966 (repealed). A window period was granted in 2002 which enabled these persons to transfer their residence out of their companies and trusts into their own names without suffering any adverse CGT, STC or transfer duty consequences.

A further window of opportunity in the form of paragraph 51of the Eighth Schedule, which operates on a roll-over basis, was introduced by the Taxation Laws Amendment Act 17 of 2009. Paragraph 51 applies to the disposal of a residence by a company or trust on or after 11 February 2009 but no later than 30 September 2010. Thus paragraph 51 will apply to residence acquired under contracts signed on or before 30 September 2010 which are not subject to any suspensive conditions at the date. Therefore property acquired unconditionally on or before 30 September 2010 which is registered after that date must still be dealt with under paragraph 51.

A disposal of a residence that is subject to suspensive FRQGLWLRQV ZKLFK DUH RQO\ IXOĂ&#x20AC;OOHG DIWHU 6HSWHPEHU must be addressed under paragraph 51A. The Taxation Laws Amendment Act 7 of 2010, which was promulgated on 2 November 2010, inserts a new paragraph 51A which widens the relief in a number of respects but also imposes new conditions. The new relief measures came into operation on 1 October 2010 and applies to the acquisition of a residence from a company or trust on or after that date.

4XDOLI\LQJ GLVSRVDOV Â&#x2021; $Q LQWHUHVW LQ D UHVLGHQFH PXVW EH GLVSRVHG RI Â&#x2021; 'LVSRVDO RI RQ RU DIWHU 2FWREHU EXW QR ODWHU WKDQ December 2012 [paragraph 51A(1)(a)]. Â&#x2021; 7KH XVH DQG RFFXSDWLRQ UHTXLUHPHQWV >SDUDJUDSK $ E

Â&#x2021; 7KH FRQQHFWHG SHUVRQ UHTXLUHPHQW >SDUDJUDSK $ F

Â&#x2021; 7KH WHUPLQDWLRQ RI WKH FRPSDQ\ RU WUXVW UHTXLUHPHQW Â&#x2021; 0XVW KDYH RUGLQDULO\ UHVLGHG LQ WKH SURSHUW\ Â&#x2021; <RX PXVW KDYH XVHG WKH SURSHUW\ IRU ´PDLQO\ GRPHVWLFÂľ SXUSRVHV Implications of the Taxation Laws Amendment Bill of 2011 (â&#x20AC;&#x153;the Billâ&#x20AC;?)

7KH %LOO SURSRVHV WR UHPRYH WKH ´RUGLQDULO\ UHVLGHQW¾ SURYLVLRQ making it possible for second dwellings used by family members as holiday homes to be transferred in terms of the amnesty. However, the Bill is yet to be promulgated.

Checklist for Deceased Estates The Estates and Trust ISG have developed a checklist for estate planning and dealing with deceased estates. This checklist can be found on the FPI website under this ISGâ&#x20AC;&#x2122;s page.

Checklists for the following have been developed: Â&#x2021; )RU GUDZLQJ XS D ZLOO Â&#x2021; (VWDWH SODQQLQJ Â&#x2021; 5HSRUWLQJ WKH HVWDWH Health Care ISG Submissions The FPI made a submission to National Treasury on the Tax Policy Document entitled â&#x20AC;&#x153;Conversion of medical deductions WR PHGLFDO WD[ FUHGLWVÂľ $ IXUWKHU VXEPLVVLRQ ZDV PDGH WR WKH &RXQFLO IRU 0HGLFDO 6FKHPHV &06 RQ ´&LUFXODU RI Âľ The Financial Planner

which dealt with the Consumer Protection Act and bringing the health industry in line with the provisions therein.

National Health Insurance (NHI) The NHI green paper was gazetted on the 12 August 2011. It is noted that the rationale for the green paper is to introduce DQ LQQRYDWLYH V\VWHP RI KHDOWKFDUH Ă&#x20AC;QDQFLQJ IRU 6RXWK $IULFDQV The NHI will ensure that everyone has access to appropriate, HIĂ&#x20AC;FLHQW DQG TXDOLW\ KHDOWK VHUYLFHV ,W ZLOO EH SKDVHG LQ RYHU a period of 14 years. The FPI will remain interactive with the governmental departments throughout the 14 year process.

Business Unity South Africa (BUSA) has established a NHI Response Drafting Team within their NHI Task Team which is geared towards commenting on the green paper. The FPI is a member of the Task Team and also forms part of the Drafting Team and has made valuable input. BUSA is busy with its draft position paper on NHI. Commentary on the NHI green paper had to be submitted to the Director-General of Health within two months of publication of the paper. However, this period has been extended to 30 December 2011.

Treating Customers Fairly (TCF) The FPI sent out an alert to the membership requesting volunteers to participate in the Financial Services Boardâ&#x20AC;&#x2122;s (FSB) task teams. These task teams are subordinate to the FSB TCF Steering Committee. As was mentioned in the last quarterly update, the FSB, in keeping with the objectives set out in the TCF roadmap, created a TCF Steering Committee managed by the Head of the TCF department. The FPI is UHSUHVHQWHG RQ WKLV VWHHULQJ FRPPLWWHH E\ *HUKDUGW 0H\HU Chairperson of the FPI, with Solly Keetse, Chairperson-Elect of the FPI, serving as his alternate.

The purpose of the task teams is to conduct a legislative alignment analysis to ensure adequate consideration of the existing regulatory framework in the context of the planned TCF RXWFRPHV DV ZHOO DV HDFK RI WKH YDULRXV Ă&#x20AC;QDQFLDO VHUYLFHV VHFWRU and activities falling within the scope of the TCF framework.

The FPI also has an internal TCF workgroup that will run parallel to the FSB workgroup, and will give input into the FSB steering committee and task teams via the FPI representatives on the FSB steering committee and task teams.

The Red Book +DYLQJ PDGH D VXEPLVVLRQ WR 1DWLRQDO 7UHDVXU\ ´17Âľ RQ WKHLU SROLF\ GRFXPHQW WLWOHG ´$ VDIHU Ă&#x20AC;QDQFLDO VHUYLFHV VHFWRU WR VHUYH 6RXWK $IULFD EHWWHUÂľ ZH KDYH EHHQ LQIRUPHG E\ WKH 17 that they wish to engage the FPI further on discussions around this document and the way forward. The document is available on the FPI website and in brief summary is a roadmap of how WKH Ă&#x20AC;QDQFLDO VHUYLFHV LQGXVWU\ ZLOO FKDQJH RYHU WKH FRPLQJ \HDUV PRUH VSHFLĂ&#x20AC;FDOO\ WKH SKLORVRSK\ DURXQG D WZLQ SHDNV model whereby regulation is divided into prudential and market conduct regulation. It is clear that changes proposed LQ WKLV GRFXPHQW ZLOO WDNH PDQ\ GLIIHUHQW IRUPV 9LVLEOH implementations are the TCF process mentioned above and the changes already being brought about within the taxation Laws Amendment Bills.

October / November 2011

40

FPI News

FPI News FPI NewsBrief The Ă&#x20AC;rst FPI monthly electronic newsletter, inTouch, was launched in September. Due to the name being a popular name for newsletters, we changed our newsletter name to FPI NewsBrief from 2ctober. If you are not receiving this newsletter, please contact the Frontline Team on 086 1000 374 to ensure that we have the correct email address.To send us your views or any information you wish to see in this newsletter, please email newsbrief@fpimail.co.za.

CPD delivered in the comfort of your home 0&$WY DQ LQGHSHQGHQW VXEVFULSWLRQ WHOHYLVLRQ VHUYLFH RIIHULQJ informative and educational content to professionals, is broadcast on the Commercial Channel of DStv every second and fourth Tuesday from February to November.

We have negotiated with them to offer FPI members access to this service at a nominal cost of R1 350.00 per year, inclusive RI 9$7 IRU D JXDUDQWHHG KRXUV RI &3' DQG VWLOO KDYH DFFHVV to other programmes at no additional cost. The full cost for this subscription is normally R2 450.00 SHU \HDU LQFOXVLYH RI 9$7 0&$WY DUH DOVR RIIHULQJ )3, PHPEHUV WKH IROORZLQJ 1. FPI members can subscribe to a free hour and a half SURJUDPPH WR EH EURDGFDVW RQ 7XHVGD\ 0DUFK before subscribing to a full paid service. Topics and VSHDNHUV IRU WKLV IUHH SURJUDPPH DUH \HW WR EH FRQĂ&#x20AC;UPHG 6XEVFULEH EHIRUH 7XHVGD\ 0DUFK DQG VWDQG D chance to win a HD PVR decoder. The winner will be DQQRXQFHG RQ 7XHVGD\ 0DUFK 3. Subscribe and pay in full for the service before Tuesday, 13 0DUFK DQG UHFHLYH WZR '9'V RQH RQ 7KH &RPSDQLHV Act and the other on The Overview of the Consumer Protection Act worth R500.00, ABSOLUTELY FREE! To take advantage of the above offers, please visit ZZZ ISL FR ]D and click on the CPD Opportunities page under the Resource Centre tab to download the registration form. For further information about this service, please email PHPEHUVKLS#ISLPDLO FR ]D. )3, SDUWLFLSDWHV LQ )36%¡V VRFLDO PHGLD SODWIRUP Financial Planet FPI Financial Planner of the Year winners Warren Ingram, CFP ÂŽ (2011), Natasja Norval-Hart, CFP ÂŽ (2010), Alec Riddle,

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CFP ÂŽ (2009) and John Campbell, CFPÂŽ (2008) , were chosen as FPIâ&#x20AC;&#x2122;s brand ambassadors to be part of the elite VHW RI JOREDO H[SHUWV RQ Ă&#x20AC;QDQFLDO SODQQLQJ )LQDQFLDO 3ODQHW ZZZ Ă&#x20AC;QDQFLDOSODQHW RUJ , launched by Financial Planning Standards Board (FPSB) on 1 November 2011. This platform will be a global online gathering place for those who share WKH YLVLRQ RI JDLQLQJ UHFRJQLWLRQ IRU Ă&#x20AC;QDQFLDO SODQQLQJ DV a distinct global profession. It will feature regular blogs by CFP ÂŽ professionals who are recognised thought leaders in their territories. )3, ZLVKHV WKH &HQWUH RI )LQDQFLDO 3ODQQLQJ /DZ D KDSS\ 10th year anniversary We would like to wish the Centre of Financial Planning Law, University of the Free State a happy 10th year anniversary. $V WKH Ă&#x20AC;UVW DFDGHPLF LQVWLWXWLRQ LQ 6RXWK $IULFD WR RIIHU IRUPDO SRVWJUDGXDWH TXDOLĂ&#x20AC;FDWLRQV JLYLQJ DFFHVV WR &)3ÂŽ professional membership of FPI, the Centre is certainly recognised as one RI WKH OHDGLQJ SURYLGHUV RI TXDOLW\ DQG SUDFWLFDO Ă&#x20AC;QDQFLDO planning programmes in South Africa.

MARKETING ACTIVITIES )3, VSRQVRUV WKH 6SHHFK &RQWHVW &HELVZD\LPIXQGR 0QJXQL of Estcourt High School won the 2011 Grade 11 Provincial Speech Contest on Finance, a competition that saw a total of 12 grade 11 learners who competed at school, circuit, ward and district level in the province taking each RWKHU KHDG RQ RQ Ă&#x20AC;QDQFH PDWWHUV DW X9RQJR 7RZQ Hall in Port Shepstone on 13 September 2011.

FPI sponsored the full tuition costs for the winner to study towards a three year tertiary level TXDOLĂ&#x20AC;FDWLRQ LQ WKH Ă&#x20AC;QDQFLDO SODQQLQJ Ă&#x20AC;HOG 7KH DLP RI WKH speech contest is to create awareness amongst young people DERXW LQVXUDQFH DQG Ă&#x20AC;QDQFLDO PDWWHUV DQG WR H[SRVH WKHP WR Ă&#x20AC;QDQFLDO SODQQLQJ DV D FDUHHU 7KH )3, KDV FRPPLWWHG LWV VSRQVRUVKLS RI WKLV EXUVDU\ SUL]H IRU WKH QH[W Ă&#x20AC;YH \HDUV

October / November 2011

41

FPI News

1&5 DQG -RKDQQ YDQ 7RQGHU 81,6$ %05 7KH FDPSDLJQ IROORZV 6$6,¡V -XO\ 6DYLQJV 0RQWK FDPSDLJQ WR FUHDWH DZDUHQHVV RI WKH EHQHĂ&#x20AC;WV RI VDYLQJ Advertising Two new adverts for CFPÂŽ professionals were launched during November. One will be used in consumer publications and ZLOO Ă&#x20AC;UVW DSSHDU LQ IRXU DLUOLQH PDJD]LQHV GXULQJ 'HFHPEHU (SAAâ&#x20AC;&#x2122;s Sawubona, Kululaâ&#x20AC;&#x2122;s Khuluma, 1Timeâ&#x20AC;&#x2122;s AbouTime and 0DQJR¡V -XLFH 7KH VHFRQG DGYHUW SURPRWHV D FDUHHU LQ Ă&#x20AC;QDQFLDO SODQQLQJ WR EH XVHG LQ XSFRPLQJ FDUHHU DQG WUDGH publications.

FPI reaches out to the SOS Childrenâ&#x20AC;&#x2122;s Village As part of our Corporate Social Investment initiative, we went WR WKH (QQHUGDOH 626 &KLOGUHQ¡V 9LOODJH RQ 6HSWHPEHU 2011 to revamp one of their old houses into a resource centre. We also interacted with the children and provided WKHP ZLWK OXQFK 9LVLW www.sosvillages.org.za to learn more about the organisation.

Exhibitions 7KH Ă&#x20AC;UVW HYHU 5HWLUH LQ 6W\OH 5HWLUHPHQW ([SR took place on 28-30 October 2011 at the Coca - Cola Dome in Johannesburg. We exhibited at the expo and also secured three 45-minute workshops on Your Retirement Journey Planning for Success. The workshops were presented by FPIâ&#x20AC;&#x2122;s )LQDQFLDO 3ODQQHU RI WKH <HDU Ă&#x20AC;QDOLVWV -DQ &DUHO %RWKD CFP ÂŽ and Shaun Latter, CFPÂŽ.

In October we also exhibited at the Gordon Institute of Business Science (GIBS) Personal Finance Series, titled How to Grow and Protect Personal Assets and Wealth, which was attended by over 100 consumers.

Financial Planning Week and Consumer Clinic :H UDQ WKH Ă&#x20AC;UVW 1DWLRQDO )LQDQFLDO 3ODQQLQJ :HHN IURP 1RYHPEHU WR 'HFHPEHU 7R FHOHEUDWH WKLV Ă&#x20AC;UVW HYHQW ZH hosted a Consumer Clinic on 30 November in Johannesburg at the Randpark Club. Attendance at the event was a free and consumers had the opportunity to get IUHH Ă&#x20AC;QDQFLDO SODQQLQJ guidance IURP &HUWLĂ&#x20AC;HG )LQDQFLDO 3ODQQHU ÂŽ professionals, all volunteering their time and expertise. After an introduction presentation, consumers were given the opportunity to meet one-on-one with FPI Financial Planner of the Year winners and Ă&#x20AC;QDOLVWV ZKR ZHUH LQYLWHG WR H[KLELW $ QXPEHU RI PDUNHWLQJ activities to promote the event were undertaken which included ELJ VFUHHQ DGYHUWLVLQJ H[KLELWLRQ DW PDOOV Ă \HU LQVHUWV LQ ORFDO FRPPXQLW\ QHZVSDSHUV DQG Ă \HUV DW PDMRU VWUHHW LQWHUVHFWLRQV The FPI received wide coverage in a number of online, print and broadcast media which was arranged by our recently appointed PR company, Fleishman Hillard.

6$6, )HVWLYH 6HDVRQ &DPSDLJQ 0HGLD /DXQFK FPI participated in the SASI Festive Season Campaign media launch on 10 November 2011. The panel was Prem Govender UHSUHVHQWLQJ 6$6, 0HUVH\ %RR\VHQ )3, 'DUUHOO %HJKLQ

The Financial Planner

INTERNATIONAL NEWS Survey of CFP Professionals Shows High Level of 6DWLVIDFWLRQ ZLWK &DUHHU &KRLFH &)3 &HUWLĂ&#x20AC;FDWLRQ CERTIFIED FINANCIAL PLANNERÂŽ professionals are very VDWLVĂ&#x20AC;HG ZLWK WKHLU FDUHHU FKRLFH LQWHQG WR NHHS WKH FHUWLĂ&#x20AC;FDWLRQ IRU QHDUO\ WZR GHFDGHV DQG DJUHH WKDW Ă&#x20AC;QDQFLDO SURIHVVLRQDOV VKRXOG DGKHUH WR D Ă&#x20AC;GXFLDU\ VWDQGDUG RI FDUH DFFRUGLQJ WR D QHZ VXUYH\ E\ &HUWLĂ&#x20AC;HG )LQDQFLDO 3ODQQHU %RDUG RI 6WDQGDUGV ,QF .H\ Ă&#x20AC;QGLQJV RI WKH VXUYH\ LQFOXGH Â&#x2021; RI UHVSRQGHQWV DUH YHU\ VDWLVĂ&#x20AC;HG ZLWK WKHLU FDUHHU FKRLFH LQ Ă&#x20AC;QDQFLDO SODQQLQJ Â&#x2021; VWURQJO\ DJUHH WKDW Ă&#x20AC;QDQFLDO SURIHVVLRQDOV SURYLGLQJ personalised investment advice should be held to a Ă&#x20AC;GXFLDU\ VWDQGDUG RI FDUH Â&#x2021; RI UHVSRQGHQWV ZRXOG UHFRPPHQG WKH &)3ÂŽ FHUWLĂ&#x20AC;FDWLRQ WR RWKHU Ă&#x20AC;QDQFLDO SURIHVVLRQDOV Â&#x2021; RI UHVSRQGHQWV VWURQJO\ DJUHH WKDW WKH &)3ÂŽ FHUWLĂ&#x20AC;FDWLRQ FRQWULEXWHV GLUHFWO\ WR WKHLU RZQ professional success. Â&#x2021; &)3ÂŽ SURIHVVLRQDOV H[SHFW WR KROG WKHLU FHUWLĂ&#x20AC;FDWLRQ IRU years, up from 15 years in 2008.

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Need the best financial advice?

Working with the right financial planner can be an extremely rewarding and valuable experience for you and your family. Make sure you speak to the right advisor to develop your financial plan to make sure you and your family are financially secure. When seeking objective, expert and trusted financial advice, speak to a CFP professional.

Contact us on 086 1000 FPI (374) or visit our Consumer section at www.fpi.co.za where you can learn more and Find a Financial Planner.

CFP Certification Global excellence in financial planning 速 CFP速, CERTIFIED FINANCIAL PLANNER速 and are trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. The FPI is the marks licensing authority for the CFP marks in South Africa through agreement with FPSB.

The Financial Planner

October / November 2011

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