Personal Finance - The Discovery Invest Story - October 2020

october 2020

Personal finance A purpose-led business

The Discovery Invest story Celebrating R100 billion in assets under management

Expanding shared value to offshore investments

Identifying a savings crisis

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The Discovery Invest story How 20 years of shared-value innovation created the country’s fastest-growing investment manager

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he notion of shared value was first introduced as a business concept in a 2006 paper, Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, authored by globally renowned business scholars, Michael Porter and Mark Kramer, and published in the Harvard Business Review.

The authors argued that businesses have an indispensable role to play in solving some of society’s most pressing challenges. To best achieve this, a balance between the more philanthropic notion of corporate social responsibility (CSR) and pure profit-driven capitalism would need to be achieved.

The shortfalls at the time were twofold. On the one hand, the notion of CSR implied that businesses had a responsibility to share, or gift surplus profits derived through economic activity in one sphere, in pursuit of social needs in another.

While just in its cause, this method of achieving social outcomes was seen as inefficient as it would “pit business against society, when clearly the two are interdependent”, while failing to align social goals with core business strategy.

On the other hand, although businesses do intrinsically achieve some social good through stimulating economic activity and employing staff, capitalism had increasingly come under siege owing to a myriad of business practices that could do more harm than good.

Kenny Rabson CEO Discovery Invest and Employee Benefits

A solution that stimulated new economic value in the process of addressing social needs, would be an improvement.

“Virtually every activity in a company’s value chain touches on communities in which the firm operates, creating either positive or negative consequences,” they wrote. “Not only does corporate activity affect society, but external social conditions also influence corporations, for better and worse.”

“The mutual dependence of corporations and society implies that both business decisions and social policies must follow the principle of shared value. That is, choices must benefit both sides. If either a business or a society pursues policies that benefit its interests at the expense of the other, it will find itself on a dangerous path. A temporary gain to one will undermine the long-term prosperity of both,” wrote the pair.

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A solution that stimulated new economic value in the process of addressing social needs would be an improvement.

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CSR can thus be contrasted to shared value on a crucial dimension: the former is based on the responsibility of business to address social challenges; the latter advances this with a method to address those challenges by creating new sources of mutually shared value.

Since publication of the seminal paper, the principle of shared value has grown to become a central concept in socially oriented business theory.

By the turn of the millennium, six years before Porter and Kramer published their paper, South African entrepreneurs seeking to disrupt a dull and lacklustre life insurance industry had unwittingly stumbled on an idea which would help grow Discovery into the world’s largest shared-value group.

Discovery’s shared value: The formative years At its outset, Discovery Life set out to disrupt the status quo in South Africa’s life insurance industry which, at the time, was characterised

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by undifferentiated product offerings, typically considered to be a grudge purchase by most consumers.

In doing so, it sought also to advance the founding ambition of the wider Discovery offering to develop products that had a “positive impact on society,” as Porter and his colleagues phrased it in a 2018 case study on Discovery.

Kenny Rabson has played an instrumental role in the 20-year evolution of Discovery’s shared-value model. After co-founding Discovery Life in 2001, he spent 11 years as Head of Product Development at the business, before taking up the position of CEO of both Discovery Invest and Employee Benefits, of which he was also a founding member.

“In life insurance, there is a principle that the pricing of products should be fair in relation to the risk of the client,” he says.

“However, at the time, life insurers would take a snapshot of your health on day one, and that would be it. And that profile, and the respective pricing of your policy, would typically be with you for the rest of your life.”

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This static approach for evaluating the health of clients at a single point did not reflect the reality that a person’s state of physical wellbeing is not fixed, but dynamic. Your health clearly changes over time.

For a life insurer, the evolving state of health of their clients has a direct impact on the sustainability of the business: quite simply, healthy clients are less likely to become sick, and thus to claim on their policies.

As it turns out, there are four lifestyle choices – smoking, excessive alcohol consumption, physical inactivity, and a poor diet – that lead to diseases that cause 70% of deaths worldwide. Change these behaviours and you would be able to prevent millions of early deaths.

“We wanted to find a way to consider our clients’ state of health on an ongoing basis and to inspire people to adopt better lifestyle behaviours. That way, if you got healthier, we would give you a much lower premium,” says Kenny Rabson.

“So, what we did was to drop the initial insurance premium for everybody. But you had to work to keep it. If your health declined over time, your premium would increase; if you adopted behaviours that worked to improve your health, your premiums would go down even further.”

The idea of incentivising healthy behaviour worked considering clients’ engagement with Discovery’s Vitality wellness programme, and adapting accordingly. The programme leverages insights from the rapidly advancing field of behavioural economics to incentivise sustained wellness behaviours through rewards, discounts, health-related information and partnerships.

“It was a huge breakthrough actuarially for us to work out a model that could give people a big discount on day one and then to encourage them not to give it up by being healthier,” recalls Rabson.

“Obviously, the things we were incentivising clients to do were good for us. If clients were healthier, we would pay out less in the form of dread disease claims, and so forth. However, it was also good for the client; they would not be as sick and would live longer, happier lives.

accrued in shared-value assets

over R100 billion

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Discovery Invest is still the fastest-growing retail investment provider in South Africa since our inception, and our assets under administration have held firm.

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“We soon realised that what was being created was a virtuous circle: as we were more profitable, we could share those extra profits with our clients in the form of enhanced incentives and rewards.

Healthier clients then benefit the wider society, which again benefits the business.”

Remarkably, there are no trade-offs in the model. Incentivising the right behaviour creates additional economic value, which is then shared between Discovery, its clients and, ultimately, society.

It is this emphasis on unlocking value while addressing real, pressing societal issues that is the hallmark of shared value.

FSG, a consulting firm founded by Porter and Kramer, credited Discovery as a pioneer in shared value in a 2017 paper titled insured-shared-value.

Vitality members have shown to live longer lives and experience lower hospitalisation costs.

By expanding its shared-value model in partnership with leading insurers globally and through its Vitality One platform, which enables insurers all over the world to plug into the Vitality wellness programme, Discovery

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is enabling a rapidly scalable diffusion of the model.

The platform is growing at a tremendous rate and is now in 21 countries, impacting 17 million clients, as Discovery pursues its goal of getting 25% of the world’s insured population more active and healthier.

In recognition of its impact, Discovery has been named the most innovative insurance company in the world by the insurance and banking industry association, Efma, in conjunction with Accenture.

Its brand has been recognised as the secondstrongest in the insurance world by Brand Finance, with its Chinese partner, Ping An, recognised as the top insurance brand globally.

Today, the shared-value model has permeated throughout a range of industries in South Africa and abroad in which Discovery is establishing itself as a disruptive player.

“The Discovery Group is now the world’s largest shared-value investment and insurance platform. Shared value permeates everything that it touches, from health and life insurance, to motor and household insurance, and from banking to employee benefits, long-term savings and offshore investing,” says Kenny Rabson.

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Identifying a savings crisis

In 2007, Discovery launched Discovery Invest, which today offers a wide range of products that provide access to over 200 unit trusts managed by leading local and international fund managers. It recently launched a unique offshore offering to enable South African investors unparalleled ease in accessing international investment opportunities.

It is seeking to leverage the shared-value model to promote financial health and freedom for millions of South Africans.

There is unquestionably a major societal imperative in this goal, with South Africa having one of the worst savings cultures in the world. Quite the opposite to being awash with savings, millions of South Africans are deeply over-indebted.

For example, a working paper by Aroop Chatterjee, Léo Czajka and Amory Gethin on the distribution of household wealth in South Africa

found that half the population “have negative net worth: the levels of the debts that they owe exceed the market value of the assets they own.”

In some cases, debt can be useful and leveraged correctly. However, uncontrolled debt can undermine your financial health. This is something that Discovery Bank is seeking to address through its iteration of shared value, Vitality Money.

Unfortunately, in South Africa, consumers have by and large borrowed from their futures to pay for the present, rather than saving in the present to unlock their financial freedom in the future.

Compounding the savings crisis in the country is the fact that people are starting to live much longer.

The transition is urging a paradigm shift in how we need to best prepare for a happy, healthy life after work.

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In the midst of a longevity revolution Craig Sher is intimately up spending as many familiar with the years in retirement as evolution of Discovery’s in your working career. shared-value proposition And that has a dramatic and was instrumental impact on how you need in building it out in the to think about long-term investment side of the investing.” business. An actuary by In 2004, the average training, Craig Sher has life expectancy for a been with Discovery South African was 52 for over 17 years and years. A mere decade has headed up Research later, by 2014, and Development for that figure had both the Life and Invest increased to businesses.

57. This trend “The retirement gap is expected to is far bigger and more continue. uncertain than most According to people think,” says Sher. the UN’s report “If you go back to on World Population the 1800s, there wasn’t Ageing, “all societies really a concept of in the world are in the retirement. The average midst of a longevity CRAIG SHER life expectancy was revolution – some are at General Manager of Discovery Invest much lower and it was its early stages and some often the case that are more advanced, you would literally work yourself to death. but all will pass through this extraordinary Today, medical technology and improved transition”. understanding of wellness are moving at Discovery Vitality members, meanwhile, such a pace that the number of people who have an average life expectancy of 81 years live beyond 100 years of age is growing of age, comparable to some of the highest exponentially. What is more, people are life expectancies seen around the world. Its delaying going into the workforce as many Gold and Diamond members, on average, prefer to study, if they can, before their first live to the age of 87. job.

South Africans are woefully underprepared What this means is that you could land for this longevity revolution.

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“The statistic we often hear is that 94% of South Africans can’t afford retirement. They publish the statistic year after year and it is very frightening, but it hasn’t changed at all,” says Craig Sher.

In addition to implying that only 6% of South Africans can enjoy a comfortable retirement, this places an enormous burden on the state and on families to support those who have stopped working.

Solving the savings crisis Although the challenge is vast and complex, the fact that the proportion of South Africans who are ill-equipped for retirement has remained stubbornly high implies that the investment industry has not effectively contributed to solving the problem.

“If you ask the retirement industry what is broken, they will respond by saying that fees should come down,” says Kenny Rabson. “This is intuitively true, as lower fees will translate into higher fund values, but it does not nearly compare

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with the impact of investing more, from a younger age and on an ongoing basis.”

An analysis by Discovery has shown that the total admin fee compression across the industry over a year was roughly equivalent to only two days’ worth of typical investment returns. This simply will not be enough when we consider how much the retirement savings gap has expanded.

“What the industry is solving for is to get everyone to undercut on fees all the time, but they are not solving the behavioural issues, which is what will make the real difference,” says Kenny Rabson.

In much the same way that the shared-value model has identified four changeable behaviours that lead to diseases responsible for 70% of deaths worldwide, Discovery Invest has identified three behaviours that lead to inadequate savings in retirement.

Firstly, those of us earning an income tend to save far too little for our retirement, with many putting away less than half the recommended proportion of their salaries.

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Secondly, only 4 out of 10 South Africans preserve their retirement savings when switching jobs, opting instead to withdraw their pensions – and they are switching jobs more often. This can mean that you effectively restart your retirement planning from scratch.

Finally, South Africans often withdraw their savings too fast. Currently, you are legally permitted to withdraw from 2.5% to 17.5% of your living annuity annually. But even a relatively conservative withdrawal rate of 6.5% could mean that you have exhausted your retirement savings in just 12 years. Not ideal if you are going to live beyond 80.

To solve this problem, Discovery Invest is using its shared-value model to incentivise the right kinds of behaviour for long-term savings. And the incentives are not to be scoffed at.

“There are four types of behaviours that underpin shared value in the investment space,” says Craig

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Sher. “The first is investing for longer. To incentivise this, we offer a boost of up to 20% to your initial contribution. If you invest R1 million, we will put in an additional R200 000. When you retire, you will get your R1 million, plus any investment growth, plus all the money we put in, plus all the growth on that. You will keep it all as long as you stay invested, so it’s a huge benefit that you get.

The point of it being shown upfront is to invoke a sense of loss aversion, so that you think twice about withdrawing your savings, and this helps you stay the course to your long-term savings goals.

The second thing that we try to do is to get you to invest more every year. So, every year we open up a period for three or four months where if you invest more into your retirement pot, we will boost that by up to 25%.

The third thing is that, when you reach retirement, and begin making withdrawals, we will give you a boost of up to 50% to the income that you take out of your retirement savings, if you withdraw your money responsibly.

We offer a boost of up to 20% to your initial contribution. If you invest R1 million, we will put in an additional R200 000.

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So, if you are healthy and only withdraw at 2.5% of your living annuity each year and that is equivalent to R10 000, we will give you an additional R5 000. Importantly, this extra amount doesn’t come from your retirement pot at all.

Finally, we suggest that you live well through Vitality, and we offer up to an additional 2% investment return per annum on top of your market returns, plus an additional 15% boost to monthly contributions that you make.”

The boosts are “up to” numbers. For example, if you had committed to a 10-year savings term, the boost would be in the region of 7.5% and this ranges up to a maximum of 20% for investment terms above 25 years.

Still, by anyone’s measure, the boosts are substantial and can translate to a dramatic improvement in your retirement provisions.

So how does Discovery achieve this?

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“That’s the quantum of the impact of positive behaviour change,” says Sher. “You have to stay the course to get these numbers and not withdraw your retirement savings early, but we want everyone to get there. Remember, it is profitable for us to give these boosts, especially at the higher levels, because for everyone that can achieve those goals, we make more money,” says Craig Sher “That is the thinking behind Discovery Invest: Can you get people to change their savings behaviour? It will be very good for them because they will have more money when they reach retirement, but it will also be very good for Discovery because we will have more assets and people will stay invested for longer.”

As always with shared value, the incentives are not funded through levying extra fees. Instead, they are layered on top of products that are intrinsically designed to be best of breed, even without the incentives.

A ‘win-win’, for business, clients and society.

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The impact of shared value in investing Discovery’s shared-value retirement offering was introduced in September 2015 and it is already evident that it is having a significant impact on savings behaviour.

A statistical analysis performed by Discovery’s actuaries has shown that the boosts are, by far, the biggest predictor of a client staying on track with their retirement savings.

Already the average term for retirement savings within its funds has increased by over three years and withdrawal rates have been coming down. Despite the impact of COVID-19, clients are withdrawing a staggering 10% to 15% less from their savings when they retire than before the shared-value structures were introduced. Discovery also saw a huge jump in the value of additional, ad hoc investments made by clients, which increased by more than 120% since the boosts were introduced.

Intriguingly, the shared-value model for investing is also working to further incentivise improved physical wellness behaviours. The group has seen Vitality clients in retirement moving rapidly from Bronze to Silver and from Silver to Gold status as

they seek to secure the additional boosts.

The appeal of the model has propelled Discovery forward, helping it become South Africa’s fastestgrowing investment provider in terms of the net growth in its assets under management.

Discovery has also moved to offer companies the benefits of shared value through its comprehensive Employee Benefits business.

“Employee Benefits are the retirement and insurance products that a company provides to its staff,” says Kenny Rabson. “We approach companies to join our umbrella fund and group risk solution, and their staff members get incentivised to improve their retirement benefits and insurance plan through the same shared-value principles that we have developed in our Life and Invest businesses.

Most companies like this philosophy as they feel they have a social responsibility towards their staff, to ensure that they are healthy and that they are saving properly for retirement.”

Employers benefit, too, with research showing that healthy, financially secure staff members are more motivated and perform better at their jobs.

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Expanding shared value to offshore investments

The same logic of incentivising positive behaviours that lead to the best long-term investing results through shared value is embedded in Discovery Invest International’s offshore offering.

The opportunities afforded to investors seeking to gain exposure to offshore investments have attracted substantial attention recently. This was in the wake of a sustained period of underperformance on the local equity markets compounded by the extreme volatility of both equities and the currency seen in the wake of the COVID-19 crisis.

Offshore investing gives people the promise of both enhanced expected returns and protection against poor local equity performance. It achieves this by allowing investors to diversify their portfolios across a wider investment universe than what is available locally, while offering a currency hedge.

“For these reasons, many people decide that a part of their savings should be offshore, and we

would support that because we think that you should diversify currency and market risk and avail yourself of opportunities available abroad,” says Rabson.

“But conceptually, offshore investing is part of the same long-term planning process as retirement savings.

It is about building up a nest egg for the future. And that is why we try to incentivise the same types of behaviours across all our long-term savings businesses.

Where shared value comes in is when we say that we will credit you at the end of 10 years, with an additional amount in your investment, as if you had started out on day one with a better exchange rate.”

This incentive works through Discovery’s currency enhancer, which translates into the equivalent of a 7% to 8% boost on your initial investment amount, provided that you remain within Discovery’s funds for a 10-year period. As such, the quantum of the boost is equivalent to that provided in its retirement funds.

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A remarkably transferable model What is it that makes the shared-value model so effective in solving so many different problems in so many different industries, according to two pioneers of the model?

“In each one of these industries, although they work in different places, and they are incentivising different things, the concepts are identical.

Effectively, we are monetising behaviour, turning it into cash and sharing that with clients and society,” says Craig Sher.

He adds that shared value is a powerful idea, not just because it’s another unique product or innovative way of trying to do something.

“It is trying to address a real problem in a real, practical way,” says Sher. “I think that is what makes it special. We are trying to solve a societal issue. It is a way of creating new sources of revenue, where that revenue is created out of people changing the way that they behave. For us, it means that we can be ultra-competitive.”

Kenny Rabson says shared value is an easy message. “We will incentivise you to do all the right things, and it’s good for you, and it’s good for us. To make it work, you need to find a way to repackage value that you know will be created in the future, so that it is felt as both immediate and tangible,” he says.

“For example, we want people to be healthier, which is a long-term goal, but they might be more concerned about getting a discount on their next flight. That is how the human mind works. By creating short-term incentives, we help people achieve long-term goals,” Rabson says.

“That is why the incentives need to be thought about very carefully, and if you think about what the Discovery Life product looks like now, it has been through 20 years of innovation. The same is true of Discovery Invest, which is working on its next big evolution of the model.”

Most critically, however, Rabson feels that the long-term goals companies are incentivising must be aligned with a real societal need.

“The companies that are really going to win in the future are the companies that make a significant social impact, and that is what we have done in every one of our products.”

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We will incentivise you to do all the right things, and it’s good for you, and it’s good for us

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Product rules, terms and conditions apply. This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact yourfinancial adviser. The Global Endowment Plan is a unit-linked life insurance policy contract, issued by Discovery Life International, the Guernsey branch of Discovery Life Limited(South Africa), licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on long-term insurance business. Discovery Life is a licensed insurer under the South African Insurance Act and an authorised financial services provider (registration number 1966/003901/06). Discovery Invest is an authorised financial services provider (registration number 2007/005969/07). All benefits are offered through the insurer. The insurer reserves the right to review and change the qualifying requirements for benefits at any time. The information given in this document is based on Discovery’s understanding of current law and practice in South Africa and Guernsey. No liability will be accepted for the effect of any future legislative or regulatory changes.

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