IOL Personal Finance -​ 4th Quarter 2022

COVER STORY

SA’s healthcare system – looking into the abyss

Unless the government and private sector urgently work together to find solutions that are acceptable to all, South Africans will likely face a healthcare crisis within the next decade because of a number of factors that appear to be converging in a perfect storm.

AN UNHEALTHY STATE OF AFFAIRS

The reasoning behind the government’s proposed National Health Insurance (NHI) scheme is sound: medical treatment and care of an acceptable standard is becoming more and more beyond the reach of the average citizen. The private medical industry, including the medical schemes (despite their protests against rising medical costs), is a self-reinforcing clique. Service providers keep upping their fees, to unreasonable levels in many instances, and in response the medical schemes keep upping contribution levels (well above the inflation rate) while reducing or limiting the benefits available to members. This is resulting in a steady decline in membership across medical schemes.

Turning to the public health system, we won't even go there – the decline in standards over the past two decades beggars belief.

The major problem with NHI is not what it proposes, although it could find a way to better accommodate the private health sector. It is in the public’s now unshakeable conviction that, even if it does find the funding, which at the moment is pie-in-the-sky, NHI will go the way of Eskom, Prasa, SAA, or any other SOE you may care to mention.

The obvious solution to this mess is to fix the public health system. Then, as one sane commentator in my story on page 6 put it, you won’t need NHI.

Also in this edition, get a thorough grounding of the greylisting saga and what South Africa needs to do to avoid being lumped with rogue nations such as Haiti, Myanmar and Syria – from Gareth Stokes on page 10.

For the investment-minded, global asset manager Schroders has provided an interesting piece on thematic investing (finding companies that are tapping into the industries of the future), paying heed to inflation and macro-economic headwinds. See page 16.

So, do enjoy the read as you wind down to what I hope will be a peaceful, relaxing year-end.

VOLUME 93

4th QUARTER 2022

An Independent Media (Pty) Ltd publication

Editor

ANA Publishing CEO

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Martin Hesse martin.hesse@inl.co.za

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All products appearing in Personal Finance are available and all prices are correct at time of print, subject to change.

MARTIN HESSE

The Wise Investor – the beginner’s guide to investing in the stock market

Author: Moroka Modiba

Publisher: Penguin Books

Retail price: R240

I hope this book sells really well, and I hope the people who mainly buy it are the millennials and younger generations who are blithely buying and selling shares (and other, more risky instruments) through sharetrading apps on their smartphones.

In the past, stock market investors formed an exclusive, wealthy man’s club. Thanks to technology, anyone can now invest directly in listed companies, at surprisingly low cost. However, this “democratisation” of the stock market has a down side: it has attracted many people who have very little comprehension of the risks. Knowledge is key: investing in shares can generate wealth if you know what you’re doing, but it can result in financial pain and anguish if you don’t.

Moroka Modiba, a qualified stockbroker with two decades’ experience in financial services, and author of Think Yourself Rich – A step-by-step guide to financial independence, has condensed the knowledge you need to know in a highly readable book.

The most important take-away at the beginning of the book is this: short-term trading is unlikely to make you money; you need patience. Investment icon Warren Buffett, one of Modiba’s heroes, who is widely quoted in the book, said: “The stock market is designed to transfer money from the active to the patient.” Long-term investing, using a “buy and hold” strategy, is a far surer way to wealth.

But what shares/companies to pick and, importantly, when should you buy them?

You need to know how companies work: the business cycle, how profit is generated and used, the difference between a well managed company and a poorly managed one, and the financial ratios to look out for.

Modiba explains all this in language that is easy to understand and he gives examples of successful companies that have made their shareholders very wealthy. If you had invested R10 000 in Capitec Bank in 2002, when it listed on the JSE, your shares, if you had held onto them over 20 years, would be worth R9 million today.

Not everyone can spot a Capitec, and few young companies show that type of exponential growth, but that is not to say that, armed with the knowledge and wisdom found in this book, you cannot share in the profits of South Africa’s – and the world’s – topperforming brands.

- Martin Hesse

Profile’s Unit Trusts and Collective Investments – September 2022

Editor: Ernie Alexander

Publisher: Profile Media

Print version available at retail outlets and directly from Profile Media for R360.

Digital version available from www.profile.co.za

Profile’s guide to unit trusts and other collective investments in South Africa provides a wealth of information for investors. The handbook is used by financial planners, fund managers, investors and students as a regulatory reference, a guide to fund investment principles and an industry quick-reference.

As a starting point for screening and fund research, the handbook is the quickest way to obtain essential information about the collective investment industry in South Africa, including the contact details of leading fund managers, fund performance, available fund classes, and the objectives of major industry players. It is published twice a year, in March and September. Chapter content is reviewed and edited before each issue in order to maintain the handbook as a reliable reference, and fund fact sheets, performance figures and other data are completely updated each issue.

- Martin Hesse

GIVEAWAY WINNERS

The following people have won a copy of Plan B – How South Africans can invest in UK property remotely by Sean Thomson, courtesy of Hands-On Books: Njabulo Buthelezi, Claude Collard, Trevor Loxton, Marc Lunau and Elizabeth Nyatanga. Congratulations!

YOUR LETTERS

DEALING WITH CHILDREN IN A WILL

My husband and I have recently had our second child, and we’ve decided to put a will in place. We are not sure of how it would work with babies and young children, and what the difference is between a guardian and a trustee. What should we prioritise?

Name withheld

Denise Fourie, Wealth Adviser at PSG Wealth, Silverlakes, Pretoria, responds: This is a great question because, when dealing with minor children in a will, extra care needs to be taken.

The first step would be to make any inheritance that is left to a minor payable into a trust – such as a testamentary trust, which is set up in your will. This type of trust comes into effect on the death of the founder, whereby assets and benefits are looked after on behalf of beneficiaries (in this case, minors), who cannot legally inherit the assets until they turn 18. The trust can include both assets and money. Your will needs to have clear instructions about how you would like your assets to be distributed, and include the details of the minors’ appointed legal guardians. It’s important to note the difference between a guardian and a trustee: a guardian is appointed to care for your children on a daily basis, whereas a trustee is appointed to manage the trust’s assets to the beneficiary’s benefit.

A guardian can also be a trustee. However, it is often a safe step to have an independent, financially secure and trustworthy person as a trustee. Keep in mind that a minor’s legal or natural guardian will be in control of the minor’s inheritance unless the High Court – who is the highest guardian of the minor – decides otherwise.

It’s best to work with a financial planner who can ensure that you set your will up to benefit your family in a way that’s right for you and your family.

HOW DO I INVEST MONEY OFFSHORE?

I’m interested in investing in the offshore markets, however, I’m uncertain of the types of investments that would suit my needs.

Name withheld

Elke Brink, Wealth Adviser at PSG Wealth Route 21, Centurion, responds:

There are two ways to invest offshore: through a so-called asset swap or through direct offshore

investing. You need to explore a route suitable for your specific needs as you can easily incur unwanted taxes if not done with proper foresight and consideration.

Consideration must also be given to local and foreign legislation and I would recommend speaking to a fiduciary specialist with multijurisdictional expertise to assist you in working out what will work best for your personal needs.

1. Asset swap: This is global exposure gained through local, rand-denominated investments such as a global feeder fund or ETF that tracks an offshore market index. This route allows you to benefit from diversification of the offshore exposure.

• A benefit is that no approval is required from the South African Reserve Bank (SARB) and funds can be available within 48 hours.

• The negative aspect of this would be limited fund choices under the jurisdiction of the SARB.

• Your funds are available locally and in rands only.

• Capital gains tax will be payable at your effective tax rate on the sale of assets. Asset-swap funds are available on all major local investment platforms, so speak to your adviser.

2. Direct offshore investing: A single discretionary allowance of R1 million per calendar year is available to all South African residents who are 18 years and older, and who are in possession of a South African identity document. This allowance may be used for any legitimate purpose, including for investment purposes abroad. In addition, a foreign capital allowance of R10 million per calendar year is also available to South African residents, subject to first obtaining a tax clearance certificate.

A positive aspect of direct offshore investing includes having a much larger investment universe available, with more funds, stocks and fund managers to choose from, with no South African jurisdiction or authority over these assets. [Note that SA tax residents are still liable for tax on income and capital gains from offshore investments. – editor]

The downside includes more paperwork and regulatory protocols, when compared to the asset-swap route.

These queries and their responses first appeared in the monthly Your Questions Answered feature in the Saturday newspaper edition of Personal Finance, sponsored by PSG Wealth.

SA’S HEALTHCARE SYSTEM LOOKING INTO THE ABYSS

Unless the government and private sector urgently work together to find solutions that are acceptable to all, South Africans will likely face a healthcare crisis within the next decade because of a number of factors that appear to be converging in a perfect storm.

Private healthcare is becoming increasingly out of reach of anyone outside the top income brackets: medical specialists are charging what they like and getting away with it because they are in high demand and becoming scarcer as more of them leave the country; liability cover for certain specialisations such as obstetrics has become prohibitive; and new-generation, hi-tech treatments and drugs for cancer and other life-threatening

conditions are costing in the hundreds of thousands, even millions of rands.

Medical schemes are battling to keep pace with these rocketing costs, resorting to tightening limits on what they cover, reducing benefits and increasing contribution rates at percentages well above CPI inflation. They also face a grave problem in the form of claim fraud, where members, often in cahoots with corrupt doctors, overclaim or claim for procedures not carried out.

Schemes also face serious declines in membership, especially among younger generations, who are looking at cheaper ways, such as short-term insurance offerings, to cover basic medical needs. Younger members, who are healthier, are necessary to subsidise older members,

who are less healthy and account for the bulk of the costs.

On top of these trends, the Covid-19 pandemic sent the industry into a tailspin, severely depleting built-up reserves and paving the way for at least one scheme to fail (see below).

Unfortunately, in finding ways to reduce costs, medical schemes often skirt the regulations in providing what, by law, they are required to provide, especially when it comes to the prescribed minimum benefits (PMBs), treatments for a list of life-threatening conditions drawn up by the Council for Medical Schemes (CMS). Another ploy is to increase the administrative burden and red tape for members claiming for PMBs.

Looking beyond the private sector,

Examining health care and the funding thereof from various angles, Martin Hesse suggests that South Africa, which once boasted a public healthcare service on par with many developed countries, is facing a calamity which will be felt by all except the very wealthy.

the state hospitals are falling further and further into disrepair and decay, not to mention the deteriorating quality of service from hospital staff, with regular news reports of even the most basic health and hygiene measures being flouted.

The worsening conditions have resulted in a flurry of negligence lawsuits against the Department of Health, adding to the cost burden.

National Health Insurance (NHI), the government’s vaunted solution to the country’s healthcare crisis, has appeared to have stalled – largely because of the intervention of Covid-19. From the outset, its biggest barrier has been the massive chunk it will gouge out of the fiscus, to be borne by South Africa’s declining tax base.

DECLINING, AGEING MEMBERSHIP

In a recent report, Fazlin Swanepoel, managing director of employee benefits at ASI Financial Services, noted that, with young people opting for healthcare solutions other than medical scheme membership, the pensioner ratio for open medical schemes increased from 7% in 2013 to almost 9% in 2020. The average age of beneficiaries in open medical schemes increased from 33.5 years in 2013 to 35.9 years in 2021, while medical schemes’ total membership has remained more or less constant since 2013, despite a growing population. According to the latest CMS annual report, open medical scheme membership reached a high point in 2018, before declining in 2019 and 2020,

increasing slightly in 2021.

“South Africa’s very high youth unemployment rate also means that medical scheme coverage is out of reach for most young people. This directly impacts medical schemes’ pricing, as the growing group of older members use more benefits than what they contribute,” Swanepoel said.

MEDICAL SCHEMES AND PMBS

Schemes are required to cover treatment of the PMBs from your risk cover, though they can insist that you use service providers of their choosing. However, certain PMB conditions are extremely expensive to treat, sometimes resulting in schemes trying to wriggle out of their obligations.

In a recent court case, a scheme was found guilty of covering PMBs from members’ medical savings accounts, which are designed to cover day-to-day low-cost out-of-hospital expenses. Michelle David, a director at Norton Rose Fulbright, reported in the law firm’s Financial Institutions Legal Snapshot newsletter that, in October this year, the High Court found that the CMS had been correct in demanding that KeyHealth Medical Scheme pay a member’s PMB costs from the risk pool and not from his medical savings account, which it had been doing. It was only after the member’s savings had been depleted, that the scheme had switched to paying these costs from the risk pool. This is prohibited under regulation 10(6) of the Medical Schemes Act.

In another case, the medical costs of a three-year-old boy suffering from Hunter’s Syndrome, a rare, inherited disorder in which the body does not properly break down sugars in the body, were judged to fall under the PMBs and therefore had to be covered by the scheme, MediHelp. Helen Michael, director and, Raisah Mahomed, candidate attorney at Werksmans Attorneys, reported that, in August this year, the Pretoria High Court found that (a) Hunter’s Syndrome did fall under the PMBs as prescribed by the CMS, a fact conceded by MediHelp, and (b) the costs of the drug Elaprase, the first and only registered treatment for the condition, had to be borne by the scheme. The scheme had argued that treatment with Elaprase was not the “prevailing predominant public

hospital practice”, but this was challenged by various expert affidavits, which confirmed that Elaprase is provided “in the public healthcare service in the four most populous of the nine provinces and in some instances, notwithstanding the rarity of the condition, in more than one public hospital in a particular province”.

A FAILED SCHEME

Health Squared Medical Scheme, a small scheme with about 48 000 members, was placed under provisional curatorship by the CMS in September. The scheme applied for voluntary liquidation after its reserve levels dropped to just over 2% by the end of July 2022, but before the High Court ruled on the application, the CMS stepped in.

While this is the only recent failure of a medical scheme, it may signify the rumblings of an avalanche of failures, especially among smaller schemes.

Lerato Mosiah, chief executive of the Health Funders Association, says that by law, a medical scheme must, at all times, hold reserves of at least 25% of its annual contributions.

As would have been the case for Health Squared, which reportedly suffered from high claims associated with Covid-19, these reserves act as a buffer when contributions no longer cover the scheme’s liabilities.

Health Squared was already running at

a deficit in 2019 and its solvency level had dropped to 15.4% (according to the CMS annual report) and so there were red flags even before the increased volatility brought on by the pandemic.

At the end of 2019, Health Squared already had the highest average age across all registered open medical schemes, with almost 26% of beneficiaries older than 65, further exacerbating the risk.

“The failure of any medical scheme has a knock-on effect on other schemes, since higher-risk members then require cover without any transfer of reserves, which ultimately increases the burden on other scheme members,” Mosiah says.

NHI AND STATE HEALTH DELIVERY

Despite a hiatus during the pandemic, the government has not lost sight of its intention to implement NHI. This despite heavy opposition to NHI in its proposed form from almost all sectors of industry and ongoing questions over its funding.

NHI, for which membership will be compulsory, will create a single fund used by the government to buy healthcare services at set fees from accredited public and private health providers. Private medical schemes will eventually cease to exist in their present form, as they won’t be allowed to provide cover for the services covered by NHI.

On various occasions this year, Dr Nicholas Crisp, deputy director-general of the Department of Health, made it clear that the government intends to press forward with NHI. The department even recently advertised 44 positions for developing and implementing the system – a move strongly opposed by trade union Solidarity.

At the Hospital Association of South Africa’s annual conference in August, Crisp said the NHI could take decades to be implemented at full scale, according to a news report by health journalism outfit Bhekisisa. “In the transitional period, which could be many years, we need medical aids to continue to provide coverage and purchase health services on behalf of those who are their members. But the question is: do we need almost 80 medical aids with 250 plus different packages as we currently have?”

Crisp said: “There won’t be an instruction in the short term that all medical aids should terminate. During times of economic hardship, as right now, we probably need to go slower, so I can tell you that we’re moving in terms of years to decades, rather than months to years.”

Apart from the main criticism over funding, there is scepticism over how the system will be managed, considering the government’s abysmal track record in managing SOE’s.

In August, at a Centre for Risk Analysis discussion on NHI, Michael Settas, managing director of health insurer Cinagi and head of the health policy unit at the Free Market Foundation, said NHI was “largely ideologically driven”.

Settas said public healthcare was fundamentally broken. “The public sector health budget from 2000 to 2020 doubled – in real terms and per capita terms. That’s an enormous increase in resources. So if the argument is that it’s a resource issue, then why aren’t the public sector outcomes better than they are?

“There’s just a complete lack of governance. The frameworks have either been dismantled or removed, and there’s simply no management or accountability within the department (of health).

“The NHI is not going to fix those things. You have to fix the fundamentals – and then you don’t need an NHI. We have a very

substantial public health system that’s got lots of problems, but the asset is still there. We haven’t lost that,” Settas said.

PRIVATE SECTOR LOW-COST SOLUTIONS

So where does the lower-income worker, who can’t afford expensive medical scheme cover but shudders at the thought of being treated in a public hospital, turn for funding assistance?

Paul Cox, managing director at the Essential Group of Companies including health insurance provider EssentialMED, says a significant portion of South Africans will readily purchase affordable private health cover if such cover is available.

Surveys from StatsSA show that nearly 30% of the population pays out-of-pocket for private primary healthcare, yet only 13% of people are covered by medical schemes, meaning there is a mismatch between the demand for private healthcare and the affordability of private cover.

Healthcare policy that would enable more affordable private cover has been in the doldrums for years now, Cox says. The insurance industry stepped into this unregulated space nearly two decades ago, but government passed the so-called “demarcation regulations” in 2017, limiting the health-related products short-term

insurers could provide, with the view that medical scheme legislation would be amended to allow for low-cost offerings.

“However, such low-cost cover would require a major overhaul of the Medical Schemes Act, allowing medical schemes to offer low-cost benefit options that are exempt from the PMBs,” Cox says.

“As a temporary measure, an exemption was allowed to permit insurance companies to offer certain low-cost products. Policy uncertainty was further exacerbated when, in December 2019, the CMS did a complete about-turn and declared their intent to shut down all affordable health products, both from insurers and medical schemes. It was only substantial push-back from the industry that forced the CMS to continue with development of the low-cost benefit options within medical schemes, and maintain the interim exemption for health insurers, but the work has been painfully slow, if not stagnant,” Cox says.

In May 2022, chief executive of Insight Actuaries & Consultants, Christoff Raath, questioned the tardiness of the CMS on this matter, and more recently the Board of Healthcare Funders, which represents medical schemes, joined the fray by taking the CMS to court to compel them to enable the regulatory provisions for low-cost products within medical schemes.

Cox says the elephant in the room is that it is not in the financial interests of medical schemes to offer low-cost benefit options, which will, in effect, trigger a buy down by members.

“One also has to wonder what the wisdom is in forcing a complex regulatory overhaul of the Medical Schemes Act when there is still no clarity on the future of NHI and what the role of private healthcare funders will be.”

Cox and Swanepoel believe that there is a place for the short-term insurance industry in the future of low-cost healthcare funding in South Africa, and Swanepoel points to the employee benefit space in particular. She says employers wanting to manage productivity are increasingly considering subsidising low-cost options, such as primary care, health insurance and even pre-paid healthcare, for lower-income staff.

“It’s time for South Africans to consider – if not demand – hybrid healthcare solutions,” says Swanepoel. “There’s no doubt that medical schemes are already unaffordable – but the need for quality primary, chronic, and emergency healthcare will not go away any time soon –not even if or when NHI rolls out. Everyone in the industry needs to be more creative in finding solutions that more people can afford,” she says.

GREYLISTING: AN INVESTMENT OWN GOAL?

South Africa Inc braces for the financial fallout from government’s latest snafu, writes Gareth Stokes.

Investors in the South African economy, already familiar with the effect of policy complacency and mismanagement on their investments, may soon have to factor in the economic and financial value decimation caused by the country’s imminent greylisting in addition to the drag due to legacy issues such as credit rating agency downgrades, Nene-gate and State Capture. This follows the global Financial Action Task Force (FATF) giving government

and the National Treasury until the end of October 2023 to address deficiencies in our anti-money laundering (AML) and counter financing of terrorism (CFT) legislation and enforcement, or face sanctions.

A report commissioned by Business Leadership South Africa and published by Intellidex concluded there was an 85% probability the FATF will go ahead with the greylisting, a step that promises significant economic and financial market

consequences. Some commentators estimate that greylisting could cost the country north of 1% of GDP in 2023-4.

“The impact of greylisting touches on a wide variety of areas, from the sentiment of global investors to the value of the rand, the ease of doing financial transactions and the ability to improve both the currently ineffective application of regulations, and prosecution of transgressors,” said David Knee, chief

investment officer at M&G Investments. Knee singled out shortcomings in procedures and processes undertaken by banks and the banking system as among the most serious concerns raised by the FATF, including know your customer (KYC), AML and CFT checks and reporting.

Momentum Investments, in an analysis titled “The impact of a potential greylisting on the SA economy and financial markets”, said that the FATF had had South Africa in the proverbial crosshairs for failures to tackle financial crimes for some time, with major concerns over enforcement outcomes.

“Much of the responsibility for the weakening of our criminal justice system lies with the previous administration’s subversion of democracy; during this period, the capacity of our tax authority, intelligence agencies and crime-fighting and law enforcement bodies were incapacitated,” wrote Sanisha Packirisamy, economist at Momentum Investments. She concluded that it was difficult to forecast the damage that greylisting might cause, because such action had never been considered against an economy of similar size.

Financial services firm KPMG South Africa took a stab at answering how the FATF greylisting might impact the country from both a regulatory and economic perspective. In an essay included with its South African Insurance Industry Survey 2022, the firm considered the “cause-andeffect relationship of subsequent events that took place in the regulatory and economic spaces” in previously greylisted jurisdictions, including Botswana, Mauritius and Turkey.

According to KPMG Botswana, asset managers in that country were no longer able to transact directly with pension funds with an offshore portfolio following greylisting, while foreign direct investment in the diamond sector was affected due to difficulties in repatriating profits. As for Mauritius, the essay noted that “a large foreign custodian operating out of India had put a halt on trades from Mauritius” and that

“the Reserve Bank of India had rejected a few applications for non-banking financial company licences as the investments were routed through Mauritius”.

KPMG offered six scenarios that local financial institutions could face from February 2023, if greylisting goes ahead, as follows:

1. Local financial firms may no longer be recognised as equivalent regulated entities by their offshore customers and suppliers.

2. There may be de-risking and disinvestment in South African entities and investment vehicles, including international firms being reluctant to retain current or start new business relationships.

3. South Africa businesses could be subjected to AML/CFT audits conducted in line with international standards and regulations.

4. Firms may face delays in foreign currency payment settlements due to additional due diligence on any foreign currency payments, for any type of fund transfer.

5. Further reluctance to establish relationships with politically exposed persons as described in the Financial Intelligence Centre (FIC) Act.

6. Extensive KYC requirements due to current sources of corporate information not being reliable; additionally, reliance on KYC performed by third parties such as agents or intermediaries may be limited.

WHAT ABOUT CAPITAL MARKETS?

“Although global empirical studies show mixed results on the impact of greylisting on a country’s capital flows, being grey listed could further impair the economy’s links to the global financial system; raise our cost of capital; and create an additional disincentive for offshore companies to deal with South Africa,” wrote Herman van Papendorp, Head of Investment Research and Asset Allocation at Momentum Investments. His views were echoed in various commentaries circulating in the mainstream media between August and October 2022, though few stated the issue as bluntly as Investment Strategist and Director of Brenthurst Wealth, Magnus Heystek.

In an interview hosted by biznews.com, Heystek said that South Africa was faced with a very idiosyncratic problem, before warning that the greylisting was coming!

“My fear is that we are underestimating the greylisting impact … the bottom line is that the FATF action, which most people now expect in February next year, will be equivalent to the great financial crash in terms of market outflows, capital outflows and a run on the currency,” he said.

One of the risks to individual investors is that offshore bank and investment accounts could be closed or suspended while offshore financial institutions re-FICA accountholders and re-confirm sources of capital. In Heystek’s words: “The greylisting has the potential to be a financial train smash; people need to consider the impact in the context of their personal financial circumstances”.

As local investors bite their fingernails to the quick, those in Parliament and Treasury appear to be exchanging words about who is to blame for the rather lastminute attempt to address flaws in the country’s existing AML and CFT legislation. As recently as 11 October – bearing in mind that the FATF decision will likely be locked in by the end of November – the chairperson for the Standing Committee on Finance wanted the Minister of Finance to explain why it had taken so long for amendments to the legislation to be tabled. The Anti-Money Laundering

and Combating Terrorism Financing Amendment Bill was only tabled in Parliament on 12 August 2022, despite government receiving recommendations from the task force in October 2021.

As Treasury explained in a media statement coinciding with the tabling of the Bill, issued on 26 August 2022: “South Africa received a very poor ratings assessment in its mutual evaluation, and as a result has been placed in an enhanced follow-up process, which involves more frequent reporting to the FATF, until South Africa has addressed all the deficiencies that were identified. South Africa was also placed in a one-year observation period (from October 2021 to October 2022) … and must submit its first follow-up report to the FATF at the end of August 2022, and a second report in October 2022, in preparation for the February 2023 FATF Plenary”. Any decision on greylisting will be issued following this plenary.

INVESTING OFFSHORE

The impact of greylisting on international investors was discussed at Sovereign Trust’s Annual 2022 International Retirement Seminar in August this year.

Kath Quayle, the chief risk and compliance officer of Capital International Group, based on the Isle of Man, said that licensed offshore financial entities would have to acknowledge and respond to the greylisting. “Following a greylisting, we expect that our local Department of Home Affairs will immediately add South Africa to the list of jurisdictions that are perceived to present a higher risk of money laundering and terrorist financing,” she said. Her firm, and no doubt others like it, are already planning how to manage and mitigate the higher risk factors perceived by the FATF.

David Noon, commercial director for South Africa at Capital International Group, said he had first-hand experience of financial institutions’ responses to greylisting thanks to a previous job at Lloyd’s Private Bank.

“South African investors can expect a decline in foreign investment, a negative impact on the local currency, and much greater friction when opening bank or investment accounts with overseas institutions,” Noon said. He quipped that he had felt like the “Grim Reape”r during previous greylistings, because the typical

response had been to close offshore investment businesses “the minute compliance or risk became too onerous”.

Noon also warned that financial advice practices domiciled in South Africa could face some difficulties due to increased scrutiny of clients’ sources of wealth.

“Customer due diligence or enhanced due diligence, including requests for source of funds, source of wealth, payslips and audited accounts might become the norm,” he said. “However, there is nothing wrong with being a good person in a bad place.” One workaround that international financial institutions could implement is to rely on South Africa based partners to meet the necessary due diligence requirements. Banks could have an edge in negotiating the administrative and compliance landscapes that greylisting will introduce. “The learnings and experience that South African banks gained from Mauritius’s 2020 greylisting and subsequent removal from the list in January 2022 are an important factor operating in favour of local banks,” said M&G’s Knee. He believes that the many years of “advance warning” that the banks and international investors have had

should contribute to “a minimal impact on international transactions and flows in the event South Africa is grey listed”. Another important consideration is that offshore investors will be factoring the risk premium associated with FATF action into their risk pricing, and that these discounts already reflect in cheaper valuations of South African bonds and equities.

MANAGING THE IMPACT

It is not all doom and gloom for investors exposed to South African financial markets, with Momentum Investments offering some soothing words in addition to the aforementioned “risk is already priced in” argument. “We remain steadfast in our view that a well-diversified investment portfolio as encapsulated in our outcome-based investing philosophy provides the best possible protection against any unforeseen global or idiosyncratic market events that may cause short-term instability; furthermore, history has shown that staying invested throughout any market turbulence has been the superior strategy for long-term returns,” said Van Papendorp.

Hopefully, with careful and proactive management from clients, financial advisers and financial institutions, the impact of greylisting on individual savers can be managed.

“Our appetite towards doing business with and in South Africa is unchanged and will remain unchanged; we should be able to mitigate and manage those risk factors through assessment, mitigation and management, and in a substantial proportion of cases, the actual greylisting of South Africa would not really cause many of our cases to become higher risk,” Quayle said.

This sentiment was seconded by Noon, who said that just because you are a South African with your wealth sourced from South Africa, you will not automatically fall into a high-risk category. “The Isle of Man regulator takes a risk-based rather than a rules-based approach, so it is up to us to mitigate the risks associated when we onboard clients … as long as we do that to regulatory standards, everything will be fine,” he said.

“There is still uncertainty as to whether South Africa will be greylisted by the

FATF,” concluded KPMG, in their paper on the topic. “Financial institutions do not need to wait for us to be included on the list to realise that South Africa has material financial crime shortcomings that need to be addressed”. Indeed, many local and correspondent banks have already put measures in place to improve risk oversight and confirm arrangements should a greylisting occur.

“Specifically, banks have termed out their debt in many cases, firmed up on arrangements with correspondent banks and instituted additional risk and compliance oversight,” said Knee. “We also believe that many of the incremental compliance and risk controls required because of greylisting are not likely to have material cost or operational impacts on the SA banks over the next two years; the digitisation of the SA banking sector will also enable controls to be implemented more effectively and cheaply than might have been the case a decade ago”.

Gareth Stokes is a specialist finance writer and director of Stokes Media Group.

THREE REASONS WHY THE US FED HOLDS THE WORLD IN ITS HANDS

Danny Bradlow examines why the US Federal Reserve Bank, fondly (or otherwise) known as the Fed, exerts such extraordinary power in the global economy

Inflation is a global problem. At the end of August, it was 8.3% in the US and 9.1% in the Euro area. It is 20.3% in Nigeria, 25% in Malawi, and over 30% in Ethiopia and Ghana.

The impact on Africa is devastating. The International Energy Agency estimates that by the end of the year 30 million more Africans will be unable to afford fuel for cooking. The World Bank estimates the number of Africans living in extreme poverty will increase from 424 million in 2019 to 463 million this year.

There is no agreement on why this is happening. Some argue that it is primarily a supply side problem. The dislocations in supply chains caused by the effects of the Covid-19 pandemic and the war in Ukraine have reduced the available supply of goods like fuel, fertiliser and food, forcing their prices up.

Others maintain that it is primarily a consequence of the loose monetary policies of leading central banks like the US Federal Reserve (Fed). For a number of years they have kept interest rates

low and engaged in quantitative easing. This involved buying bonds on financial markets to increase the funds available to financial institutions like commercial banks, investment banks, asset management firms, private equity firms, hedge funds, pension funds, insurance companies, money market funds, and sovereign wealth funds.

These two groups also differ on how to manage the problem. The first group argues that it will diminish as the supply side issues are resolved. They maintain that the current high prices will incentivise companies to increase production. The increased availability of goods such as food, fuel and fertiliser will ultimately lead to their prices – and inflation – falling.

The second camp argues that central banks should raise interest rates and unwind quantitative easing. They argue that these actions will make it more expensive for companies, households and governments to borrow. This in turn will slow the economy down and reduce demand (and potentially employment).

This, they maintain, will drag prices lower and end inflation.

Unfortunately, the realities of global financial governance mean that the decision on which approach to adopt has been taken out of African hands.

The Fed has decided that the problem must be addressed as a monetary problem. Consequently, it is raising interest rates and unwinding quantitative easing.

African central banks must follow suit for at least three reasons.

WHY AFRICAN COUNTRIES HAVE NO CHOICE

First, the US dollar is the world’s most important currency. In 2021 it accounted for 59% of global foreign reserves, over 70% of all trade invoices and over 60% of both deposits and loans denominated in non-local currencies. In 2019 it was involved in over 80% of foreign exchange transactions around the world.

The dollar’s dominance means that the economic wellbeing of all countries is linked to their ability to obtain dollars

and to its price in their local currency. It also gives the Fed, which is responsible for protecting its value, global leverage.

Second, the US$27 trillion market for US treasury securities is the largest and safest in the world. When there is trouble or uncertainty in the world, investors rush to buy dollars and invest in US markets. Their incentive to do so strengthens as the difference between US rates and those in other countries shrinks.

African central banks wishing to manage these movements have to raise their interest rates. Otherwise, they face the prospect of their currencies depreciating as investors sell assets denominated in local currencies to buy dollars. The falling value of their local currency will make it more expensive for their countries to buy the dollars they need to service their dollar denominated debts and pay for imports. This in turn risks causing higher domestic inflation.

Third, de facto, the Fed is the most important actor in the governance of the international financial system.

For example, at the onset of the Covid-19 pandemic panicked investors around the world scrambled to convert their investments into dollars, thereby reducing access to credit for sovereigns, corporations, and households around the world. The Fed, to avoid a crisis in US markets, responded forcefully and rapidly. Within weeks, the Fed injected over US$2.3 trillion into financial markets and activated swap lines that provided access to $30-60 billion to select central banks. It also created a special facility to help other central banks.

The Fed’s actions provided liquidity to financial institutions. They, in turn, decided how to allocate the trillions of dollars of additional liquidity among their many sovereign, corporate and household clients.

By mid-2020 US dollar credit to emerging-market and developing countries had grown by about 7% to US$4 trillion.

The International Monetary Fund, ostensibly the leading global economic governance institution, moved more slowly. Between March 2020 and March 2022, it provided a total of US$171 billion in emergency financial support to 90 countries.

THE FED’S ROLE TODAY

Now that the Fed has decided to fight inflation, it is, in effect, reversing the support it was giving to the global economy. Its policies are contributing to depreciating currencies, rising prices and greater risk of debt defaults in many African countries.

International organisations can do relatively little to help developing countries deal with the situation. At best these institutions can make tens of billions of dollars available to all their developing country member states. By comparison, the US Fed’s quantitative tightening policy will withdraw US$95 billion per month from markets.

The growing role of the Fed in global financial governance poses two challenges. The first is that the Fed is a creature of US law and is required to fulfil its statutory mandate of price stability and full employment in the US. To the extent that it takes the impact of its actions on other countries into account, it focuses on those countries that it believes have a significant impact on the US domestic monetary and financial situation.

This exacerbates the international financial system’s bias in favour of the richest countries. It may also adversely affect the sustainability of the global economy and the planet.

The second challenge is that African countries have no means for holding the Fed accountable for the adverse impacts its actions have on Africa.

WHAT CAN AFRICAN STATES DO?

Clearly, their options are limited as long as the dollar retains its dominant position in the global financial system and global financial markets remain so powerful.

First, they can promote greater awareness of the impact this situation has on Africa.

African central banks, operating through an organisation like the Association of African Central Banks, can educate the Fed about the impacts of its policies and actions on Africa.

Second, they can advocate for an

international body such as the Bank for International Settlements to set up an independent office to study the global financial governance role of central banks, to consult with affected parties and to issue regular public reports. This office should develop a set of international standards to guide the Fed and other leading central banks on how to balance their domestic mandates and their extra-territorial responsibilities as global financial governance actors.

Danny Bradlow is SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria. This article was first published by The Conversation in September 2022. Visit https://theconversation.com/africa

HOW IS INFLATION AFFECTING INVESTMENT THEMES?

Analysts at London-based global investment house Schroders look at what the resurgence of inflation means for thematic investing. How is it impacting industrial trends into the future?

This time last year, many central bankers were talking about the “transient” inflation being experienced by the global economy as the imbalances caused by the Covid-19 pandemic unwound. But any thoughts that inflation may be temporary have long since been banished, especially as inflation broadens out to affect not just goods, but services too.

Schroders’ economists are forecasting global inflation of 7.2% in 2022, up from 3.4% in 2021. They forecast a moderation to 4.3% in 2023, but this is still above many central banks’ targets and well above the level experienced in most major economies in recent years.

Different geographies are experiencing inflation in different ways. After a protracted period of deflation, Japan’s current 3.0% inflation (year-on-year, as of August 2022) is welcome news for policymakers. That’s not the case in the eurozone where the 10.0% inflation rate (y/y, as of September 2022) is largely the result of soaring power prices and is causing worries about imminent recession. But what of different investment themes? David Docherty, investment director of thematics, says: “Thematic investing offers precise exposure to powerful, long-term global trends which are transforming the world. But each theme is different, so they won’t all be affected by inflation in the same way.

“What’s important to remember is that the most powerful themes have a very long duration. A theme like energy transition, for example, is an investment opportunity for the next 30 to 40 years, and the same goes for other themes that are shaping the

world around us.”

Schroders experts explain how the return of inflation is impacting some of their favoured themes: global cities, digital infrastructure, energy transition, food and water, and smart manufacturing.

GLOBAL CITIES AND DIGITAL INFRASTRUCTURE

Property is a sector where investors can often benefit from rising inflation. In part, this is because rising costs of building materials or labour hold back new construction, making existing properties more valuable. But many types of property have direct links to inflation.

Portfolio manager Tom Walker says: “Many leases across all types of subsectors have explicit commitments to rental increases tied to inflation. In some instances, there are also leases with fixed escalators or rent reviews at specific times. These all give investors the opportunity to ensure their income generates a real return; that is, one that is above inflation.”

However, not all real estate assets are the same. Investors need to pay close attention to the specific type of property they are investing in. Some types of real estate – housing, hospitals – are essential. Others are benefiting from strong demand and limited supply, such as data centres or student accommodation. But other segments are both inessential and experiencing weaker demand.

Walker says: “The Covid-19 pandemic has accelerated a number of trends, such as e-commerce and working from home. These long-term structural issues have weakened the pricing power for owners of property assets such as retail and office space. Consequently, the ability to pass on

inflationary increases to tenants in these buildings is severely limited.”

Location is also crucial when investing in property given that assets in more desirable locations can command higher prices.

“Focusing on locations where economic growth is consistently the strongest means that investors can maximise their chances of being able to pass on increased costs to their tenants,” Walker says.

ENERGY TRANSITION

The energy transition theme is one that has witnessed a significant impact from inflation in the past two years.

Portfolio manager Alex Monk says: “From an earnings perspective, companies have seen their profitability decline as their costs have increased. And from a valuation perspective, the higher interest rates required to tame inflation have decreased the value of future cashflow growth.

“It's with respect to this threat that companies in some of those higher growth areas – such as renewable energy, energy storage, and hydrogen – have felt the most pain. This is because the value

of their earnings is far further out in time, and they've also been more exposed supply chain shocks.”

Companies making large items such as wind turbines have been among those most severely affected. This is not only because of the rising price of raw materials like steel and other metals, but also the higher cost of shipping. Factors ranging from disruption in Chinese ports as a result of Covid-19, to the temporary blockage of the Suez Canal in March 2021, all put upward pressure on freight costs.

There are signs that some of these factors are easing, and prices for metals have been falling. But the energy transition theme remains in the inflation spotlight because of the sharply elevated power prices in Europe as a result of the reduced supply of Russian gas.

Monk says: “With energy prices being one of the main causes of inflation, which in turn may cause a recession, it is absolutely vital that more energy supply is brought on.

“Given the speed at which we can increase renewables capacity compared to some of the conventional forms of energy, the need for more supply plays into the structural opportunity behind the energy transition space. We are going to need lots more renewables, lots more energy storage, and even hydrogen to solve the energy crisis that we have today, particularly in Europe.”

FOOD AND WATER

Higher food prices have been a substantial component of higher overall inflation this year. As with energy, this is due in large part to Russia’s invasion of Ukraine, which has pushed up prices for some agricultural commodities.

Wheat prices in particular have soared, given that Russia and Ukraine together accounted for about 25% of global wheat exports prior to the invasion.

This situation may well persist, according to portfolio manager Felix Odey. “Tightness in supply and demand may even worsen in 2023 and beyond,” he said. “That’s because unpredictable weather patterns are adding to supply uncertainty, alongside the possibility of continued disruption to production in Ukraine.”

Higher agricultural commodity prices may be beneficial for farmers and investors in those commodities, but they feed into food price inflation all along the chain to food producers, retailers and ending up with consumers.

“There is a lag between agricultural commodity prices going up and those rises being passed down the chain,” Odey says. “What we’ve seen so far is that food producers have been quicker to put up their prices than the retailers.

“Partly this is because of an awareness of other price pressures facing consumers, and the possibility of negative publicity for a supermarket raising prices.”

Rising food prices can mean consumers trading down, meaning they buy cheaper

products such as supermarket’s own ranges, rather than branded products. However, the fact food is essential means demand will never drop very far. Food retailers may even benefit as consumer spending patterns change.

“Higher prices in restaurants may mean people are less likely to eat out, preparing more meals at home instead”, Odey says. “It’s not only the supermarkets who could benefit from that trend, but also firms like the meal kit providers, who offer a break from home cooking without the expense of dining out.”

SMART MANUFACTURING

The smart manufacturing theme is about innovation driving a digital industrial revolution to manufacture better goods, and to manufacture better. Technologies that help improve energy efficiency are an integral part of this.

Portfolio manager Dan McFetrich says: “In Europe, industrial energy consumption amounts to 26% of total European

and energy inflation is high, we would expect demand to increase for technologies that enable electrification and energy savings.”

But there are manufacturing trends that are also sources of inflation, rather than solutions to it. Re-shoring – or the trend for companies to move production closer to demand – is an example of this. It has partly been driven by the pandemic when goods needed in Europe or the US were held up by prolonged lockdowns in China.

“Re-shoring is inherently inflationary,” McFetrich says. “It’s about companies pursuing the ‘best cost’ rather than the lowest cost option. For example, this may imply higher labour costs or costlier components as businesses move production to more expensive regions. But the upside is more resilient supply chains, reduced logistics costs, and lower carbon emissions from transportation.”

And a further aspect of smart manufacturing – automation - has the potential to ease the cost of re-shoring.

The cost of robots is falling due to

adoption of automation across a range of industries. But many industries are facing labour shortages - which will only worsen due to ageing populations in developed countries – and are having to lift wages to attract workers.

“For all industries, automation can result in higher productivity, reduced labour costs and greater energy efficiency – all of which is an extremely attractive proposition at a time of rising inflation,” McFetrich says.

INFLATION IMPACT IS NOT UNIFORM

What’s clear is that the inflation impact on different themes is very diverse. Even within a single theme, the investment opportunities are not all affected in the same way.

Docherty says: “While the strongest themes are about global transformation, that doesn’t mean all the investment opportunities within each individual theme are simply plays on long-dated growth. Within food & water, for example,

DEATH HAS AN EXPENSIVE PRICE TAG

R.I.P

Do you have any idea what costs the executor of your estate – and indirectly your heirs – will face after your death? Here is a rundown…

Death can be expensive and none of us wants to see our loved ones saddled with serious cash shortfalls when they have to wind up our estates.

Consider that the average cost of winding up an estate is 3.5% of the gross value of the assets, plus VAT (15%). On a R1 million estate, that’s R35 000, plus R5 250 VAT. So, over R40 000 gone, straight off the bat. The executor of the estate is also entitled to a fee on all income earned post the date of

death. It’s clear that proper estate planning is key to ensure our beneficiaries don’t bear the brunt of too little cash in our estate.

Sadly, this is often exactly the reality for family members who stay behind, as people tend to seriously underestimate death-related costs, with significant consequences. Sanlam Trust found that over 46% of the deceased estates it administers have insufficient cash to cover all debts, costs, cash bequests and taxes

payable during one’s lifetime, and income tax, capital gains tax and estate duty upon death. This can have serious consequences for loved ones left behind.

David Thomson, senior legal adviser for Sanlam Trust, says we should all become more familiar with the costs involved at death. It’s important to understand that costs are classified as a) administration costs, which accrue as a result of the death and are mostly paid in cash, and b) claims

against the estate – this means the costs the deceased was liable for at the time of death. Tax is the exception.

COSTS TO THE ESTATE

Here are eleven costs you need to consider:

1. Fees payable to the Master of the High Court: for estates valued between R250 000 and R400 000 the fee is R600. This escalates as the value of the estate increases, to a maximum of R7 000.

2. Administration charges (the executor’s fee): 4.025% of the estate value (including VAT).

3. Valuation costs of assets for estate duty purposes: R2 000 to R5 000.

4. Advertising costs (advertisements for calling on creditors and giving notice that the liquidation and distribution account is open for inspection): R850.

5. Costs for provision of security to the Master (a security bond protects an estate from any negligent act from the executor): 0.05% plus the VAT of the asset value.

6. Bank charges on estate accounts: banks charge per transaction – these charges could total R600 or more.

7. Transfer costs of fixed property to an heir (determined by a sliding scale issued by the Law Society): R29 000 on a property worth R1 million.

8. Cancellation costs of bonds registered over fixed property in the estate: R3 500.

9. Rates and taxes payable to the City Council with the transfer of fixed property – five months rates in advance.

10. Postage: R260.

11. Funeral costs: A funeral can cost anything from R6 000 to R50 000 or more.

TAXES AND ADMINISTRATION

Thomson says there should be enough cash in an estate to help loved ones cover three to six months’ rates and contractual commitments such as rental payments, mortgage bond repayments, and medical aid premiums.

There may also be capital gains tax (CGT) and estate duty to contend with. These taxes must be paid to SARS before heirs can receive their inheritance.

CGT is levied on any capital gain (profit) made on the disposal (whether by sale,

donation or expropriation) of an asset –on death we are deemed to have disposed of all our assets. At its maximum, 18% CGT would be levied. However, instead of the annual R40 000 exclusion for individuals, the exclusion is R300 000 for the year of death.

Estate duty is the tax paid on the deceased’s dutiable estate (all the individual’s assets and life insurance policies minus their liabilities and allowable deductions and exemptions). Duty of 20% is charged on the first R30 million, and 25% on anything above that. The first R3.5 million is not taxed, and, if an estate is bequeathed to a spouse, this “rolls over” to total R7 million.

The executor has a duty to determine the financial position of the estate and decide if there’s enough cash to cover all the administration and debts. If not, the executor and heirs need to assess whether there are sufficient assets to sell in order to settle these expenses. The law is quite clear that if a shortfall exists, the executor has to sell the assets of the estate to cover it. Should heirs not cooperate, then the executor must follow a process set out in section 47 of the Administration of Estates Act and obtain the consent of the Master of the High Court for the sale of immovable property. A certificate authorising the sale in terms of section (42(2)) is also required. Alternatively, the heirs may choose to pay the cash shortfall themselves in order to retain the assets.

It’s important to note that all liabilities must be paid in full to creditors by the estate. For example, in the case of an unpaid vehicle loan, the bank/creditor will issue a summons for repossession of the vehicle and payment of the debt. In addition, they can reclaim their legal fees and costs of collection from the estate. A creditor may – in exceptional circumstances

– agree to renegotiate the credit terms with the estate and/or the heirs.

If an estate is insolvent, the creditors may decide to surrender the estate formally, and then it will be administered in terms of the Insolvency Act.

IN CONCLUSION

Thomson says proper estate planning is a significant act of love. “Ask your financial adviser to help draw up an estate plan for you. One or more life insurance policies can significantly contribute to ensuring sufficient cash flow in an estate. If you have maintenance commitments to children or an ex-spouse, you should ensure your life cover provides for that. Be sure to mention in your will that the specific policy is to be used for the maintenance claim. Always be aware of your obligations towards your spouse.”

A tip is not to bequeath all life policies to beneficiaries, but to make at least one payable to the estate to provide muchneeded liquidity, Thompson says.

He also suggests you use an estate liquidity calculator, to see if you have any shortfalls, so you can work alongside your financial adviser to ensure you make adequate provision for your surviving loved ones.

This article was first published on the Sanlam website. It is republished with kind permission from Sanlam.

HOW THE REGULATOR DEALS WITH TROUBLED PENSION FUNDS

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On 19 December 2017, the Pretoria High Court granted an application brought by the Registrar of Pension Funds in terms of section 5(1) of the Financial Institutions (Protection of Funds) Act (FI Act) for the appointment of curators to the Municipal Councillors Pension Fund. The court appointed the two joint curators of the fund.

The application was brought pursuant to an inspection and reports issued by the Financial Services Conduct Authority (FSCA) after several serious irregularities pertaining to poor investment decisions and lack of governance in the fund were reported. The fund remains under curatorship.

Since 2017, four funds have been placed under curatorship – Boselo, Cadac, Bophelo and more recently Akani – and

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curators were appointed in terms of the FI Act by agreement with the retirement funds and without the intervention of a court.

Once under curatorship, the primary role of the curator is to protect the interests of those who invested in the institution. It can be done either by attempting to restore the institution to health or, failing this, to realise the institution’s assets for the investors’ optimal benefit. The complementary role is to pursue wrongdoers for punishment.

“The curators are experienced lawyers or accountants, who are well placed to fulfil the duties required of them as curators and to ensure that all necessary steps are taken to protect the interests of the fund and its members,” says Cornelia Buitendag,

who heads up the retirement fund conduct supervision unit at the FSCA.

Throughout the process, the veracity of the FSCA inspection report is central. It guides the curators in the performance of their duties and, where wrongdoing is found, it lays the basis for successful remedial action, she says.

The curatorship is intended to stabilise the management and operation of the fund, and to protect the interests of its members, she adds. The curators that have assumed office upload bi-annual reports to the FSCA website.

The FSCA has come in for plenty of stick for its appointment of curators to retirement funds and the ensuing, costly and lengthy processes – some up to 20 years. There are countless media stories of

The Finance Sector Conduct Authority has a couple of options when dealing with

distressed retirement fund: it can place the fund under curatorship

appoint

statutory manager. Ruan Jooste reports

funds in curatorship for years on end, not to mention frequent reports of excessive curatorship fees, and the lack of updated reports on many cases.

Buitendag says reviews of past curatorship proceedings flagged shortcomings for which changes had been introduced, which include that curators’ appointment letters must now indicate their monthly fee cap. Curators are also required to submit their invoices to the FSCA offices, along with supporting schedules and monthly statements of the retirement funds they are overseeing. Curators are also required to report to the authority regularly, by submitting monthly or bi-monthly feedback reports; and have quarterly meetings with the FSCA.

Before a curator can affect payment of its fees, it must receive formal approval of these fees from our office,” says Buitendag, adding that this hands-on regulatory approach is yielding results. “The approach has proven to be effective in ensuring that curators discharge their duties efficiently within the ambit of the legislation.”

The FSCA issued board notice 56 containing guidelines on the conduct of curators in 2015.

However, Wilmi van der Walt, manager of conduct supervision at the FSCA, sayst the latest thinking on the matter is to use curatorship as a last resort and to rather appoint a statutory manager, as has happened in the recent case of N-e-FG Administrators. “It is a valuable regulatory tool of intervention, which is not considered as adverse as a curatorship,” she says.

Because a statutory manager is appointed by agreement, according to the FI Act, it promotes cooperation between the retirement fund and the authority, whose primary objective is to act in the best interest of the members of the fund.

“We have also proposed changes to the law to enable the FSCA to appoint one without fund consent,” Van der Walt says.

According to the Act, statutory managers are required to report to the authority monthly or bi-monthly on the progress made in regularising the affairs of the retirement fund and any other matter considered material, and to make

a recommendation to FSCA, following a thorough analysis of challenges faced by the retirement fund, as to whether the fund should be placed under curatorship.

That said, it is likely that more reliance will be placed on statutory managers in future, as provided for under the FI Act.

The FI Act provides for a statutory manager having a casting vote, should a disagreement exist between the board of the retirement fund and the statutory manager.

“Statutory management has proven an effective way to address non-compliance by a retirement fund,” says Van der Walt. The FSCA says it has four funds under statutory management, but unlike

foul of this stipulation or find themselves without a board at all, which could be the case when a company closes down or the fund is transferred to a new employer, the FSCA will then appoint the board members itself to represent members’ best interests. But this is only a short term solution, says Buitendag.

During the Covid-19 pandemic, lockdown restrictions made it impossible for some funds to hold elections within the period stipulated in their rules, and the FSCA had to intervene there as well, in terms of Section 26 of the PFA, but this was very specific and special circumstances, according to the fund.

But Buitendag makes it very clear that the regulator does not get directly involved in the normal running of a fund. “With a staff complement of 19 in my division, it is simply impossible to do that. The FSCA is responsible for the oversight of 1 200 active funds already, not to mention the 4 000 or so dormant, distressed and unclaimed benefit structures that have to be supervised. We also don’t have the experience to manage all these funds, with different rules, and across diverse definitions,” she says.

The FSCA appoints qualified trustees, following a rigorous selection process, and also has a selected and vetted pool of professionals registered on its database. But there is an exception to everything, and there have been instances where one of Buitendag’s team members had to take up a position as an interim board trustee, she says.

curatorship these records are not public.

The definition of a distressed fund goes a bit further than just curatorship or statutory manager. According to section 26 of the Pension Funds Act (PFA), a board of trustees must consist of at least four members with representation from the employer and the member. There are exemptions to the rule, including for bargaining council and umbrella funds for example, but most stand-alone funds have to comply with this rule. Exempted structures do, however, have at least one independent member serving on its board.

So the point is if retirement funds fall

But although curatorship and statutory management are intended to be interim solutions, it doesn’t always work out that way. The FSCA has inherited a legacy system from stand-alone and stateowned funds that go back many years and with paper trails miles long, and contact methods long gone, so timelines are prescribed on a case-to-case basis, says Buitendag. “No specific time is prescribed in the FI or PFA for any of these interventions,” she says. However, she does point out that both the SATAWU fund – which was under curatorship for 20 years – and Bophelo have been removed from it recently.

THE SECRET ABOUT THE SEQUENCE OF RETURNS

New research conducted by Nedgroup Investments has debunked the idea of sequence of returns risk, and traditional methods to mitigate it. Instead, it is more important to find practical ways to help retired investors withstand the urge to disinvest or make emotionally driven changes to their investments during volatility, particularly if this occurs in the early years of retirement.

Sequence of returns risk refers to the risk of retiring just before a market crisis or period of negative returns. Should this occur, because of the money withdrawn over the downturn, your capital can never recover sufficiently when the market recovers.

Tracy Jensen, senior investment analyst at Nedgroup Investments, has spent most of this year investigating the effects of the sequence of returns by analysing the outcomes after 10 years of retirement across hundreds of scenarios and various portfolios. What she found in practice was that the order of returns is less important than the overall returns earned by a retiree. Furthermore, the traditional methods of reducing sequence of returns risk (for example, by reducing exposure to growth assets and a number of the bucketing approaches) can actually lead to worse investment outcomes for retirees.

The below scenarios explain why this research is important to consider for any retirement plan.

THE “WORST CASE”: A PERFECT STORM OF RISKS

Consider an investor who retired on 1 January 2008, just before the impending financial crisis. Say the investor invested in a high equity fund (which has about 75% in growth assets so has notable ups and downs) and withdrew what is considered a high income of 10% in the first year, increasing this by the inflation rate each year. Assuming they had R1 million at the start of retirement on 1 January 2008, 14 and a half years later (30 June 2022) they would have just under R300 000.

THE “MAGIC CASE”: NO VOLATILITY EXPERIENCE

Now, imagine the same perfect storm example, but we had the magical ability to remove all ups and downs, so that the retiree had absolutely no volatility but still earned the same average returns over the period. If they had R1 million at the start of retirement in 2008, they would have just over R300 000 (see Graph A). At 30 June 2022. To be precise, they would have R32 291 more with a zero-volatility

strategy – not a vast improvement. “This small improvement was consistent in our research across numerous retirement dates for those who retired just before a market dip. However, for all other retirement dates, the rand value 10 years into retirement of the zero-volatility fund was typically lower than a standard high equity fund,” Jensen says.

ACKNOWLEDGING EMOTIONS

Although the outcomes of the 2008 perfect storm example are not that different, the journeys were drastically different, as illustrated by the chart below. Imagine how you would feel, if just over a year into your retirement you had lost almost R300 000 of the R1 million you retired with. Naturally, it would be very difficult to stay the course and not switch investments.

So, what strategies could be considered to help you stay the course? Jensen tested two different strategies to see if they would help. The first is reducing the proportion of growth assets to reduce volatility and the second is called the bucketing method.

“Both strategies were tested for a range of different retirement dates going as far back as we have data for our high equity fund (May 2002). Each person retires with R1 million and withdraws an income of 10% in the first year, escalating this with inflation. For each retirement date, we tested how much money someone had left 10 years

into their retirement. The first person retires on 1 May 2002, second person retires on 1 June 2002, and so forth, with the last person (number 123), retiring on 1 July 2012. The last retirement date is 1 July 2012 because 10 years into retirement take us to ‘today’ (30 June 2022),” Jensen says.

STRATEGY 1: Does reducing the proportion of growth assets help?

Each dot in Graph B represents the money a retiree has left 10 years into their retirement. For each retirement date there are three different colour dots representing the three different funds. Across all retirement dates, a high-equity fund gave retirees the same or more money 10 years into their retirement than a medium- or low-equity fund (dark green dots are above the light green and yellow dots).

Reducing the proportion in growth assets did not improve outcomes in poor markets and was, in fact, very detrimental in good markets, with retirees having up to R1 million less in a low-equity fund than a high-equity fund.

GRAPH A: Rand value of R1 million invested on 1 January 2008 with an initial withdrawal of 10% with aim of income growing with inflation

STRATEGY 2: Does holding a few years of income in a "cash" bucket help?

We tested a few bucket systems and only cover the most effective version here. The other variations did not improve outcomes in poor markets and were detrimental in good markets, Jensen says.

The most effective bucket system of the options considered was to place three years of income in a “cash” bucket and the balance in a “risk” bucket (high-equity fund). Retirees withdraw income from the cash bucket and never top it up, so when it runs out, they withdraw their income from the risk bucket.

In Graph C each dot represents the money a retiree has left 10 years into

their retirement. “We see a marginal improvement in outcomes with bucketing for people who retired and soon thereafter experienced a market dip. Importantly, in typical and good markets, it didn’t cost retirees too much – they only had slightly less money after 10 years.

“From the perspective of helping retirees stay the course, this is a good option in practice, as it helped a bit in bad times, didn’t cost too much in good times and psychologically provided reassurance of having a cash reserve in the early years of retirement,” Jensen says.

CONCLUSION

In practice the order of your returns in retirement is not as important as the overall return earned over the period.

The four keys to a financially successful retirement are to:

1. Invest in sufficient growth assets (± 75%).

2. Keep total costs to a reasonable level as this erodes returns (preferably 1% per year or less).

3. Draw a sustainable income (preferably 5% or less in the first year, with income escalating with inflation each year).

4. Consider an effective bucket approach (avoid the bad ones) if this will help you not to switch investments when market returns are poor.

GRAPH B: Value 10 years into retirement of R1 million invested in low-, medium, or highequity fund with initial withdrawal of 10% (growing with inflation) – starting dates May 2002 to July 2012

GRAPH C: Value 10 years into retirement of R1 million invested in high-equity fund plus cash bucket with initial withdrawal of 10% (growing with inflation) – starting dates May 2002 to July 2012

THE CONSUMER PROTECTION ACT AND THE EXHAUSTION OF REMEDIES

Arecent High Court judgment (Steynberg v Tammy Taylor Nails Franchising) considered section 69 of the Consumer Protection Act (CPA), which provides that you may not seek to enforce any right in terms of the CPA, or in terms of a transaction or agreement or otherwise to resolve a dispute by approaching the court with jurisdiction of the matter, unless “all other remedies available to [you] in terms of national legislation have been exhausted”.

In this dispute, in which the applicant had cancelled a franchise agreement and approached the court seeking a refund and declaration that the agreement was void and unenforceable because of the failure to comply with the relevant provisions of the CPA, the respondent argued that the court did not have jurisdiction to adjudicate the claims because the applicant had not exhausted

available to her.

The court considered whether the CPA or other legislation provided a remedy sufficient to correct the breaches that the applicant alleged occurred. It could find no reference to a consumer court having been established as envisaged by the CPA in terms of any provincial legislation and that therefore that avenue was not available to the applicant.

The respondent had not argued that the applicant had an ability to obtain relief from the Consumer Goods and Services Ombud. In any event the court did not believe a referral to that ombud would be appropriate or sufficient to deal with the applicant’s complaint, it being doubtful that the relevant ombud had the power to grant the applicant the relief it sought.

The National Consumer Tribunal’s powers were circumscribed by its rules. It did not appear to have power to grant declaratory relief nor to deal with the claims for payment of money. And it did not appear that the Tribunal had the power to deal with the contravention of the relevant sections complained of by the applicant.

The court observed that at common law there is a presumption against construing a statute so as to oust the court’s jurisdiction. Reference was made to the Supreme Court of Appeal remarks in Motus Corporation (Pty) Ltd t/a Zambezi Multifranchise and Another v A Wentzel of 2021, where the court said: “Section 69(d) should not lightly be read as excluding the right of consumers to approach the court in order to obtain redress. A claim for cancellation of the contract and the refund of the price of goods on the grounds

that they were defective falls under the actio redhibitoria and dates to Roman times. Our courts have always had jurisdiction to resolve such claims and there is no apparent reason why the section should preclude a consumer, at their election, from pursuing that avenue of relief until they have approached other entities…

“Furthermore, subsection (d) does not refer to the consumer pursuing all other remedies ‘in terms of this Act’, but of pursuing all other remedies available in terms of national legislation. That could be a reference to legislation other than the Act, or to the remedies under both the Act and other applicable consumer legislation, such as the National Credit Act.”

The court was referred to two unreported cases decided in the Free State High Court which held that the court did not have jurisdiction to deal with matters because the plaintiffs had not exhausted their remedies under section 69.

The court did not consider itself bound by those Free State High Court decisions and in any event respectfully disagreed with the findings to the extent that they are contrary to the court’s opinion in Motus Corporation. No purpose would be served by requiring the applicant to approach the relevant ombud or National Consumer Tribunal or by requiring her to file a complaint with the National Consumer Commission. That would merely serve to delay the adjudication of the claims.

The jurisdictional objection was dismissed.

Donald Dinnie is a director of law firm Norton Rose Fulbright. This article first appeared in the firm’s Financial Institutions Legal Snapshot newsletter.

Donald Dinnie reports on a recent case that considered whether you have to exhaust all avenues provided in the statutes before turning to the courts in a consumer dispute.

HOW TO GROW A FAMILY BUSINESS IN SOUTH AFRICA

Despite a unique set of challenges, family-run businesses can take decisive steps towards ensuring a positive and sustainable growth path, says a small business expert.

Family businesses make up a significant portion of SMEs in South Africa. While statistical data on the contribution of family businesses to GDP is not widely available, their centrality to economic growth is illustrated by the fact that about 60% of companies listed on the JSE were founded or are currently run by family units.

In the global business context, where purpose-driven leadership is being touted as the key to long-term success, family businesses have a unique opportunity to leverage their core values and gain a foothold in the market now more than ever.

This is the opinion of Arnold February, regional investment manager at small and medium enterprise financier, Business Partners, who says that by focusing on purpose and upholding core values, a

family business can thrive.

THE INTERSECTION OF FAMILY VALUES AND BUSINESS PRACTICE

Recent research by Deloitte suggests that more consumers are interrogating the values of the brands and businesses they support, in search of ideals such as authenticity, relatability and integrity.

“Driven by the evolving consumer demands of younger generations, a fundamental market shift from the sole focus on profit to a trifecta of ‘purpose, people and planet’ is evident both globally and abroad, and company values are the cornerstones of purpose,” says February.

It is for this reason that he emphasises the importance of communicating company values clearly, particularly in a

family business, where trust and cohesion play a pivotal role in the achievement of business milestones.

“Not only will the clear communication of values assist with driving an internal culture of mutual cooperation, but from a customer relations perspective; it is a powerful and persuasive tool for attracting and driving customer loyalty,” February says.

Evidence supporting this approach can be found in PwC’s most recent African Family Business Survey, which found that, for 80% of the South African family businesses who follow a clearly defined set of values, the vast majority say this helped them to mitigate the impact of the Covid-19 pandemic on their business operations. Furthermore, nearly four out of five respondents said

that having these values in a written and accessible form correlates strongly with long-term success.

EMBRACING CHANGE AND THE IMPORTANCE OF AGILITY

Expanding on his advice, February encourages entrepreneurs to view agility as a business imperative. ‘Tradition and heritage are fundamentals in family-run businesses, but rigidity and an inability to adapt to an evolving social and business environment can serve as a barrier to growth,” he says.

In an article titled “Sustaining a culture of continuous transformation in family business”, KPMG Private Enterprise echoed this view, arguing that a “proactive” rather than a “reactive” stance to sector developments is advised. In a roundtable of South African family business leaders, participants acknowledged the importance of becoming “drivers of change,” rather than “passengers”.

Embracing change and implementing solid change-management policies and practices should be a matter of priority for businesses, particularly given the rapid technological advancements that are transforming various industries.

Taking an open-minded approach to changes within an industry, as well as in the way that customers relate to both businesses and each other, is a vital component of becoming adaptable and, ultimately, thriving during periods of disruption or uncertainty.

February says that while many may view change through the lens of digital transformation, particularly now with the impact of the Fourth Industrial Revolution, he argues that this is only one contributor to business longevity.

A RENEWED FOCUS ON GOVERNANCE

Another priority should be governance. “Family entrepreneurs to scrutinise and formalise their governance policies and structures wherever possible,” February says. “The ‘G’ in ‘ESG’ (which stands for the environmental, social and governance criteria that investors look for in well-run companies) is often neglected in family-

run businesses and, as a result, the human and social capital of those companies is not fully realised.”

The PwC report suggests that South African family businesses are on a positive trajectory where the defining of roles and responsibilities is concerned, with almost 90% of respondents claiming that their leadership teams were strong and equipped with the data and tools they needed to execute their duties.

Governance, however, is a multifaceted component in family businesses, and has a direct influence on whether communication systems support positive

growth or lead to internal divisions and the breakdown of value systems.

February concludes that a family business growth strategy needs to include aspects such as succession and business continuity planning. “In order for factors like the transfer of leadership and ownership from one generation to the next not to serve as disruptive forces, open discussion and contractual agreements need to be encouraged and facilitated. Family members need to see themselves not only as employees and team members but as custodians of their family’s legacy.”

- Supplied by Business Partners.

SUCCESSION PLANNING FOR AN OWNER-MANAGED BUSINESS

Whether we like it or not, things come to an end. This reality, which applies to life as it does business, was brought into stark relief by Covid. As grim as the picture appears, it’s also an opportunity to confront this harsh truth head on. This is not only sage advice for someone concerned about the well-being of their family, but just as essential when it comes to succession planning for an owner-managed business, writes

Ricardo Teixeira.

It's important to remember that with owner-managed businesses, the lines between ownership and management are often blurred, which brings in nuances that complicate succession planning. And so, with succession planning, as the owner it’s really about planning for two things: how you transfer ownership as well as management when you’re no longer running the business. This process also needs to take into consideration whether your exit is either done voluntarily (you choose when to

handover) or involuntarily (a life event makes the decision for you).

WHY SUCCESSION DOESN’T GET ADDRESSED

One of the main difficulties in succession planning is the sense of vulnerability required to have the conversation. It requires recognising that you're not going to be around in the long run – a bitter pill to swallow. But the irony is that by not confronting the issue and failing to create a plan, business owners put themselves in an

even more vulnerable position.

Ignorance is another common factor. In some cases, this is simple procrastination, thinking it’s okay to put succession off until it’s really urgent. Concomitant to that is not knowing how to start such a process, which is often a problem of self-diagnosis – “I don’t know what I don’t know or therefore how to solve it”. When it comes to ownership, this problem is relatively straightforward, often involving a simple shares transfer. However, from a management perspective, the question of hiring a successor can pose

difficulties.

Family-owned businesses can also introduce a challenge in terms of relationship dynamics. Not every family member will be an owner and or manager of a business, but there will always be certain emotional connections that come with the matter of legacy and how a family is treated throughout the process. This often leads to an expectation gap regarding the question of a successor, with a family having different opinions from the directors.

Overall, the challenge most businesses

face when trying to develop a succession plan is clarity of thought: distilling what is important to you and what’s best for the long-term success of the business. For that reason, there is no template, meaning it’s not a problem that can be easily outsourced. It's about having an authentic dialogue and developing a personalised solution that speaks to each family, owner and the executive management team of the business.

WHO PUTS TOGETHER A SUCCESSION PLAN?

The starting point of any successful succession plan begins with the stakeholders. This includes the owners of a business (the shareholders), the executive management, and the family, if it’s a family-owned or branded business.

External advisers can be brought in for conversations related to the structure of ownership and management. This expertise can prove helpful when it comes to governance discussions, specifically an owner’s position in relation to management, as well the transfer of wealth between generations.

When it comes to consulting a family, a good course of action can be to draft something along the lines of a family charter. While it’s not a legal document of any sorts, a charter is a way for a family to establish a set of principles related to how a family business is managed, how the family relates to the business, how decisions are made in relation to the business, and how the family engages with the board of directors. In essence, a family charter is a way to establish certain values and help a family articulate a sense of purpose in relation to the business.

HOW MUCH TIME SHOULD YOU GIVE YOURSELF TO PLAN?

There is no specific length of time a succession plan takes to form. If it’s put together to address a voluntary exit, it’s easier to plan in advance. If an owner is clear on when they are going to leave a business, or step aside from ownership or management, then a five-to-seven-year window period is advisable. This allows

enough time to groom a successor, or identify what sort of person is needed to fill the role. This period also adequately allows an owner to prepare the various stakeholders of a business if they are looking to sell or merge.

In cases where succession is involuntary, things are naturally a bit more difficult. At any stage something can happen to an owner, making him or her unable to continue operating the business. In such a case, if a succession plan has not been developed, it’s advisable that a business holds key man insurance, or an equivalent policy. This will provide a safety net so that there’s capital should a business need to employ a stand-in CEO at short notice.

THE KEY IS REGULAR REVIEW

The hardest part of building a succession plan is starting one. Once that’s underway, the key to making it work is constant review to ensure it stays relevant. As a business grows and changes, so too should the succession plan, and over time, once the ball is rolling, the business can bring in outside guidance to help review the plan. This is where an independent advisory service can come in useful, bringing a framework of thinking and objectivity that can help to identify any gaps in a plan.

How does your plan account for wealth transfer? What does it mean for the owner’s estate planning? Have you considered the tax implications and what it would mean for the business’s cash flow?

These are the sorts of risks and consequences a professional advisory firm will be able to identify and manage, bringing oversight through a broad service perspective, which includes accounting, corporate finance, wealth management, legal counsel, cyber security and an internal audit.

Every business is unique, which is why having a succession plan is so important. By not putting together a plan, a business owner ultimately leaves it up to someone else to make the difficult decisions, leaving everyone attached to the business to deal with the consequences that come with that.

Ricardo Teixeira, CFP, is Chief Operating Officer of BDO Wealth Advisers.

THE SHIFT TO UMBRELLA FUNDS WHAT NEEDS TO BE CONSIDERED?

The move from single-employer to multi-employer (umbrella) retirement funds is gaining momentum. Carlyle Field highlights concerns National Treasury has about umbrella funds and what you should consider if moving to one, as an employer or employee.

There has been a noticeable acceleration in the shift by employers from stand-alone (single employer) retirement funding arrangements to umbrella (multi-employer) retirement funding arrangements in recent years.

The annual reports issued by the Financial Sector Conduct Authority (FSCA) indicate that total membership

of retirement funds in South Africa grew from 16 439 288 as at 31 December 2015 to 17 610 098 as at 31 December 2019 – these figures include membership of umbrella funds. By way of comparison, National Treasury’s communication issued on 14 December 2021 titled “Governance of Umbrella Funds” indicates that membership of umbrella funds grew

from 7 927 754 to 8 874 163 over the same period.

Expressed differently, while overall retirement fund membership grew by 7.1% over the four years to the end of 2019, umbrella fund membership grew by 11.9%. The figures above also reflect that membership of umbrella funds constitutes approximately half of overall retirement

fund membership.

To what can this acceleration be attributed?

One of the primary factors for employers are the enhanced economies of scale typically associated with umbrella funds – that is, that cost-savings for members are more readily achievable by the distribution of costs across a larger

number of members.

Another factor is that employers are relieved of the administrative burden of the operation of a stand-alone fund, most notably due to the fact that employerappointed and member-elected trustees (who are typically all members of staff of the employer) are not primarily responsible for the operations and governance of the fund. This allows the employers and staff to focus on their core business as opposed to the business of running a retirement fund.

These factors, coupled with a regulatory emphasis on the consolidation of retirement funds in South Africa, have been the primary drivers in the shift from stand-alone to umbrella funds.

GOVERNANCE CONCERNS

The National Treasury communication referred to above does, however, cite certain concerns pertaining to the governance of umbrella funds. First, umbrella funds may be exempted by the FSCA from the requirement in the Pension Funds Act that the members of the fund have a right to elect at least half of the members of the board of trustees.

The boards of trustees of umbrella funds, other than independent trustees, are typically appointed directly or indirectly by the sponsor of the fund, which Treasury notes raises the possibility of conflicts of interest between boards and members. Furthermore, whilst some umbrella funds permit an employer to appoint a management committee to represent the interests of the employees of that employer, the ultimate responsibility for the operation and governance of the fund rests with the board of trustees.

A concern that flows from the constitution of the board of trustees of umbrella funds is weak governance, particularly in respect of the appointment of service providers. Treasury identified that some umbrella funds were established on the basis that services provided by the sponsor will be utilised exclusively by the fund. Furthermore, it was identified that even in situations where the board of trustees is empowered

to utilise an alternate service provider, it was difficult for the board to be truly independent in making such a decision given that at least half of the board comprises sponsor-appointed trustees.

By comparison, employer-appointed and member-elected trustees in a stand-alone fund are typically entirely independent from any service providers and therefore not conflicted in any way when deciding on the appointment of a certain provider.

OPAQUE FEE STRUCTURES

Another concern highlighted by Treasury is the complex and opaque fee structures of certain umbrella funds, specifically those that have not adopted the cost disclosure standard established by the Association for Savings and Investments South Africa. Such fee structures are of particular concern in scenarios where the sponsor renders various services to the fund – in such cases it is critical to assess the overall costs to members in order to properly evaluate whether the employer and its members are deriving value for money.

It should be borne in mind when considering costs and economies of scale that commercial umbrella funds are typically established for the purpose of the sponsor deriving a profit, whereas stand-alone funds and industry specific umbrella funds are typically established for the benefit of a certain class of employees (and not for the purpose of deriving a profit).

A further concern noted by Treasury are potential barriers to entering or switching umbrella funds, such as fund rules that prohibit an employer from exiting the fund.

The concerns mentioned above highlight the importance of conducting a detailed due diligence when considering making the switch from a stand-alone fund to umbrella fund arrangement as well as when comparing and assessing the offerings of various umbrella funds.

Carlyle Field is a partner at law firm Shepstone & Wylie who specialises in pension fund law.

UNCLAIMED BENEFITS ‘MAKE YOURSELF TRACEABLE’

Retirement fund actuaries are urging South Africans to make themselves traceable by retirement funds trying to unite former members and beneficiaries with billions in unclaimed benefits. By the end of last year, unclaimed benefits worth R47.3 billion were sitting in retirement funds, according to the Financial Sector Conduct Authority (FSCA).

Jeanine Astrup, a consulting actuary and member of the Actuarial Society of South Africa (ASSA) Retirement Matters Committee, points out that most retirement funds and their administrators are already working with tracing agents in an effort to whittle down the unclaimed assets. This comes at a significant cost for retirement funds, she adds.

“The more specialised and intense the search for beneficiaries of unclaimed retirement benefits, the higher the cost implications. Cases where ID numbers, dates of birth, or surnames differ, require further investigation by potentially the employer, fund, and administrator. This has time and cost

There’s a pot of nearly R50 billion of unclaimed benefits in retirement funds. Some of it could be yours…

implications.”

Astrup believes that retirement fund trustees and administrators could probably do more to unite former members and beneficiaries with their unclaimed benefits but points out that individuals also have an obligation to ensure that they are traceable.

“While it may seem incomprehensible that retirement fund members could simply ‘forget’ about their benefits, the size of the unclaimed benefits pot shows that this is not uncommon,” she says.

According to Astrup, there are several steps that former retirement fund members and their beneficiaries can take to make it easier for retirement funds to unite unclaimed benefits with their rightful owners.

MEMBERS OF DEFINED BENEFIT FUNDS PRE-2004

Astrup says a portion of unclaimed retirement fund benefits was generated by defined benefit funds that declared a surplus in terms of Surplus Apportionment legislation to members who left these funds after 1980, but where trustees were unable to trace former employees.

“Many unclaimed surplus benefits date back to the years preceding the digital age. Old payroll systems, some of which were not even electronic, did not capture ID numbers, seldom had first and second names, and rarely recorded gender.

Even where information was captured, there was no such thing as system verifications, and information was often captured incorrectly.”

Astrup says former members of defined benefit funds should contact their previous employers if all of the following apply:

• You withdrew from a defined benefit fund before 2005 (the last surplus apportionment date was 30 November 2004);

• You have not been paid an additional surplus benefit; and

• You have not already confirmed that your former fund did not undertake a surplus allocation.

If you are a beneficiary of a former member of a defined benefit fund who has died, and you believe that the above apply, you should take up the cause, says Astrup.

DIFFERENTIATE BETWEEN LEGITIMATE APPROACHES AND SCAMS

“With all the scams out there, it is no surprise that members are sceptical when out of the blue they receive a phone call or email advising them that the employer they left five, 10 or even 20 years ago would like to pay them money,” says Astrup.

She adds, however, that simply dismissing legitimate approaches by tracing agents makes it very difficult for retirement funds to unite people with their benefits. She therefore urges consumers to do their homework before simply dismissing an approach from a tracing agent. (For tips on how to verify that a tracing agent is legitimate, see “Identifying a legitimate agent”, below.)

Astrup says agents have to request personal information such as ID and bank account details in order to facilitate the payment of your benefits. “If you are worried that the request may be a scam, ask for the administrator’s email address so that you can send your documents to the administrator directly. Again, make sure that the email address looks legitimate and is not a free web-based service like Gmail or Hotmail.”

She stresses that a tracing agent will never need your bank account login details or any pins from your bank.

UNDERSTAND WHY YOU MAY HAVE BECOME UNTRACEABLE

Astrup says “desktop” tracing is often successful for former retirement fund members who are still employed and living in the country.

“However, these ‘first-level’ traces become less useful for former members who have left the country, no longer work and rely on their children for financial support, or who have since remarried and changed their surname once or possibly twice. Even more complicated is tracing former members who passed away after having left South Africa.”

Astrup says people often

believe that if they were owed money by a retirement fund, they would have been contacted and informed of their windfall. “This is not a given and if there is any doubt, there is no harm in making contact with your former employer or with the principal officer of the retirement fund in question.”

The FSCA has created an unclaimed benefit search engine for individuals who did not receive a benefit payout when they left employment. Astrup encourages members of the public to use this search engine and to use different variations of their personal details that may have been on record at the time. “Your details may have been captured using your first name and middle name, or possibly your first name and an initial. If you were using a different surname at the time, remember to enter your details as they could have been on record when you were a member of a specific fund. If your employer used to have your date of birth recorded incorrectly, try using the date of birth that they would have had on record.”

She also points out that many of the big retirement fund administrators have their own unclaimed benefits search mechanisms on their websites.

TRACING BENEFICIARIES

Astrup says that as time passes, the chances increase of the rightful owners of unclaimed benefits being deceased, turning a former member trace into a beneficiary trace.

“Once you have found the beneficiaries, in or outside of South Africa, trustees have the challenge of understanding if the deceased had an estate, the value of the estate, if the estate is still open, and how to get hold of the executor.”

MASTERING THE PAPERWORK

Astrup says once fund members or their beneficiaries have been traced, a new round of complexities presents itself in the form of stringent document requirements.

“The financial regulations surrounding benefit payments made by fund administrators make the paperwork required to make a benefit payment to someone who barely exists in the administration system hard work.” Some of the challenges include:

• Proving your surname. Before the current marriage certificate template was implemented, the previous template asked for a woman’s maiden surname and married surname, but not the surname at the time of marriage, which may have been the surname from a previous marriage. Astrup says this creates problems for women who have been married more than once. “The only way to solve this for the woman involved is a trip to Home Affairs to ask for a marriage certificate that shows their surname at the time of marriage and the surname after marriage. Waiting for this certificate can take weeks or even months.”

• Financial immigration. “Financial immigration out of South Africa means that the former member no longer has a South African bank account,” says Astrup. Therefore, before a payment can be made, the retirement fund administrator must confirm that the former member correctly financially immigrated. “This becomes complicated if the member has not kept a copy of his/her South African ID and SARS financial immigration number,” she says.

• Foreign fund members. Former members who were working in South

Africa but who were never South African citizens often return to their country of origin, says Astrup. “The former members do not have a South African bank account and cannot meet FICA requirements to open one. Payment to these members becomes a challenge for the administrator and for the former member who must produce the paperwork requested.”

MAKE SURE THAT YOU AND YOUR BENEFICIARIES REMAIN TRACEABLE

According to Astrup, people sometimes do not realise that they are a member of their employer’s pension or provident fund and when they resign, they simply walk away from their benefits.

“People either do not check their payslips, which are meant to reflect retirement fund contributions, or they simply don’t hold their employer accountable if payslips are not issued. This means that the fund

member as well as family members are unaware that there are retirement savings that become payable on termination of employment, death or disability.”

She says if you are not sure whether you belong to a retirement fund, do the following:

• Check with your employer whether you belong to a retirement fund. If you do, read the fund rules, understand who pays the contributions and ask whether there are other benefits such as life and disability cover.

• Always complete the beneficiary nomination form, which will guide the retirement fund trustees on what should happen to your retirement savings if you die while you are a member of the fund.

• Leave copies of these documents with a trusted member of the family and/or your financial adviser.

- Supplied by ASSA.

IDENTIFYING A LEGITIMATE AGENT

Tips on how to verify that the tracing agent is legitimate:

• The tracing agent will know something about you. If you receive a text message saying that you have unclaimed benefits owing but the SMS does not include your name, it is likely to be a scam.

• If you receive a phone call from someone, ask for a number that you can call them back on. All legitimate callers will have no problem providing you with a contact number for a return call.

• Ask the tracing agent what company they are doing the tracing for and what

the company may have been called before. If you did not work for that company, then you would not have a benefit due.

• Ask the tracing agent for a letter from the company they are tracing for.

• Do an internet search to check that the tracing agent is a legitimate company. Make sure that, if you receive an email, the email address includes the tracing agent’s name. Call the pension fund and ask if they are doing a tracing exercise. The contact details for every pension fund’s principal officer is available on the FSCA website.

THE STATE OF THE SA INSURANCE INDUSTRY

South African insurers have suffered punishing blows from all angles over the past two years – Covid-19, destructive riots and catastrophic floods were the main contributors. While the challenges have been almost unprecedented, the industry has managed to weather them.

Statistics from two sources – one covering the entire industry in South Africa and one covering just the life insurers – show that, despite huge challenges in the past two years, the local insurance industry is in good shape.

The KPMG Insurance Survey 2022, released In September, and long-term statistics of life companies, released recently by the Association for Savings and Investment SA (Asisa), show a betterthan expected financial position, although reinsurers, which suffered the brunt of the damages, have yet to recover.

KPMG SURVEY

KPMG’s study surveyed 34 non-life insurers, 19 life insurers and four reinsurers on their financial position at the end of 2021. The results indicate that while the reinsurance market in South Africa has had a rough ride, the overall insurance industry had a better-than-expected year – with strong gains in both the life (longterm insurance) and non-life (short-term insurance) sectors. However, the research points to very real risks the sector faces in the future, including economic volatility, ever increasing evidence of climate change, a much-needed focus on ESG (environmental, social and governance) reporting, support and understanding as well as finding a way forward in navigating South Africa’s social challenges.

“It is great to see that the non-life and life insurers bounced back nicely after the pandemic and showed a strong recovery,” says Mark Danckwerts, partner at KPMG Africa’s insurance practice. “However, to remain agile, insurers are going to have to consider the role they play in mitigating risk, in dealing with risk brought about by changing technology, social patterns and economic turbulence and in finding ways to innovate further to meet the unique challenges that the South African landscape presents.”

NON-LIFE INSURANCE INDUSTRY

Following the significant volumes and values of business interruption claims in 2020 because of the Covid-19 pandemic, the non-life insurance industry presented

robust 2021 results, with the sector increasing profits by more than double the 2020 figures to R12.1 billion.

The industry reported gross written premiums (GWP) of R131.6 billion, an increase of 7% from the prior year. The 10 largest non-life insurers, when measured on GWP, have a market share of 76.5%. There were marginal shifts in this space, with Escap moving into the top 10, Centriq Insurance moving down to the 10th position, and Mutual and Federal Risk Financing moving out of the top 10 into 11th position.

GWP growth for the sector exceeded headline CPI inflation of 5.9%, with five insurers outperforming the GWP growth rate of 7%; these are Escap, Guardrisk, Discovery Insure, Bryte Insurance and Lombard Insurance. Growth came from diversifying client bases and improved new business volumes. In this period Discovery Insure reported its lowest lapse rate since inception: 2% lower than the previous year.

The sector showed incredible resilience by getting back to pre-pandemic results, with profit after tax increasing by 110%, from R5.6 billion to R11.7 billion, largely as a result of a decreased industry loss ratio of 57% (61% in 2020).

“While the non-life industry had a strong year, the pressure is on to remain resilient. Increasing crime, weatherrelated catastrophe events, the continued erosion of social cohesion in South Africa, and supply chain and power supply disruptions, all paint a picture that will require tenacity, skill and an increased focus on loss-preventing technology,” Danckwerts says.

LIFE INSURANCE INDUSTRY

While life insurers faced another turbulent year, the industry experienced improvements in the volume and profitability of new business and welcomed a positive lapse experience and better equity and bond market performance. The industry demonstrated its resilience once again and was able to remain well capitalised to meet policyholder obligations,” says Danckwerts.

In 2020, several life insurers reported having paid or accrued more claims than

ever before, resulting in an overall loss of R5 billion. The life industry did well to return to profitability in 2021. (See Asisa figures below for more recent results.)

REINSURANCE INDUSTRY

While the primary insurance industry was sufficiently protected by the reinsurance industry through the robust reinsurance structures and arrangements in place, there is no doubt that the reinsurance industry bore the brunt of the loss events that occurred during 2020 and 2021. With GWP growth of only 1%, an 11% decline in investment income and underwriting losses from all surveyed reinsurers (R3.8 billion), it is safe to say that the reinsurers did not recover well following Covid-19 related business interruption claims from non-life insurers and increased mortality experience by life insurers.

“The reality is that while reinsurers writing life insurance risks were hit much harder than non-life insurance risks, it was a tough year all round for both. Consequently, we have seen the hardening of reinsurance rates in 2022,” Danckwerts says.

ASISA LIFE INDUSTRY STATISTICS

The past two years severely stress tested the financial resilience of South African life insurers. Nevertheless the industry remains in robust financial health and well capitalised to honour its long-term contractual promises to customers, Asisa says.

The Asisa statistics show that the life insurance industry held assets of R3.51 trillion at the end of June 2022, while liabilities amounted to R3.18 trillion. This left the industry with free assets of R335.8 billion, which is more than double the reserve buffer required by the solvency capital requirements.

Hennie de Villiers, deputy chair of the Asisa Life and Risk Board Committee, points out that this is the first time since 2020 that the industry’s collective reserve buffer was more than double the requirement. He explains that a healthy reserve buffer is of critical importance, because it enables insurers to pay claims and policy benefits even in times of extreme market turmoil or unusually high claims.

De Villiers reports that policyholders and beneficiaries received claims and benefit payments worth R270.2 billion from South African life insurers in the first half of 2022. Payments made to policyholders and beneficiaries included retirement annuity and endowment policy benefits as well as claims against life, disability, severe illness and income protection policies.

“These payments would have been received by consumers following either a tragic life event like death or disability, or a life stage change like retirement,” De Villiers says.

STRUGGLING CONSUMERS SACRIFICE COVER

The harsh economic realities imposed on South African consumers during the first half of this year placed a damper on their appreciation of the value of long-term risk protection such as life and disability cover gained during the Covid-19 pandemic.

The statistics show that, in stark contrast to the same period last year, consumers not only bought fewer risk policies in the first six months of 2022, but also lapsed a higher number of policies.

Last year, while the country was still suffering the full impact of the pandemic, the long-term insurance industry had recorded a significant increase in new risk policies bought in the first half of the year, with lapses also much lower.

De Villiers points out that consumers have had to absorb unprecedented fuel price increases as well as higher food prices and rising interest rates in the first half of this year. At the same time, 64% of South Africans between the ages of 25 to 34 were unemployed, according to the Quarterly Labour Force Survey for the first quarter.

“South Africans in this age group are meant to be economically active and

under normal circumstances would be concerned with buying cover to offer financial protection to their growing families and cover credit purchases such as mortgage bonds,” says De Villiers. He adds, however, that many of those who are employed are likely to be reluctant to commit to monthly premium payments while living costs are at an all-time high.

De Villiers notes that even credit life policies failed to achieve meaningful growth in the first half of 2022, which indicates that consumers were struggling to access credit or practising greater restraint when buying on credit.

At the start of 2022 there were 34.3 million recurring premium risk policies (life policies, funeral policies, credit life policies, disability policies, severe illness policies and income protection policies) in force. However, while consumers bought 4.4 million new risk policies in the first six months of this year, 4.3 million risk policies were lapsed and claims against 199 023 policies submitted. This resulted in a marginal drop of 0.1% to 34.2 million in force at the end of June 2022.

On a more positive note, says De Villiers, the number of claims reduced significantly in the first half of 2022 relative to the same period in 2021 when the country was still in the midst of the pandemic.

De Villiers also reports a further marginal decline in the number of individual recurring premium savings policies (endowments and retirement annuities), from 5.75 million policies at the start of 2022 to 5.71 million at the end of June 2022. At the end of June 2021, there were 5.96 million of these policies in force.

Of particular concern is the high number of policy surrenders, says

De Villiers. While 293 423 new policies were sold during the six-month period to the end of June 2022, 319 318 policies were surrendered. (A surrender occurs when the policyholder stops paying premiums and withdraws the fund value before maturity, often incurring penalties.)

MESSAGE TO CONSUMERS

With an unemployment rate at record highs and living costs climbing relentlessly, consumers may be tempted to let go of their life, disability, severe illness and income protection policies, says De Villiers. However, as Covid-19 has taught us, the true value of having longterm insurance in place is generally only realised during times of crisis.

De Villiers therefore urges consumers to consider long-term risk protection cover as a valuable financial asset, which can become impossible to replace as you grow older.

“If you are struggling to make ends meet, the temptation to let go of your life and disability cover can be overwhelming. But before you do, weigh up the expense of your monthly premium against the dire financial impact the loss of your income could have on your family. Rather first speak to your financial adviser or insurer if you are struggling to keep up with premium payments.”

- Supplied by KPMG and Asisa.

TABLE: THE LIFE INDUSTRY IN NUMBERS

Source: Asisa

Just as there are many ways to classify different types of personalities, there are also various ways of classifying, or profiling, investors. Recognising the type you most closely resemble will hopefully help you to be more successful in reaching your investment goals. The common denominator is risk. Investment risk associated is largely dependent on the type of assets held. The asset classes have different risk-return profiles, and deciding which to invest in should largely depend on fundamental factors, such as investment objectives and time horizon. In practice, however, sentiment drives the choice of some investors.

Over the years, we’ve identified four broad types of investors:

TYPE 1: THE AVOIDER

MILLENNIAL VIEW WHICH TYPE OF INVESTOR ARE YOU?

Avoiders probably haven’t started investing yet. They might think that investing is too complicated and feel overwhelmed by the vast amount of investment options out there. They might think it takes too much time to start investing, or that something could go wrong. Investment risk is not the primary driver; instead, their lack of knowledge and fear of losing money often prevent them from making the time to get started. Fortunately, there is plenty of information available online on how to get started, or a financial adviser can help get the process going.

TYPE 2: THE RISK TAKER

Risk Takers’ approach to investing is much the same as their approach to life. They tend to be focused on short-term gains, thrive on seeing immediate results and hate missing out on opportunities. Risk Takers want the highest returns possible and expect to be compensated for taking risks. Alternative investments, such as hedge funds and cryptocurrencies, usually feature in their investment portfolios. Risk Takers, however, are prone to certain behavioural characteristics that, when left unchecked, can significantly erode returns, such as

chasing the latest top performers, or switching out of an investment at the wrong time. Risk Takers tend to be more actively engaged with their investments, but this can be detrimental if it involves poor investment behaviour. Fortunately, with some self-restraint and patience, achieving greater long-term returns is possible.

TYPE 3: THE BALANCER

The Balancer is normally less impulsive than The Risk Taker. Balancers like to look at the whole picture and weigh their options before deciding how to invest. Because of the bewildering array of choices available, they may tend to take a long time to decide. However, they can narrow down their options by knowing what their investment goals are, as well as their timeframes for achieving them. By their nature, they also prefer to keep their fingers in many pies, to hedge their bets. As such, Balancers often have a diversified portfolio of single-asset unit trusts, or as a simpler option, choose multi-asset, or “balanced”, funds. The trick with diversifying in investing is to find the right balance – being under- or over-diversified can be risky to investment success.

TYPE 4: THE PROTECTOR

When it comes to investing, the risk of losing money is probably among The Protector’s top considerations. Stability is the goal, not volatility. As a result, they invest primarily in conservative assets, such as cash and bonds, rather than riskier assets such equities. Having a conservative investment portfolio has historically offered more stability and thus a more dependable investment experience over the shorter term. But the cons include incurring higher opportunity costs and achieving lower returns.

Which type of investor are you? Knowing where you stand on risk can shed light on how best to manage your investment journey and reach your investment goals more easily.

GRAYSON RAINIER

Grayson Rainier is Marketing Manager, M&G Investments

OMBUD CASE FILE

Ombud rules against policyholder on rain damage

Summer brings with it thunderstorms in the centre and north of the country, and with thunderstorms come the risk of floods and water damage to property.

The Ombudsman for Short Term Insurance (Osti) says that if you are a property owner with a buildings policy covering your property, you must be familiar with what constitutes claimable water damage with insurers and what does not.

The water damage must be sudden and unforeseen, not gradual or over time or involve wear-and-tear. There must be actual damage, which means you cannot claim for carpets or clothing that have become wet, unless the wetness resulted in damage, including change in appearance or unsightly marks or a bad odour, for example. You can also not claim for mould, because it occurs over time. Furthermore, the damage cannot be caused by inherent vice (slow self-destruction over time), defective design or workmanship, or lack of maintenance.

It is also important to note that carrying out repairs before the damage has been validated may lead to a declined claim. If you need to do emergency repairs, proper records or proof must be maintained for validation purposes.

Case study

In a case the Osti dealt with recently, Mrs M submitted a claim to her insurer for storm related damage to the insured property. The insurer was not convinced that the claim fell within the ambit of cover, thus the claim was rejected. Dissatisfied with the outcome and believing that the insurer

due to a storm and heavy rains. The roof was leaking. The insurer had rejected the claim on the basis that the proximate cause of the damage was a lack of maintenance.

The relevant policy exclusion the insurer relied on is as follows:

“General exclusions: This section is applicable to the entire policy. You will not be covered for loss or damage caused by servicing, maintenance, cleaning, repairing, restoring, dyeing, bleaching or alteration.”

To substantiate its stance, the insurer referred to the damage report prepared by its appointed assessor. The assessor had found no evidence of storm damage but that the asbestos roof coverings were not maintained, allowing water to penetrate through the unpainted roof sheeting. The assessor expressed the opinion that the roof would not have leaked had it been maintained. The assessor recommended the replacement of the roof sheeting to remedy the situation.

was reneging on its obligation, Mrs M approached the Osti to compel the insurer to settle the claim.

In her application for assistance, Mrs M indicated that her property was damaged

Although Mrs M did not dispute that the roof had not been maintained maintained, she argued that she had moved into the property eight months before the claim was submitted; hence she should not be held responsible for the unmaintained condition of the roof. It was Mrs M’s further contention that the insurer should

General exclusions: This section is applicable to the entire policy. You will not be covered for loss or damage caused by servicing, maintenance, cleaning, repairing, restoring, dyeing, bleaching or alteration.

have assessed the property and noted any defects before proceeding to collect premiums.

The Osti could not grant the relief sought by Mrs M. The insurer’s decision to reject the claim was upheld, as it was made in line with the policy terms and conditions. Mrs M conceded that the property was not maintained. Her own version also suggested that the loss was not covered by the policy, as she attributed her loss to heavy rains (in the plural, meaning multiple events).

The insurer further demonstrated, relying on the assessor’s report, that the unmaintained roof was material to the loss. Consequently, the Osti could not fault the insurer’s stance. Mrs M’s contention that the insurer had not conducted any inspections was irrelevant, as the policy clearly stated that no cover would be provided where there is lack of maintenance.

The Osti pointed out to Mrs M that the terms of the policy governing the contractual relationship between the insurer and Mrs M did not require the insurer to assess the property before placing it on cover. It is the policyholder’s responsibility to ensure that the property is regularly maintained.

Lessons learned

Mrs M’s case illustrates that the mere fact that a policyholder pays a premium does not necessarily mean that all claims submitted will be accepted. An insurer is entitled to refute a claim where it can demonstrate, on a balance of probabilities, that the damage is attributable to the

whether the cause of the damage could be attributed to such a failure.

Even if an insured event, such as a storm or rain, did occur and caused water damage to the insured property, in certain instances, similar to Mrs M’s case, an insurer may justly repudiate such a claim. Should an insurer rely on a lack of maintenance to reject a claim, the insurer’s evidence would have to show on a balance of probabilities that the proximate cause of the damage was the lack of maintenance of the property. Such evidence can be in the form of a damage report and photographs.

Some policies include guidelines on how you can be sure that the insured property is maintained. You don't need to physically assess the property in person before purchase or attend to the maintenance; there are service providers that can do this on your behalf.

unmaintained condition of the property.

Depending on the type of policy, in the event of a claim, an insurer may appoint an expert to establish whether the policyholder discharged the responsibility of attending to the necessary maintenance and, if not,

Where maintenance has been carried out, it is advisable to request invoices from the service provider, containing a detailed description of the work done. Similarly, when purchasing property, one may request for an assessment to be carried out before purchase to ensure that the property does not have defects, and that where defects have been noted, they are rectified.

- Supplied by the Osti.

Even if an insured event, such as a storm or rain, did occur and caused water damage to the insured property, in certain instances, similar to Mrs M’s case, an insurer may justly repudiate such a claim.

AMPLIFY SCI WEALTH PROTECTOR FUND

Amplify Investment Partners is a CapeTown-based boutique investment firm headed by Marthinus van der Nest, which outsources the management of its seven unit trust funds and seven retail hedge funds to carefully chosen external fund managers.

The Amplify SCI Wealth Protector Fund is a low-equity multi-asset fund managed by Truffle Asset Management. It is aimed at investors who want an above-inflation return on their investment but need to protect their capital.

As of September 2022, the fund had the following asset allocation: SA cash 11.99%; SA bonds 35.42%, SA property 3.20%, SA equity 23.89%, non-SA cash 16.40%, nonSA bonds 6.16%, non-SA property 0.17%, and non-SA equity 2.77%.

At the end of the third quarter, the fund was leading its peers in the lowequity multi-asset sub-category over one, three and five years, boasting an annualised return of 9.98% over five years, two percentage points above its CPI+3% benchmark of 7.93% over that period.

In fact, over five years it had also outperformed all funds in the multi-asset medium-equity subcategory and all but a handful of funds in the crowded multi-asset high-equity and flexible subcategories.

Personal Finance put the following questions to Truffle Asset Management:

As a low-equity fund, aimed at risk-averse investors, what is your investment strategy regarding asset allocation and, within the equity

allocation, stock selection?

The primary focus of the Amplify SCI Wealth Protector fund as a low-equity fund is to generate the target return of CPI+3% while protecting capital over the short term (no negative returns over a rolling one-year period).

To achieve this objective, we build the portfolio from the bottom-up, where each security must at least meet or exceed the CPI+3% return hurdle on a risk-adjusted basis. We are active and agile through changing market cycles. Our asset allocation strategy means we stay mindful of changing risks and valuation opportunities across asset classes and that we actively manage the portfolio at a security level to ensure we consistently deliver to the stated objective.

PERFORMANCE SINCE INCEPTION

Amplify SCI Wealth Protector Fund Benchmark (CPI+3%) Multi-asset low-equity peer group average

Over the last decade Truffle has delivered consistent alpha in each asset class. The fund therefore benefits from the best selection of securities across all asset classes in addition to benefiting from each asset class’s risk premium.

A major competitive advantage of Truffle’s approach versus our peers is our focus on capital protection. Protecting capital during market drawdowns and dislocations through skilful security selection, portfolio construction and hedging has resulted in significant gains for our clients. The power of compounding off a higher base then becomes a major differentiator when market beta returns and risks subside.

To what do you attribute the fund's success in providing healthy returns at

low capital risk over the last five years? We attribute our success to our obsessive focus on understanding the downside risks and not losing capital. We recognise the fund’s return objective, and we are happy to take risk, but only where we feel we are being adequately compensated in the quality of returns achieved.

We rigorously stress-test the portfolios in our portfolio construction process to avoid exposure to unintended risks or shocks. This provides clients with an additional layer of protection in the fast-changing world and volatile financial markets.

This focus on the potential downside and understanding the downside risks of owning an asset is valuable in seeking out securities where we believe the returns are skewed to the upside (given higher upside outcomes).

How is the changing macro-economic environment, with higher inflation, higher interest rates and higher stockmarket volatility, plus a possible upcoming recession, affecting your management of and outlook for the fund?

Macro-economic forecasting is difficult to get correct with high frequency. While we have a sense of the current macroeconomic environment and potential scenarios and outcomes, we try to focus on valuation and what the market is currently pricing into assets.

We aim to hold a diversified portfolio of many uncorrelated and attractively valued securities (that is, trading at a discount to their intrinsic value). This tends to be a better predictor of long-term returns, rather than timing the economic cycle.

The year to date has certainly tested the resilience of investors, and there is no sign that the current market volatility is about to abate. While we anticipated that global imbalances would have to unwind at some point in time, there can be little doubt that the current upheaval is causing much discomfort for investors. Part of the unease arises from the fact that traditional safe havens are proving far less secure than previously thought: global bonds markets recently saw their first bear market in over forty years. It is quite sobering to think that a whole generation of bond investors have not experienced a global bond rout before.

As artificial as a snow globe?

After the Global Financial Crisis (GFC) in 2008/9, central bankers maintained easy monetary policy to stabilise a fragile financial system. When the Covid-19 pandemic happened in 2020, central bankers and governments responded by pouring further liquidity and fiscal stimulus into an ailing global economy. Access to easy money causes people to assess risk differently than they would when money is scarce, and, as it turned out, this time was no different.

In a sense, excess liquidity and artificially low interest rates had created something of an artificial environment. Think of this as the “snow globe”. Inside the easy cash, low interest rate snow globe risk and speculative assets thrived, while value strategies and short duration assets seemed dull, outdated and boring. Now that higher inflation rates and normalising interest rates are exerting pressure on the snow globe, the artificial bubble environment is starting to deflate and investors are realising it’s the dull, outdated and boring world outside that is actually real.

The unwinding of the imbalances built since the GFC was never likely to transpire smoothly, but volatility has been exacerbated further by stubborn inflation, geopolitical uncertainty, and

arguably the rise of the polycrisis environment. All of this has made for a rather difficult time for investors. Few reality checks ever turn out to be pleasant. Now, investors are facing the painful task of reassessing their investment strategies against the backdrop of an environment they were not designed to navigate.

Focus on the opportunities

Investors will be faced with the very real challenge of building wealth in an environment that has brought new challenges, most notably stubborn inflation and ongoing volatility. No wonder some are tempted to simply sit this out in cash, where inflation is sure to eat away at their wealth stealthily over time. In our view, this would be the wrong approach.

ON THE CONTRARY ACHIEVING INVESTMENT SUCCESS BEYOND THE SNOW GLOBE

We have a strong view that there are always opportunities in the market, provided that you look beyond the short-term noise and prevailing narratives. Ironically, these opportunities tend to appear at times like these, when expectations have been shaken to the core. The danger, however, is that investors rely on what has worked previously, when the snow globe is already a shattered relic of the past. Those who do not adapt their investment strategies to the new realities, may find their ability to grow wealth successfully into the future severely compromised.

To succeed, investors will not only have to uncover opportunities that are suited to an investment environment that looks very different to that of the past decade, but they will also need the conviction to pursue those opportunities despite high levels of discomfort and noise. In seeking to navigate the world beyond the snow globe successfully, investors would be well served to partner with differentiated thinkers who construct portfolios with long-term outcomes in mind and to ensure that their overall strategy includes a truly diversified opportunity set.

Anet Ahern is the CEO of PSG Asset Management.

DATABANK

WHERE TO GET HELP

With BANKING problems:

The Ombudsman for Banking Services is Reana Steyn.

ShareCall: 0860 800 900 or Telephone: 011 712 1800

Fax: 011 483 3212

Post: PO Box 87056, Houghton, 2041

Email: info@obssa.co.za

Website: www.obssa.co.za

With COMMUNITY-SCHEME-RELATED problems: The Community Schemes Ombud Service is a statutory dispute-resolution service for owners and residents of community schemes, including sectional-title schemes share-block companies, homeowners’ associations and schemes for retired persons. The Chief Ombud is Advocate Boyce Mkhize.

Telephone: 010 593 0533

Fax: 010 590 6154

Post: 63 Wierda Road East, Wierda Valley, Sandton, 2196

Email: info@csos.org.za

Website: www.csos.org.za

With CONSUMER-RELATED problems: The National Consumer Commissioner is Ebrahim Mohamed.

Toll-free: 0860 003 600

Telephone: (complaints) 012 428 7000 or (switchboard) 012 428 7726

Fax: 086 758 4990

Post: PO Box 36628, Menlo Park, 0102

Email: complaints@thencc.org.za

Website: www.thencc.gov.za

The Consumer Goods and Services Ombud is Magauta Mphahlele. This is a voluntary dispute-resolution scheme that only has jurisdiction over retailers, wholesalers and manufacturers that subscribe to the Consumer Goods and Services Industry Code of Conduct.

ShareCall: 0860 000 272

Fax: 086 206 1999

Post: PO Box 3815, Randburg, 2125

Email: info@cgso.org.za

Website: www.cgso.org.za

With CREDIT TRANSACTION problems: The Credit Ombud is Howard Gabriels.

MaxiCall: 0861 662 837

Telephone: 011 781 6431

Fax: 086 674 7414

Post: PO Box 805, Pinegowrie, 2123

Email: ombud@creditombud.org.za

Website: www.creditombud.org.za

With DEBT COUNSELLING problems: The National Credit Regulator also deals with disputes that are not resolved by the Credit Ombud. The Chief Executive Officer is Nomsa Motshegare.

ShareCall: 0860 627 627

Telephone: 011 554 2600

Fax: 011 554 2871

Post: PO Box 209, Halfway House, 1685

Email: complaints@ncr.org.za or (debt counselling complaints) dccomplaints@ncr.org.za

Website: www.ncr.org.za

With FIDUCIARY problems:

The Fiduciary Institute of Southern Africa (FISA) is a selfregulating body in fiduciary matters such as wills, trusts and estate planning.

Telephone: 082 449 2569

Post: PO Box 67027, Bryanston, 2021

Email: secretariat@fisa.net.za

Website: www.fisa.net.za

With FINANCIAL ADVICE problems:

The Ombud for Financial Services Providers is John Simpson.

Telephone: 012 470 9080 or 012 762 5000

Fax: 086 764 1422, 012 348 3447 or 012 470 9097

Post: PO Box 74571, Lynnwood Ridge, 0040

Email: info@faisombud.co.za

Website: www.faisombud.co.za

With INVESTMENT problems:

The Financial Sector Conduct Authority, which is headed by Dube Tshidi, regulates the financial services industry.

ShareCall: 0800 110 443 or 0800 202 087

Telephone: 012 428 8000

Fax: 012 346 6941

Post: PO Box 35655, Menlo Park, 0102

Email: info@fsb.co.za

Website: www.fsb.co.za

With LIFE ASSURANCE problems:

The Ombudsman for Long-term Insurance is Judge Ron McLaren.

ShareCall: 0860 103 236 or Telephone: 021 657 5000

Fax: 021 674 0951

Post: Private Bag X45, Claremont, 7735

Email: info@ombud.co.za

Website: www.ombud.co.za

With MEDICAL SCHEME problems:

The Council for Medical Schemes is a statutory body that supervises medical schemes. The Registrar of Medical Schemes is Dr Sipho Kabane.

MaxiCall: 0861 123 267

Fax: (enquiries) 012 430 7644 or (complaints) 086 673 2466

Post: Private Bag X34, Hatfield, 0028

Email: complaints@medicalschemes.com or information@medicalschemes.com

Website: www.medicalschemes.com

With MOTOR VEHICLE problems: The Motor Industry Ombudsman of South Africa is an independent institution that resolves disputes between the motor and related industries and their customers. The Ombudsman is Johan van Vreden.

MaxiCall: 0861 164 672

Fax: 086 630 6141

Post: Suite 156, Private Bag X025, Lynnwood Ridge, 0040

Email: info@miosa.co.za

Website: www.miosa.co.za

With RETIREMENT FUND problems:

The Pension Funds Adjudicator is Muvhango Lukhaimane.

ShareCall: 0860 662 837

Telephone: 012 748 4000 or 012 346 1738

Fax: 086 693 7472

Post: PO Box 580. Menlyn, 0063

Email: enquiries@pfa.org.za

Website: www.pfa.org.za

With SHORT-TERM INSURANCE problems: The Ombudsman for Short-term Insurance is Judge Ron McLaren.

ShareCall: 0860 726 890 or Telephone: 011 726 8900

Fax: 011 726 5501

Post: PO Box 32334, Braamfontein, 2017

Email: info@osti.co.za

Website: www.osti.co.za

With TAX problems: The Tax Ombud is Judge Bernard Ngoepe.

ShareCall: 0800 662 837 or Telephone: 012 431 9105

Fax: 012 452 5013

Post: PO Box 12314, Hatfield, 0028

Email: complaints@taxombud.gov.za

Website: www.taxombud.gov.za

PLEXCROWN RANKING OF MANAGEMENT COMPANIES

DOMESTIC MANAGEMENT

PERFORMANCE OF DOMESTIC SUB-CATEGORIES TO 30 SEPTEMBER 2022

PERFORMANCE OF OFFSHORE SUB-CATEGORIES TO 30 SEPTEMBER 2022

PERFORMANCE OF DOMESTIC FUNDS TO 30 SEPTEMBER 2022

PERFORMANCE OF OFFSHORE FUNDS TO TO 30 SEPTEMBER 2022

WHAT DO THE PLEXCROWN FUND RATINGS TELL YOU?

The last column in the collective investment scheme performance tables on pages 50 to 61 shows the PlexCrown rating of a fund if it qualifies for a rating. The PlexCrown Fund Ratings system encompasses the different quantitative measures used in calculating investment performances in one number and makes it easy for investors to evaluate fund managers on the basis of their long-term risk-adjusted returns.

The PlexCrown Fund Ratings enable investors to know at a glance how a unit trust fund has fared over time on a risk-adjusted return basis, compared with the other funds in its Association for Savings & Investment SA subcategory. Therefore, the ratings assist investors in determining whether or not a fund manager is adding value to their unit trust investments, given the manager’s mandate and the amount of risk he or she is taking.

The PlexCrown Fund Ratings are unbiased and objective because they are based on quantitative measures; no

subjectivity is brought into the research methodology.

In calculating risk-adjusted returns, the methodology accepts that various quantitative formulae each have their unique drawbacks. In order to overcome this, up to five different risk measures are used:

• Total risk (Sharpe Ratio);

• Downside risk (Sortino Ratio and Omega Risk/Reward Measure); and

• Manager’s skill (Jensen’s Alpha and Treynor).

The research method ensures that the unit trust funds under evaluation are exposed to similar risks; therefore, the subcategories for unclassified funds and money market funds are excluded.

The PlexCrown rating system is a measure of consistency because ratings are done over three and five years and are time weighted, with the emphasis on the longer period of measurement. Funds within a unit trust subcategory are ranked only if there are at least five funds in that subcategory with a

track record of at least five years. To qualify for a rating, a fund must have an official track record of at least five years.

Each qualifying unit trust fund is awarded a certain number of PlexCrowns ranging from one to five, with the top-performing funds allocated the highest rating of five.

The PlexCrown ratings distinguish between poor performers and excellent performers, but are based on historical data and should be used only as a first step in the construction of a unit trust portfolio. It remains the responsibility of investors together with their financial advisers, to make sure that the funds they choose suit their risk profiles and that their investment plans include an appropriate level of diversification.

Visit www.plexcrown.com for a full description of the PlexCrown Fund Ratings system.

Information in the above tables was provided by PlexCrown Fund Ratings and ProfileData

COLLECTIVE INVESTMENT SCHEME PERFORMANCE TO 30 SEPTEMBER 2022

ABOUT THE LISTINGS

• Results are based on the performance of a lump-sum investment over four periods that ended on 30 SEPTEMBER, 2022. In each of the periods, there is a percentage (to two decimal places) by which an investment would have grown or shrunk, and the fund’s position or rank relative to other funds.

• Returns for the three- and five-year periods are annualised (that is, the percentage represents the average performance in a year). As unit trust funds are medium- to long-term investments, the most important performance periods are those of three years or longer.

• INITIAL COSTS have not been taken into account and can have an effect on returns.

• ANNUAL MANAGEMENT FEES are included in the returns.

• DIVIDENDS have been reinvested on the ex-dividend date (the day after they are declared) at the price at which the units are sold to you.

• INDICES normally supplied as benchmarks reflect percentage changes and take into account dividends and interest. In the case of new indices, a history is not yet available.

• The PLEXCROWN RATING indicates how a fund has fared over time compared with the other funds in its subcategory on a risk-adjusted return basis. Turn to page 57 for more information about the ratings.

WHAT DOES THE * INDICATE?

The asterisk (*) before a fund’s name indicates that the fund complies with the investment requirements of Regulation 28 of the Pension Funds Act. Funds suitable for retirement savings must comply with Regulation 28, which lays down guidelines about Inv. in different categories of assets. To reduce the risk and volatility of a fund, the Act restricts exposure to equities to a maximum of 75 percent of the fund and its exposure to property to 25 percent.

HOW FUNDS ARE CLASSIFIED

The Association for Savings & Investment SA’s classification system categorises unit trust funds according to their investment universe: where they invest, what they invest in and their main investment focus.

The first tier of the classification system categorises funds as South African, global, worldwide or regional.

South African funds must invest at least 70 percent of their assets in South African investment markets at all times. They may invest a maximum of 25 percent in foreign markets and a maximum of five percent in African (excluding South African) markets.

Global funds must invest a minimum of 80 percent of their assets outside SA. Worldwide funds do not have any restrictions on where they may invest but they typically allocate between South African and foreign markets in line with the manager’s outlook for local versus foreign assets.

Regional funds must invest at least 80 percent of their assets in a specific geographic region, such as Asia or Africa, excluding South Africa, or a country such as the United States. Regional funds may invest a maximum of 20 percent of their assets in South Africa.

The second tier of the classification system categorises funds according to the asset class in which they predominantly invest. At this level, funds are categorised as equity funds, interest-bearing funds, real estate funds or multi-asset funds.

Equity funds must invest at least 80 percent of the net asset value of a fund.

Interest-bearing funds invest in bonds, fixed interest and money-market instruments.

Real estate funds must invest at least 80 percent of their assets in shares in the real estate sector of the JSE or a similar sector of an international stock exchange. A fund may invest a maximum of 10 percent in property shares that are not classified in the real estate sector.

Multi-asset funds save you the trouble of deciding how to allocate your assets between shares, bonds, property or cash. The managers of multi-asset funds decide, for you, which asset classes they believe will produce the best returns and then, within those classes, which securities will perform the best. Some funds have a fixed allocation to the different asset classes whereas others change the mix of asset classes in line with their views of how the different classes or securities will perform.

MONEY MARKET YIELDS

The third tier of the classification system categorises funds according to their main investment focus.

WHAT DOES THE ‘R’ OR ‘A’ MEAN?

These indicate the annual management fees a unit trust company can charge and depend partly on the class of units you buy.

Before June 1998, the fees charged on funds were regulated with a maximum annual management fee of one percent a year plus VAT. Funds launched before this date have the letter “R” behind the fund name and can only change their fees after a ballot of all unit trust holders. Many unit trust companies have closed their “R” class funds to new investments and launched new fund classes.

Funds and fund classes launched after June 1998 can charge any fees. Typically, fees range from 0.25 percent to 2 percent, excluding VAT. Funds with unregulated fees can be “A”, “B”, “C” or “D” class funds.

Typically, “A” class funds are offered to retail investors while cheaper “B” class funds are for institutional investors who invest in bulk. Only the institutional funds available to you through a linked-investment services provider (Lisp) are published here.

The different classes of a single fund are managed collectively and the difference in performance between them is purely a result of the difference in management fees.

Most recently what are known as all-in-fee classes (“C” or “D” classes) have been introduced. These funds charge a single fee covering the management fee, the broker fee and the administration (or Lisp) fee.

Performance figures supplied by ProfileData

Telephone: 011 728 5510

Email: unittrust@profile.co.za

Website: www.fundsdata.co.za

Disclaimer: Although all reasonable efforts have been made to publish the correct data, neither ProfileData nor Personal Finance can guarantee the accuracy of the information on the unit trust fund performance pages.

EQUITY

GLOBAL INTEREST-BEARING

TAXES AND DEDUCTIONS FOR THE 2022/23 TAX YEAR

INCOME TAX RATES FOR INDIVIDUALS AND SPECIAL TRUSTS*

the benefit of disabled people and testamentary trusts established for the benefit of minor children. All other trusts pay income tax at a flat rate of 45%.

DEDUCTIONS FOR RETIREMENT FUND CONTRIBUTIONS

Amounts contributed to pension, provident and retirement annuity (RA) funds are deductible by fund members. Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employee. The deduction is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). The deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain. Any contributions that exceed the limits are carried forward to the next tax year and deemed to be contributed in that year. The amounts carried forward are reduced by contributions set off when determining taxable retirement fund lump sums or RAs.

DEDUCTIONS FOR MEDICAL AND DISABILITY EXPENSES

All taxpayers: If you contribute to a medical scheme, you are entitled to a tax rebate (referred to as a medical scheme contributions tax credit) of up to R347 each for the individual who paid the contributions and the first dependant on the medical scheme and up to R234 a month for each additional dependant.

Additional tax credit for taxpayers under 65 years: You are entitled to a tax credit of 25% of an amount equal to your qualifying medical expenses plus an amount by which your medical scheme contributions exceed four times the medical scheme contribution tax credit for the tax year, limited to the amount that exceeds 7.5% of taxable income (excluding severance or retirement fund lump sums).

Additional tax credit for taxpayers with a disability and/or with a disabled family member or taxpayers over 65 years: You are entitled to a tax credit of 33.3% of your qualifying medical expenses plus 33.3% of the amount by which your medical scheme contributions exceed three times the medical scheme contribution tax credit for the tax year.

TAX ON LOCAL AND FOREIGN DIVIDENDS

Dividends received by individuals from South African companies are generally exempt from income tax, but dividends tax at a rate of 20% is withheld by the entities paying the dividends to individuals. Dividends received by resident individuals from real estate investment trusts (Reits) are subject to income tax. Non-residents in receipt of those dividends are subject only to dividends tax. Most foreign dividends received by individuals from foreign companies (a shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 20%.

CALCULATE REAL AFTER-TAX RETURNS ON INTEREST-BEARING INVESTMENTS

CPI INFLATION RATE: 7.5% IN SEPTEMBER 2022

PROVISIONAL TAX

A provisional taxpayer is any person who earns income by way of remuneration from an unregistered employer income that is not remuneration or an allowance or an advance payable by his or her employer. You are exempt from the payment of provisional tax if you do not carry on any business and your taxable income:

• Will not exceed the tax threshold for the tax year; or

• From interest, dividends, foreign dividends and the rental of fixed property and remuneration from an unregistered employer will be R30 000 or less for the tax year.

Deceased estates are not provisional taxpayers.

CAPITAL GAINS TAX

INCLUSION RATES

• Individuals special trusts and individual policyholder funds: 40% • Other taxpayers: 80%

MAXIMUM EFFECTIVE RATES

• Individuals and special trusts: 18%

• Other trusts: 36% • Companies: 22.4%

SOME OF THE EXCLUSIONS

• R2 million gain/loss on disposal of primary residence

• Annual exclusion of R40 000 to individuals and special trusts

• R300 000 in the year of death (instead of the annual exclusion)

• Retirement benefits

• Most personal use assets

• Payments in respect of original long-term insurance policies

• R1.8 million for individuals (at least 55 years of age) when a small business with a market value that does not exceed R10 million is disposed of.

ESTATE DUTY

Rate: 20% on the first R30m; 25% on estates above R30m. Amounts in an estate up to R3.5m are not taxed. For the second-dying spouse, amounts up to R7m less the exemption used by the first-dying spouse are not taxed.

TAX-FREE SAVINGS ACCOUNTS

No income tax on interest, dividends withholding tax or capital gains tax. Contributions are limited to R36 000 a year, up to R500 000 over your lifetime. Contributions that exceed the limits will be taxed at 40%.

DONATIONS TAX

• Donations tax payable by the donor is levied at a rate of 20% on property donated with a value up to R30 million. The rate on property with a value of more than R30 million is 25%.

• The first R100 000 of property donated in each year to a natural person is exempt from donations tax.

The real rate of return on money you invest is affected not only by inflation, but also by the rate at which you are taxed. The lower the inflation rate, the better your real rate of interest is likely to be. To calculate your real return, first work out what your after-tax return will be and then subtract the inflation rate. The table provides the marginal tax brackets and the interest rates at which you will start to receive a real (after-tax) rate of return on your money if it is taxed at that rate. The calculations ignore the fact that in the 2020/21 tax year, the first R23 800 (R34 500 if you are over 65 years of age) you earn in interest is tax-free. Any interest you receive above the exempt amount is taxed at your marginal tax rate.

• Donations between spouses are exempt from donations tax.

• Tax deductions on donations to approved public benefit organisations are limited to 10% of taxable income before deducting medical expenses (excluding retirement fund lump sums and severance benefits).

RETIREMENT FUND LUMP-SUM WITHDRAWAL BENEFITS

LUMP SUM RATE OF TAX

R0 to R25 000 0% of taxable income

R25 001 to R660 000 18% of taxable income above R25 000

R660 001 to R990 000 R114 300 plus 27% of taxable income above R660 000 R990 001 and above R203 400 plus 36% of taxable income above R990 000

Retirement fund lump-sum withdrawal benefits consist of lump sums from a pension, pension preservation provident, provident preservation or retirement annuity fund on withdrawal (including assignment in terms of a divorce order).

The tax on a retirement fund lump-sum withdrawal benefit (X) is equal to:

• The tax determined by applying the tax table to the aggregate of lump sum X plus all other retirement fund lump-sum withdrawal benefits accruing from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lump-sum withdrawal benefits accruing before lump-sum X from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011.

RETIREMENT FUND LUMP-SUM BENEFITS OR SEVERANCE BENEFITS

LUMP

SUM

to R500 000

R500 001 to R700 000 18% of taxable income above R500 000 R700 001 to R1 050 000 R36 000 plus 27% of taxable income above R700 000 R1 050 001 plus R130 500 plus 36% of taxable income above R1 050 000

Retirement fund lump-sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death retirement or termination of employment due to attaining the age of 55 sickness accident injury incapacity redundancy or termination of the employer’s trade.

Severance benefits consist of lump sums from or by arrangement with an employer due to relinquishment, termination, loss, repudiation, cancellation or variation of a person’s office or employment.

Tax on a retirement fund lump-sum benefit or a severance benefit (Y) is equal to:

• The tax determined by applying the tax table to the aggregate of lump-sum or severance benefit Y plus all other retirement fund lump-sum benefits accruing from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all other severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lumpsum benefits accruing before lump-sum Y from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all severance benefits accruing before severance benefit Y from March 2011.

TRANSFER DUTY RATES

SARS INTEREST RATES

RATES OF INTEREST FROM 1 FEBRUARY 2022:

Fringe benefits - interest-free or low-interest loan (official rate): 5% a year

RATES OF INTEREST FROM 1 MARCH 2022:

Late or underpayment of tax: 7.25% a year

Refund of overpayment of provisional tax: 3.25% a year

Refund of tax on successful appeal or where the appeal was conceded by SARS: 7.25% a year.

Refund of VAT or late payment of VAT: 7.25%

WHO DOES NOT HAVE TO SUBMIT A TAX RETURN?

You do not have to submit a return if: your total pre-tax earnings from one employer were less than R500 000 for the tax year, you have no other sources of income (for example rental or interest) and there are no deductions that you want to claim.

TRAVELLING ALLOWANCES

Rates per kilometre, which may be used in determining the allowable deduction for business travel against an allowance or advance where actual costs are not claimed, are determined by using the following table:

Note:

• 80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

• No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (for example the vehicle is covered by a maintenance plan).

• The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

• The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a logbook are used to determine the costs that may be claimed against a travelling allowance.

Alternative simplified method:

Where an allowance or advance is based on the actual distance travelled by the employee for business purposes no tax is payable on an allowance by an employer to an employee up to the rate of 418 cents per kilometre regardless of the value of the vehicle. However, this alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle.

FRINGE BENEFITS: EMPLOYER-OWNED VEHICLES

• The taxable value is 3.5% of the determined value (the cash value including VAT) a month of each vehicle. Where the vehicle is:

– The subject of a maintenance plan when the employer acquired the vehicle, the taxable value is 3.25% of the determined value; or

– Acquired by the employer under an operating lease, the taxable value is the cost incurred by the employer under the operating lease plus the cost of fuel.

• 80% of the fringe benefit must be included in the employee’s remuneration for the purpose of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the vehicle for the tax year is for business purposes.

• On assessment the fringe benefit for the tax year is reduced by the ratio of the distance travelled for business purposes (substantiated by a logbook) divided by the actual distance travelled during the tax year.

• On assessment further relief is available for the cost of the licence, insurance, maintenance and fuel for private travel if the employee has borne the full cost thereof and if the distance travelled for private purposes is substantiated by a logbook.

SUBSISTENCE ALLOWANCES AND ADVANCES

If you are obliged to spend at least one night away from your usual place of residence on business and you receive an allowance or advance for accommodation in South Africa, which is to pay for:

• Meals and incidental costs: R493 a day is deemed to have been spent; or

• Incidental costs only: R152 for each day is deemed to have been spent. Where the allowance or advance is for accommodation outside South Africa, a specific amount per country is deemed to have been spent. Refer to www.sars.gov.za > Legal counsel > Secondary legislation > Income tax notices > 2022.

TURNOVER

FOR MICRO BUSINESSES

ANNUITY RATES

Rates valid for November 1, 2022. Information supplied by the relevant life assurance companies.

COMPULSORY ANNUITIES

ABOUT THE TABLES

These tables show initial monthly pensions guaranteed for 10 years and then for life if, at the ages listed, you buy a life annuity (see definition below) with R1 million. In these tables. the amount escalates at a rate of 6 percent a year.

WHAT IS AN ANNUITY?

An annuity is a payment you receive annually. The life assurance industry has adapted the word to mean any amount you receive regularly (normally monthly) from an investment, usually in the form of a pension, when you retire.

COMPULSORY PURCHASE ANNUITY

VOLUNTARY ANNUITIES

COMPULSORY JOINT LIFE AND SURVIVORSHIP ANNUITIES

This must be bought with at least two-thirds of the benefits you receive from your pension fund or retirement annuity when you retire (provident funds are excluded from this requirement). If you are a member of a defined-benefit pension fund, the annuity is normally provided to you without any choice.

VOLUNTARY ANNUITY

This is an investment you choose to make with a lump sum from any source. With voluntary annuities, you can invest for a fixed period. For example, for 10 years – or for life. Note that compulsory and voluntary annuities are taxed differently, both on the investment itself and on your income from it. This is because you buy a compulsory annuity with pre-tax savings whereas you buy a voluntary annuity with after-tax savings.

TRADITIONAL (LIFE) ANNUITY

VOLUNTARY JOINT LIFE AND SURVIVORSHIP ANNUITIES

You buy this type of annuity from a life assurance company. You are guaranteed a fixed income for life, which may or may not escalate annually at a certain rate, depending on whether you have a level or escalating annuity. In the initial years, you will receive less from an escalating annuity than from a level annuity but the level annuity will be eroded over the years by inflation. Because the life assurance company takes on your longevity risk, your investment normally dies with you. You can, however, buy an annuity “guaranteed for X years and then for life”, which means your nominated heir will receive the income if you die before the X years are up. After X years, the annuity dies with you. Joint life annuities are based on a pension being paid to the surviving spouse after the death of his or her partner.

LIVING (INVESTMENT-LINKED) ANNUITY

You buy this type of annuity from an asset manager and can choose the underlying Inv. You must decide each year how much of your investment you want to draw down as a pension with a minimum of 2.5 percent and a maximum of 17.5 percent. When you die, what is left of your investment is passed on to your heirs. However, you take the risk of outliving your capital.

OFFSHORE ALLOWANCES

HOW MUCH YOU CAN TAKE OUT OF SOUTH AFRICA

Offshore investment allowance: R10 million each year

Discretionary allowance for adults: R1 million each year

Travel allowance for children under 18: R200 000 each year

The tax on international air travel is R190 per passenger or R100 for flights to Southern African Customs Union countries.