It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Investment Survey – Market Value Funds – South Africa, February 2012

Investment Survey – Market Value Funds – Namibia, February 2012

The purpose of this brief note is to highlight the proposals mentioned in the Budget Speech and Budget Review document of 22 February 2012 which have an impact on the Retirement Fund and Healthcare Industries. The main points are:

A. Retirement funding and savings

From 1 March 2014 major changes to tax treatment of contributions to retirement funds.

1. Major changes to the tax treatment of contributions to retirement funds are to take effect in 2014 and not from 1 March 2012 as mentioned in last year’s Budget.
2. From 1 March 2014 an employer’s contribution will be deemed to be a taxable fringe benefit and individuals will be allowed to deduct up to 22.5% (persons younger than 45) and 27.5% (persons 45 years and older) of the higher of their taxable income or employment income, for contributions to pension, provident and retirement annuity funds, with a minimum annual deduction of R20 000. The maximum annual deduction will be R250 000 for taxpayers younger than 45 and R300 000 for taxpayers older than 45. Contributions in respect of risk benefits and administration costs within retirement savings will be included in the maximum allowable deduction. It is pleasing to note that Industry recommendations have been taken into account by allowing higher deductions for older taxpayers.
3. Non-deductible contributions (in excess of the thresholds) will be exempt from income tax if they are taken as part of the lump sum or as annuity income upon retirement.
4. Lump sum withdrawals on retirement from pension and retirement annuity funds are currently restricted to a maximum of one-third of accumulated savings. Members of provident funds may currently access their total benefit on withdrawal or retirement. Consultations will be held with interested parties on a consistent approach to retirement fund withdrawals.
5. To encourage voluntary savings, consideration is being given to the introduction of tax-exempt short and medium-term savings products. The proposal is that individuals should be permitted to save up to R30 000 a year, with a lifetime limit of R500 000, in registered savings or investment products that would be free of tax on interest, dividends or capital gains. The current tax free interest income thresholds will be reviewed and possibly phased out as part of this reform. A discussion document will be introduced by May 2012.
6. False Job Terminations: Employees cannot withdraw funds from employer- provided retirement schemes before retirement unless an employee terminates employment with that employer. In some instances employees terminate their employment solely to gain access to employer-provided retirement funds only to be rehired by the same employer shortly thereafter. False job termination of an employee solely to gain access to employer provided retirement funds is not allowed.
7. Measures to address the complexity of Defined Benefit Funds will also be considered. This relates to point 2 above and again reflects that Treasury has taken cognizance of Industry recommendations.
8. The labour department will establish retirement funds for domestic and farm workers by March 2013.
9. There is a proposed increase in the means test for Social Old Age Pension encouraging lower earners to save for retirement.

B. Dividends tax

1. The secondary tax on companies will be terminated on 31 March 2012 and a withholding tax on dividends will be implemented on 1 April 2012. This will align South Africa’s tax treatment of dividends with that in most other countries. Pension funds will benefit from this transition as they will receive dividends tax free. The dividend tax will be introduced at 15 per cent, which is 50% higher than the 10% that was initially expected.

C. Financial sector development

Discussion papers will be released this year on reforming the retirement industry.

1. A revised financial sector charter code will be gazetted shortly for public comment by the Minister of Trade and Industry.
2. More appropriate and balanced capital adequacy and liquidity standards are being phased in for banks, and similar reforms are planned for the insurance sector.
3. There is intention to shift towards a twin peaks system for financial regulation, where prudential is separated from market conduct supervision of the financial sector. Consultations will continue during 2012, with a view to tabling legislation in early 2013.
4. Discussion papers will be released this year on promoting household savings and reforming the retirement industry. Consultation with the industry, employers and trade unions will take place on these reforms. Among the issues is improved governance over pension funds, including more effective interventions to eliminate corruption and fraud and ways to improve preservation of retirement fund assets to ensure higher levels of income in retirement. The main proposal remains to establish a mandatory statutory fund to provide pensions, life insurance and disability benefits.
5. Fees for many products in the financial sector remain too high. High costs in savings products undermine the national objective of getting people to save more. The financial industry must take more urgent steps to reduce costs and introduce more appropriate and transparent saving and investment products, including annuities. There is also much to be done to improve market conduct practices in the financial sector. The “treating customers fairly” initiative will be accelerated to protect customers more vigorously.

D. Medical deductions converted to medical tax credits

A system of medical tax credits will be introduced from 1 March 2012.

Introduction of Medical Tax Credits in March 2012

One of the most interesting changes to taxation legislation to be implemented in the 2012/2013 tax year is the change in treatment of medical scheme contributions. Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. It was contended that these monthly deductions were more rewarding to wealthier taxpayers.

As an example, if you pay tax at a rate of 40%, your medical tax benefit is 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only receives (R720 x 18%= R129).

The new system ensures the same monetary benefit to everyone in the form of tax credits. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income).

The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.

Tax credit system for the 2012/2013 tax year

E. Funding for National Health Insurance

National Health Insurance is to be phased in over a 14 year period beginning in 2012/2013.

1. National Health Insurance is to be phased in over a 14 year period beginning in 2012/13. Over the medium term, general taxes will remain the primary financing mechanism for the public health system and national health insurance pilot projects. Over the longer term, new sources of financing will be required to fill the funding gap associated with improved access to more comprehensive health services.
2. Funding options could include a payroll tax (payable by both employees and employers), a higher value-added tax (VAT) rate or a surcharge on taxable income, or some combination of these.
3. It is expected that an additional revenue source will be needed in 2014/15 amounting to about R6 billion in that year, which is not currently provided for in the Medium Term Expenditure Framework (MTEF).
4. A discussion paper will be published by end April 2012.

Adri du Plessis

Legal and Compliance Manager

It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Investment Survey – Market Value Funds – South Africa, January 2012

Investment Survey – Market Value Funds – Namibia, January 2012

It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Investment Survey – Market Value Funds – South Africa, December 2011

Investment Survey – Market Value Funds – Namibia, December 2011

It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Fully Vesting Guaranteed Funds Survey – Group Products – December 2011

It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Investment Survey – Market Value Funds – South Africa, October 2011

Investment Survey – Market Value Funds – Namibia, October 2011

Overview of Industry: Recent and Future Developments: Wanjiru Kirima: Group Principal Officer for Firstrand Group of Companies

Ms Kirima highlighted the establishment of the Principal Officer’s Association (POA) as a step towards the professionalization of the industry. The POA regularly meets to debate problems and developments within the South African pension industry. Its goal is to empower trustees and principal officers to contribute to the industry as effectively as possible. To this end, the POA also engages with international retirement organisations to discuss global issues affecting the industry.

Regulation 28 and PF 130: Wilma Mokupo: Head of Pensions Prudential Supervision Division of Financial Services Board (FSB) and panellists:

• Michael Prinsloo: Head of Employee Benefits Consulting Strategy, Alexander Forbes Financial Services.
• Mark de Klerk: Vice Chairperson of the Principal Officers Association and Senior Manager, Retirement Funds at Anglo American Platinum.

Ms Mokupo provided an overview of Regulation 28, its history and the motivation behind the recent changes. The panel discussion further affirmed that the recent changes to Regulation 28 and PF 130 are in the best interests of the members of retirement funds and provide for improved transparency with respect to investments. Their recommendation was that trustees should therefore be proactive in complying with the requirements of PF 130.

Insight from the Johannesburg Stock Exchange: Exchange Traded Products and Environmental Social Governance: Greg Volkwyn: Journalist, and panellists:

• Leanne Parsons: Chief Operating Officer and Head of Equity Market JSE.
• Corli le Roux: Legal Counsel/ Head of SRI Index, JSE.

The panel focussed on how Exchange Traded Funds (ETF’s) and Exchange Traded Notes (ETN’s) operate, their use in passive investment strategies and their advantages. There was also a discussion on the Social Responsible Investment (SRI) Index and the need for investors to incorporate environmental, social and governance factors in their analysis of companies.

Alternative Investments: Hedge Funds, Gold, Private Equity and Convertible Bonds: Cobie Legrange, Analyst at Acsis Limited and panellists:

• Jean Pierre Mathews: CFA, Managing Director PSG Absolute Investments.
• Dr Vladimir Nedeljkovic: Principal Head: Investments ABSA Capital.
• Emile du Toit: Harith Fund Managers, Head of PAIDF.
• Simon Koch: Founding Partner of Sovereignty Capital.

Various investment opportunities within the South African market were debated, including:

• Hedge funds, their relative risks and lack of correlation with the stock market.
• Private equity as unlisted investments with a long term investment horizon and a predefined exit strategy.
• New Gold ETF, which is listed on the JSE but is backed by physical gold.
• Convertible bonds which are issued with a defined period and conversion price/rate and are traded over the counter (OTC).

The Role of a Default Portfolio in a Member Investment Choice Environment: Greg Volkwyn and panellists:

• Willem le Roux: Investment Consultant and Actuary, Simeka Consultants and Actuaries.
• Fagmeedah Petersen Lurie: Independent Actuary, Pension Governance Investment.

The panel provided statistics as well as anecdotal evidence regarding the important role that the selection of the default portfolio plays within the individual member choice environment. Conservatively, over 75% of members invest in the default portfolio selected by the trustees, making the selection of the default portfolio the most important decision made by trustees when establishing an individual member choice structure.

Insight from National Treasury: Safeguarding Pensioners through preservation, portability and proper governance: Olano Makhubela, Chief Director: Financial Investments and Savings National Treasury, and Alex Burn

The government is considering introducing compulsory preservation on withdrawal from retirement funds. South Africans generally retire with vastly insufficient retirement savings; the major reason for this is the tendency for members to withdraw benefits when switching employers before retirement age. Mr Makhubela stated that compulsory preservation may be subject to some needs-based exceptions, such as life-saving medical procedures, but would be strictly enforced otherwise. He emphasised, however, that National Treasury is open to comments and interaction from the industry regarding pension preservation before this proposal is formalised.

Balanced vs Specialist Mandates: Sara Herbert: Head Investment Consulting, JMCA and panellists:

• Geoff Blunt: CEO, Cannon Asset Managers.
• Chris Freund: Balanced Fund Portfolio Manager, Investec Asset Management.
• Steve Roberts: Joint Managing Director, Taquanta Asset Managers.

Pension funds have the option of investing in balanced funds, where the investment house manages the allocation to different asset classes. The alternative is to employ a number of managers specialising in a certain asset class and have the trustees or their advisors manage the allocation between these managers. The panel considered factors such as diverse skill sets, costs and portfolio construction in evaluating these options. The importance of active asset allocation was highlighted and the challenge of how asset allocation can efficiently be implemented under a specialist approach was discussed. The role of multi-managers, making the specialist approach accessible to smaller funds, was debated, as well as the difficulties facing small emerging “boutique” managers in a balanced world.

Performance as a Manager Selection Criterion: Hildegard Wilson: Consultant, JMCA, and panellists:

• Johan de Waal: Principal Officer of Impala Platinum Funds and Director of the POA.
• Prof Bootha: Director of the School of Accounting, North West University.
• Dinesh Munu: Partner, Deloitte Retirement Funds Leader.

Using past performance as a manager selection criterion is a dangerous approach that can lead to chasing market returns and significantly underperforming over time. The panel considered situations in which the consideration of past performance is applicable, for example, situations in which past performance highlights the investment style of a manager, or situations in which the style of the manager can be used to rationalise underperformance in the past. It was agreed that past performance is not a reliable indicator of future performance and, in order to select a manager, other criteria such as the skills, processes, philosophies and systems of the portfolio manager should be considered in more detail.

JMCA received very positive feedback from the trustees who attended the conference. In a DC environment, the investments of the fund constitute the most important decision that trustees make on behalf of their members. We welcome the efforts of the JSE to empower and train trustees on this subject, and hope that the conference will be repeated in future years and brought to other cities in due course.

[The conference was filmed and we expect that some or all of the presentations will be made available for download. We will inform you once they become available.]

Chinell Lehmann

Investment Specialist

In our view, a regular market survey of administration providers is essential for a well governed fund. Switching administrators is onerous and should only be done after very careful consideration. However, if a significant shortcoming is identified and raised with the current provider and is not addressed, a move may become necessary to ensure that the members’ best interests are served.

In this case, Trustees need to consider how they can best measure and compare the capabilities of various administrators when deciding on who to appoint.

The Traditional Process of Appointing a New Administrator

Quotations are requested in the market. Usually, large companies with well-established brands are invited to quote. A brand however does not necessarily guarantee excellence, as many a fund has found to their disappointment.

The tenders submitted are often full of jargon which the average trustee finds confusing. The IT jargon accompanying new state-of-the-art administration systems further complicates matters.

All the quotations are then analyzed and a shortlist is produced. These shortlisted providers are then requested to present to the Board of Trustees.

In many instances cost is the first and foremost criterion considered in the decision as to who should be appointed. The administrator who quoted the lowest cost usually features prominently and is very likely to get the business at the end of the day.

Breaking with Tradition

• Consider an open tender rather than hand picking participants. This way the bias towards known brands can be reduced.
• Be very specific when stating your requirements: the number of members, types of benefits, asset size and salaries, number of meetings per year, and any other requirements, should be stated upfront. Details such as any fund reserve accounts, the requirements in terms of investment strategy and the manner in which returns are to be allocated to members should also be mentioned.
• It is often useful for the trustees to meet with their advisors prior to the presentations by shortlisted candidates. This meeting should focus on how the presentations should be interpreted, what sort of questions should be raised, and what is important and not important to look out for in the presentation.
• Each administrator will ensure that the person doing their presentation is a good marketer. Beware of slick salesman promising the earth. Rather request that the person who will actually be responsible for administering the fund be present and meet them. This person will be the trustees’ main point of contact and the success of the appointment will depend on their ability to relate to you.
• Credentials: Trustees should ask not only “How many funds did you lose in the last three years?” but also “How much business have you gained in the last three years?” A number of administrators in the industry are really struggling to cope with all their new business and are losing some of their established clients as a result.
• References: Ask for a list of current clients rather than for references. Then select a few of the current clients at random for references.
• Check that the “state of the art” system really works in practise. How difficult is it to register a member on the website? Is it easy to log-on? How long does the member password remain active? It goes without saying that internet capability with members having access to their individual benefit records is a must, but few of these systems actually work well in practice.
• Will the new administrator come to train the members of the fund to use their internet facility? Remember that staff come and go. How often will new staff be trained?
• Investigate what services are excluded from the quoted fee. Is attendance at trustee meetings included? Are meetings with HR staff included? Do they prepare the Rules and Amendments as part of the service? The Service Level Agreement should be scrutinized for “hidden” costs and services not included in the admin fee.
• Retirement Funds are audited annually and the financial statements of each fund must be approved by the Financial Services Board. Ask the administrator who the major audit firms are that audit the funds under their administration. Then contact each of them for an opinion. Auditors may not always be willing to give such a reference, but if they do, it may be very useful in evaluating the provider.

The process of changing an administrator is onerous and should not be undertaken lightly. Once a board decides that a change is needed, it is therefore essential that the right questions are asked to ensure the best provider is chosen. One way to make sure that no stone is left unturned is to enlist the help of an independent professional consulting firm not biased towards any one administrator.

We have assisted many funds with such investigations, drawing both on our experience in the industry and on the views of our actuarial team. Actuaries interact with administrators on a regular basis to obtain data needed for the valuation of their funds. They are therefore well placed to comment on the quality of data maintained by various administration companies. If you require assistance with selecting an administrator, please contact us and we would be happy to assist.

Nico van der Walt

Employee Benefits Consultant

How It Worked Previously

Any premiums paid by an employer with respect to policies that were not part of the retirement fund (i.e. “unapproved” policies) were dealt with in accordance with Section 11(w) of the Income Tax Act. So for both GLA and PHI policies outside of the fund, employers could claim a tax deduction on the premiums they paid.

Benefits paid out from unapproved GLA policies were also tax free, while benefits arising from PHI policies were taxable.

Reasons For The Change

In this environment, it was possible for dependants to receive death benefits from an unapproved GLA policy on which no tax had been paid at all, not on premiums nor on benefits. This was not the intention of Treasury, and therefore the Income Tax Act was amended in 2010 to make premiums for unapproved policies taxable as a fringe benefit in the hands of the employee.

Unfortunately, “unapproved policies” include PHI policies, inadvertently resulting in these policies being double-taxed – both premiums and benefits were taxable. This was not the intention of Treasury.

The Situation After The 2010 Amendments

The Amendment introduced in 2010 stated that an employer could only claim a tax deduction for premiums in respect of an employer owned policy where premiums are taxed as a fringe benefit. As these premiums are not paid by the employee, the employee does not qualify for a tax deduction, meaning that the employee could pay the fringe benefit tax on the employer paid premium and still be taxed on the proceeds of the policy, as in the case of a PHI policy.

The effective date of these changes was 1 January 2011 with the amendments applying to each employer from the start of their new financial year.

There were a number of problems with this Amendment and some employers were even considering restructuring their policies to continue to comply with the new legislation. Treasury was therefore requested to provide clarity around the issue with auditors and advisors generally advising their clients to defer implementation until such time as these issues had been resolved.

Further Changes Resulting From The Taxation Laws Amendment Bill (tlab) Of 2011

In response to such requests, the Taxation Laws Amendment Bill was issued in 2011. It should be noted that this is still a Bill (draft Act). One of the effects of this Bill is to postpone the effective date of the fringe benefit implications discussed above to become effective only from 1 March 2012. The previous effective date of 1 January 2011 no longer applies.

The anomaly in the treatment of PHI premiums (double taxation for any employee who becomes a disability claimant) has been addressed: with effect from 1 March 2012 PHI premiums paid by the employer (and included in the taxable income of an employee) will be deemed to have been paid by the employee and may be deducted from the employee’s taxable remuneration. The effect is that PHI premiums are now effectively tax neutral. The proceeds from a PHI claim (excluding the employer premium waiver) will remain taxable as income to the disability claimant.

The Taxation Laws Amendment Bill does not change the treatment of unapproved GLA premiums and the proceeds of unapproved GLA policies will continue to be tax-free.

Conclusion

The Taxation Laws Amendment Bill of 2011 will now finally address the uncertainty which prevailed after the introduction of the Taxation Laws Amendment Act 2010 and there is therefore no need to restructure employer owned policies. However, it is vital that employers who have not done so already, include the unapproved GLA premiums in the employees’ gross income.

Summary

Adri du Plessis

Legal and Compliance Manager

It should however be noted that surveys should never be used in isolation to make investment decisions, but should rather be used for comparative purposes only. Please contact Hildegard Wilson for more information on our services in this regard.

Fully Vesting Guaranteed Funds Survey – Group Products – September 2011