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.

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

Investment Survey – Market Value Funds – Namibia, August 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, July 2011

Investment Survey – Market Value Funds – Namibia, July 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, June 2011

Investment Survey – Market Value Funds – Namibia, June 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, May 2011

Investment Survey – Market Value Funds – Namibia, May 2011

What is the NHI?

The proposals outline an NHI which is a combination of vastly improved public healthcare and contracted-in private providers. Those private providers receive a monthly fee from the state in exchange for being available to see NHI members at no extra cost. All residents contribute to the NHI and all can use its services at no cost.

The emphasis in the new framework is on education, prevention and early detection, combined with a referral system which will be designed to ensure that every patient receives the right level of care.

The eventual cost is estimated to be in the region of R255 billion per year in current money terms. The current healthcare spend is R227 billion, of which R90 billion are medical aid contributions. Basically, the proposals are to redeploy the current private and public health spending into the NHI which is intended to largely replace both as the main healthcare provider.

Building a new tomorrow

The main focus of the paper is the way services will be delivered under the new NHI. It is a manual for building a healthcare framework. The system it outlines would, in our view, be capable of delivering on the promise of universal healthcare if it is successfully implemented.

The greatest challenges in such an implementation will be:

1. Improvement to the public sector service. A full restructure and new management is proposed, with new oversight bodies monitoring quality of service. The proposals recognise that the current public hospitals are failing and the redesign and improvement of these facilities is the focus of the 14 year transition period. It is essential that this succeeds to the point where individuals who currently turn to the private sector would be comfortable to be admitted to a public doctor or hospital.
2. Participation of private practitioners. In order for the NHI to work, private doctors, hospitals and other providers must become willing participants in the system. It is a delicate balance: if the NHI works, private patient numbers will reduce, and contracting into the NHI will become a viable income stream for private doctors. But if the NHI pays too little, doctors won’t contract in and it is likely that the NHI will as a result not succeed among private patients, leaving current private patient numbers the same and private doctors with no need to try and contract in. The right path is a compromise where the cost of treating each patient is lower, but each doctor has more patients to make up the revenue.
3. The right spread of providers is achieved. South African medical services are currently concentrated in the urban areas. The outlying, mainly rural areas will however also require sophisticated medical teams. The challenge will be to attract doctors to such remote posts.
4. More resources. Even if private practitioners participate, there are currently not enough doctors in South Africa to deliver satisfactory healthcare to the whole population. More doctors will have to be trained or enticed into the country in order for the system to be effective.

If the above challenges are overcome, the NHI will be a sustainable framework. What will the future of SA’s medical service look like in such a case?

A bright vision

Let us fast forward to 2025. The NHI has been fully implemented, and let us assume that the fine balancing act of upgrading public healthcare facilities and incentivising private practitioners to contract into the NHI has been successful.

If you are a South African resident, your monthly pay check is automatically debited with an NHI contribution, deducted by SARS in the same way as income tax. You do not have an option not to contribute (just like you don’t have an option to pay tax!). The contribution is likely to be related to your salary – the more you earn, the more you will be contributing, we expect. (This is not clearly spelt out but equity at different salary levels is emphasised in the proposals).

If you are a South African resident, whether you contribute or not (i.e. even if you are unemployed or earning below the contribution threshold), you have a card in your wallet, showing the details of your NHI membership.

In 2025, if you require medical help, you make an appointment with one of the primary healthcare providers in your ward – basically, your voting district. Those providers may be a public primary health clinic, or they may be private doctors in your area who are contracted into the NHI. You make an appointment and see one of these providers, at no fee.

If your condition warrants it, your doctor will refer you to a specialist. That may again be a specialist in a public hospital or a private specialist contracting into the NHI. It is unlikely, however, that you will be offered a choice. Any hospital stay, specialist visit or procedure resulting from such a referral is also free of cost.

The NHI will cover any condition you may have except elective procedures and certain other exceptions (such as expensive dentistry). There will not be co-payments or any of the other costs experienced in the private system.

If you would like, you may want to obtain top up cover from a medical aid fund. These will be insurance type products as the industry has been deregulated and companies are be permitted to make a profit. If the NHI works really well, these products are unlikely to offer full cover as they do now. They may however offer innovative top up products covering whatever the NHI will be struggling with – if NHI dentists are in short supply, expect top up private dental plans to be popular, and so forth.

It is unlikely that full medical aid, as we see it now, would continue in this scenario of a well-implemented NHI. There would not be sufficient demand. The NHI will effectively deliver suitable levels of care to all residents.

This is the ideal scenario envisaged by policy makers. But what if things don’t turn out as expected?

All good intentions…

The challenges of successfully involving private providers, getting enough medical staff and enticing them into rural areas are not trivial. Here is an alternative future where the NHI system has failed to surmount these challenges:

It is 2025, and your pay check shows a new deduction – the NHI contribution. Your employer no longer insists that you belong to a medical aid fund, but nobody in your family feels that they want to go to the NHI when they are ill – you have heard you wait in queues for days and the doctors are under-qualified and overworked. You have made the decision to continue medical scheme membership voluntarily.

Unfortunately, contributions to a medical aid are no longer tax deductible, and so the contribution is more expensive than before. On top of the new NHI contribution, which you see as a tax, the costs of medical care seem prohibitive.

You may want to rethink the private medical aid. The medical aid providers have been deregulated and there are myriads of new products on the market, some functioning as NHI top ups. For example, you could use the NHI GP, but choose to go to a private hospital for operations. You may decide that you cannot afford the medical aid at all any more, but once you are ill, you will consider paying out of pocket for private care.

The NHI, in this scenario, is basically the current public healthcare network, with whatever improvements have been implemented over the 14 year period. The private healthcare system continues side by side, and total medical costs for most employed people have gone up.

What about employers?

From the perspective of employers, the main change will be the introduction of the NHI contribution. If the employer previously had no compulsory medical aid cover for its employees, this will be a new deduction. For employers who currently enforce mandatory medical aid membership for their staff, the conditions of employment would need to be amended to replace such a contribution with the NHI contribution. We do not expect any employer to continue with mandatory medical aid membership as the double deduction (NHI and private, where private contributions are not tax subsidised) would be too high to enforce in our view.

It is unclear if the NHI contribution will be member only, or split between member and employer, like for example the UIF contribution. If it is split, the employer portion of the contribution would be in excess of total cost to company, and so there would be an increase in total cost of employment.

For employers with post-retirement medical aid benefit schemes, the arrangement would need to be renegotiated if the promise is expressed as a proportion of medical aid contributions. It is likely that medical aid scheme options and prices would change in the new framework, so the previous arrangement would no longer be meaningful. Employers could use the opportunity to buy out the benefits in exchange for a cash lump sum or a monthly monetary “pension”. The other alternative is to cover the pensioners’ NHI contributions instead.

Next steps

The implementation will be gradual. A pilot scheme will be run in 10 selected districts from 2012. These pilot schemes will be funded by the state, not by member contributions, and the emphasis is testing the new mechanisms for service delivery. Detailed costing of the scheme is only expected in 2013. Accreditation of private providers and population registration is likely to commence in 2012 -2014 but will only be finalised towards the end of the 14 year period.

Healthy balance

In summary, the proposals describe a viable collaboration between private and public providers that should be able to address the inequities of healthcare in South Africa if implemented properly.

If the public health sector is successfully improved, private practitioners are enticed to contract in with reasonable fees, doctors are properly incentivised to work in outlying areas and the number of medical workers is increased, the NHI can work and become the main healthcare provider for most South Africans. Private medical schemes and private medical care will continue, but on a greatly reduced level.

If implementation does not work out as planned, the danger is that the NHI becomes a “tax on the rich”. Higher income workers will not choose to use the NHI benefits, private practitioners will not contract in, and the dual private/public system will continue, albeit at greater cost to the public.

The final result is likely to lie between the two scenarios. The NHI may end up being sufficiently developed for a proportion of current medical aid members to rely on it. The remainder will utilise medical insurance top ups and out of pocket payments to continue supporting private doctors. Over time, if the NHI improves, the system may slowly shift further towards full NHI utilisation.

We will continue tracking developments in the NHI design and implementation and will keep you up to date. Further reading on the proposals can be found here:
NHI Green Paper [PDF, 1.9MB];
NHI Questions and Answers [PDF, 270KB];
NHI Unpacked at Fin24.

1. Employer and member contributions are to be treated as a fringe benefit taxable in the hands of the member.
2. Tax Deductible contributions are to be limited to 22.5% of taxable salary per annum
3. Tax deductible contributions are to be limited to R200,000 per annum per member

These limits are to apply across all retirement arrangements a member may have, on a cumulative basis.
These changes, outlined in the 2011 budget for March 2012 implementation, did however not materialise in the Draft Taxation Amendment Bill issued in June. The question arises: were these scrapped? The answer is no.
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The reason why the Taxation Amendment Bill did not incorporate these changes is mainly because of a number of valid concerns raised by various industry bodies. These concerns are unlikely to lead to a scrapping of the proposals, but they did make government realise that more work will be required to cater for a number of special cases.

Probing deeper

In order to understand the various objections, we need to understand how the proposed new arrangements differ from what is happening currently.

1. Tax treatment of contributions: Currently, a distinction is made between employer and member contributions.
2. Limit on contributions as a percentage of salary: Currently there are technically some limits on the level of contributions, but in practice the SARS has not enforced these limits. The new limit of 22.5% is lower than what is currently permitted (some funds have contribution rates of over 50% of salaries).
3. R200,000 p.a. limit on contributions: there is currently no upper ceiling on tax deductible contributions.

Problems with the proposals

These proposed changes are aimed to increase transparency of tax deductions, prevent abuse of the deductions and limit subsidies for the very wealthy, allowing the government to focus more on the poor. This appears to be in line with the intentions of the Retirement Fund Reform.
However, any solution creates more problems. The challenge now is to amend the proposals to eliminate some of these emerging problems, which include:
Reduction in savings levels and cover: Many funds are likely to amend their rules to limit contributions to those that are deductible. For high income individuals, this may also reduce other benefits, such as risk cover. The contributions no longer flowing into retirement funds may not be redirected to savings – they may simply increase spending in a country that already suffers from very low savings rates.
DB Funds: While there are not many Defined Benefit (DB) funds left in South Africa, these funds do not easily fit into the new tax system. Take, for example, a fund with a large deficit (which is possible in the DB space). Such a fund may easily have to contribute more than 22.5% of members’ salaries each year to make up the deficit – it seems unfair to penalise this with additional taxation. Similar concerns apply to aging funds where the cost of funding increases with age.
Workers with irregular incomes: Some people, for example entrepreneurs, have income that fluctuates from year to year, or even disappears for a few years at a time. Other people start earning an income late in life and would need to contribute more than 22.5% of salaries to secure a decent pension. The limits proposed in the 2011 budget do not cater for such cases very well.

Way forward

The above issues, and many others, need to be taken into consideration before a formal Taxation Amendment relating to retirement fund contributions can be expected. Government is working on these proposals – whether the 1 March 2012 deadline can still be seen as a target date is unclear, though. The next step is an expected August paper which is likely to focus on retirement contribution taxation proposals.
We will keep you posted on developments. In the meantime, do not hesitate to contact me if you would like to discuss these issues further!

Joanna Legutko

Actuary and Chief Technical Officer

Taking the above into account, what interim measures should Employers or Funds be taking to structure their PHI schemes for maximum tax relief? Firstly, we suggest that Employers involve their tax advisors in the discussions to confirm the procedure they would recommend. However, it is likely that the following existing policy contracts will have to be reviewed:

• PHI scheme policies will need to be amended to reflect a contract between the employees/members and the Insurer. The employees will be noted as the “Proposer” on the policy, with claim payments to the employees.
• PHI premiums should be separated from the Employer retirement fund contributions and paid directly to the Insurer (PHI schemes have always been separate contracts to the retirement fund). Retirement fund rules may still reflect that the Employer pays a set percentage of salary to the retirement fund, less the cost of PHI, other insurance and administration costs, as the case may be;
• The PHI premiums should be reflected by the Employer as a fringe benefit in the hands of the employee and the employee may claim a deduction as an expense related to the production of income. Unfortunately, it seems as though this deduction may only be claimed at the end of the tax year. This issue is one of the main “bones of contention” at the moment

The question remains as to whether or not the Employer has to deduct tax from the employees/members in respect of these premiums. Bearing in mind that the Employer is allowed to offset deductible Retirement Annuity (RA) contributions from taxable income, should this be construed as a similar arrangement?

What is clear is that proceeds from a PHI claim, (excluding Employer premium waivers) where the premiums have been tax deductible by either party, will be taxed as income to the disability claimant.

We will be following the negotiations closely and will provide further information when available. Should you wish to discuss this matter further or have your existing disability arrangements reviewed in light of this information, please do not hesitate to contact us.

Ian Richards

Employee Benefits Consultant