TUESDAY, 7 AUGUST 2018 - Institute of Retirement Funds
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TUESDAY, 7 AUGUST 2018 1
TABLE OF CONTENT
LOCAL NEWS
TCF proves to be the pension industry’s bugbear
Women: How to take control of your financial destiny
Liberty trying to trace members of funds closed in error
Is consolidation treating customers fairly?
Government pension fund has R1.6bn in unclaimed benefits
INTERNATIONAL NEWS
Pension ‘dippers’ face tax relief shock
Forecast pensions surplus brings payout hope for thousands of retirees
2LOCAL NEWS TCF proves to be the pension industry’s bugbear If anyone is in denial about how tough 2017 was on the financial services industry, as well as on some of our clients, they just need to take a look at the 2016/17 Annual Report of the Pension Funds Adjudicator (PFA) to change their view. The PFA received 7 501 new complaints during the period under review. While this is a 22% reduction in the number of new complaints, Muvhango Lukhaimane – the PFA – said that some of the compliance trends were worrying. The major complaint Complaints relating to withdrawal benefits continue to be the highest at almost 70% of total complaints finalised. These complaints relate to non-compliance with Section 13A of the Pension Funds Act by employers (non-payment of contributions) and retirement funds (failure to enforce employer non- compliance). “This is a trend that has continued unabated, indicating levels of non-compliance that fly in the face of regulatory prescripts. In this instance, the lack of enforcement by the Financial Services Board (FSB), as the registrar, is compounded by the awareness by retirement funds of such lack of enforcement in that retirement funds do not even go through the prescribed legislative procedures of claiming outstanding contributions from employers,” said Lukhaimane. This behaviour often leaves members out-of-pocket when they claim their benefits. Commercial umbrella funds are also not faring any better in this regard. The regulatory bugbear According to Lukhaimane, compliance with the outcomes of Treating Customers Fairly (TCF) is proving to be a major problem for the pension funds industry. “If we look at TCF as the end game, then the trend of complaints points to an industry that is not in good health as far as governance and its conduct is concerned. The failure by retirement funds to enforce compliance with Section 13A of the Act (by following the prescribed procedures) is of utmost concern,” said Lukhaimane. She added that retirement funds are obliged in terms of Section 13A of the Act to recover outstanding contributions on behalf of members as soon as non-compliance occurs. However, this is not done except for an automated electronic mail generated from an administration system here and there. “Even in instances where funds approach the PFA for intervention in respect of employer non-compliance with Section 13A, this is often the first and only step that they would have embarked on. In significant instances, by the time a member lodges a complaint with the PFA, it is often too late as the employer might be under business rescue or undergoing voluntary liquidation. It is, therefore, imperative that the registrar, in the 3
least, sets up a reporting mechanism to keep track of non-compliance with Section 13A of the Act. After all, without compliance to Section 13A and enforcement thereof, we do not have a retirement industry,” said Lukhaimane. The key role-player Regulatory compliance is a very wide reaching challenge that insurers, advisory practices, and brokers need to comply with. As pointed out by the FSB, TCF is much more than dotting a few I’s and crossing a few T’s. The nature of the relationship between all role players in the industry needs to fundamentally change so that the objectives of TCF are adhered to. Ultimately, this will result in a better relationship between insurers and policyholders. One of the ways to achieve this is through a changing dynamic between insurers and advisers. If compliance with Section 13A is a problem, then advisers need to engage more with employers. If the regulator is lacking enforcement in this area, advisers can keep employers in check. However, it must be remembered that advisers are not policemen and that the FSB will eventually have to address this situation. Further issues The PFA belongs to a tribunal (which is made up of the PFA, the FSB and National Treasury) which meets on a quarterly basis to review the complaints that are received by the PFA. The Tribunal records the number of complaints and TCF outcome related thereto. The PFA's statistics for the period in question revealed that 83,5% of the complaints involved the provision of clear information (TCF outcome 3), 10,5% of complaints relate to investment performance (TCF outcome 5 which states that customers are provided with products that perform as firms have led them to expect). A further 4,2% of the complaints relate to the advice or lack thereof provided at the time of contracting (TCF outcome 4 which regulates the provision of suitable advice) while 1,4% of complaints relate to refusal to allow a transfer of funds (TCF Outcome 6 which regulates post-sale barriers). Half a percent of complaints relate to general dissatisfaction with service (TCF outcome 1 which regulates the fair treatment of customers). "This Tribunal remains concerned about the weaknesses in regulations in the retirement sector when viewed in light of the abovementioned TCF outcomes," said Lukhaimane. FA News| 6 August 2018| By Jonathan Faurie 4
Women: How to take control of your financial destiny Financial vulnerability is one of the greatest challenges women face today. Women experience various types of gender bias throughout their working life that result in them saving less for retirement than their male counterparts. And not only are women saving less – if they outlive their spouse or get divorced, they could face being left destitute in retirement and becoming a financial burden on their families or the state. With Women’s Day on the 9th of August, it seems appropriate that we look at the financial issues women face as they grow older and empower them to make informed choices about their future. “Unfortunately, gender bias continues in retirement when women outlive their husbands with less in retirement savings to see them through for life,” says Twané Wessels, Product Actuary at Just. “It is crucial that we as women empower ourselves and not plead ignorance.” Gender inequality in retirement Recent independent research commissioned by Just, in which South Africans between the ages of 55 and 85 years in the major metropolitan areas were interviewed, confirmed that females were not aware that they would and could outlive their male counterparts. When males and females were asked what age they thought they would live to, males said 83 on average and females said 79 on average. In reality the opposite is true. In post-retirement a woman’s life expectancy is three to four years longer than a man’s. The average life expectancy for a male at age 65 is 82 years of age and for a female it is 86 years of age. The survey also indicated that 65% of females say that the main reasons for not planning financially in advance for retirement are that they will do it closer to retirement and that they are not sure how to do it. “Alarm bells should ring because in addition to needing more money for living longer and leaving financial planning for retirement too late, in pre-retirement women have less time and income to accumulate sufficient savings,” cautions Wessels. This is due to temporary absence from the workplace for maternity leave or to care for children or elderly parents, and is also the result of sacrificed earning potential because certain jobs or roles with demanding time and travelling requirements are difficult to sustain alongside family responsibilities. Take control of your own post-retirement destiny – a man is not a financial plan “Women also typically marry husbands who are three to four years older than themselves. It is the last survivor, in most cases the widow, who will suffer the indignity of being unable to fund their basic living costs in their final six to eight years of life if they don’t prepare adequately. Don’t assume your spouse is making the right provision for a sustainable lifetime income that will be sufficient for both of you,” warns Wessels. 5
The concern is greater if basic living costs in retirement can’t be covered because there is no guaranteed annuity in place to pay an income for life that won’t ever decrease. Currently in the industry, the popular choice for purchasing a retirement income is by means of a living annuity. A living annuity has the advantage of providing flexibility in how much you want to draw down each year. However, the retiree must manage all the risks and the sustainability of income is not guaranteed. This is complex and one must keep in mind that logical thinking can deteriorate with age. In many cases then, instead of being able to leave something to their spouse when they die, retirees outlive their money and become a financial burden on their families or on the state. Ask the necessary and the uncomfortable questions What happens to retirement savings if you get divorced or your spouse dies? In divorce before retirement, if a person is a member of a retirement fund, the Divorce Act states that their spouse is entitled to a portion of the member’s benefit. Normally the amount or percentage will be negotiated between the parties and set out in a divorce settlement agreement. If the member dies, the rules of the fund will determine what benefit a spouse will qualify for. The trustees of the fund will generally have discretion to decide who should receive the benefit according to financial dependency on the deceased, despite any nomination that the member may have made. After retirement, in the event of a divorce the capital in an annuity may not be split. This is also the case for a living annuity according to a recent judgment by the Supreme Court of Appeal, because the capital belongs to the life assurance company, not the annuitant. Only with a settlement agreement which has been made a court order on divorce, will the ex-spouse have a legal right to access the income which the annuitant receives from their annuity. On the death of an annuitant, a guaranteed annuity provides more security if you are the named spouse in a joint annuity where you will receive income payments following the death of your ex-spouse, despite a divorce. In the case of a living annuity it is more complicated. The spouse would be a nominated beneficiary and should the parties get divorced the retiree can easily change their beneficiary to a new wife or another beneficiary to receive the remaining funds as a death benefit when they die. It is also important to note that upon death the benefit from a living annuity will be distributed to the beneficiary and will override the nomination in a will. It is not too late – start saving today “Let’s be honest, most women like to spend money. We work hard and so we feel that we deserve to treat ourselves. Saving money is the very definition of delayed gratification. It is challenging, but it is worth it,” says Wessels. 6
For example, women spend more than men on clothes and personal care. If instead of spending R400 per month at a nail bar from age 25, you save the money (let’s conservatively assume in a Money Market Fund), it will amount to R1.3 million when you reach age 65. Based on current annuity rates this would purchase a lifetime income of R8200 per month that would aim to keep track with inflation. “Now this would be a decent treat to your future self! Make the effort to empower yourself in retirement. The alternative – spending the last years of your life in a low cost old age home trying to make ends meet – is not a rosy outlook,” concludes Wessels. FA News| 6 August 2018 Liberty trying to trace members of funds closed in error Liberty is actively tracing an estimated 3‚000 members of the funds its administration business erroneously closed as it needs to pay some R100m to them. The company announced at its interim results presentation last week that it had deregistered 130 pension and provident funds that it believed were dormant‚ but which still had assets owed to members. In March it successfully applied to the Pretoria High Court to set aside the Registrar of Pension Funds’ decision to close 24 of these funds. The matter was unopposed. The retirement fund administrator is now in the process of recommending trustees and getting the registrar to use his powers under the Pension Funds Act to appoint them to run the funds while the assets are distributed to the rightful members‚ Tiaan Kotze‚ the CEO of Liberty Corporate‚ said. Kotze says in the meantime Liberty has started tracing the affected members and paying the benefits to them‚ with the company taking the risk that the trustees may not approve the payments. He says once Liberty has all the information it needs it will have to approach a court again to open the other 105 funds unless the Financial Sector Conduct Authority can assist the company in finding an alternative way to pay the benefits to the members. Olano Makhubela‚ the divisional executive for retirement funds at the FSCA‚ says there is a lacuna in retirement fund legislation in that the registrar is not legally empowered to reinstate funds that have been deregistered. After a fund has been deregistered‚ there is no alternative way to pay money found to the rightful members other than by asking a court to set the decision aside and then appointing trustees‚ he says. 7
Makhubela says there are obviously costs involved in going to court and appointing trustees just to pay benefits and then again deregistering the funds. The FSCA is considering amending the Pension Funds Act to provide for assets found after a fund has been closed to be transferred to another fund and then paid out to the rightful members in a carefully monitored process. In the meantime‚ Makhubela says the FSCA will not oppose applications to reinstate funds that were deregistered in error. Sunday Times| 4 August 2018|By Laura du Preez Is consolidation treating customers fairly? Over the past two years, the South African medical schemes sector has experienced a lot of change through the implementation of Demarcation Regulations – and will likely expect further changes in the future as government moves closer to the implementation of the National Health Insurance (NHI). But perhaps some of the immediate biggest changes will come in the form of industry consolidation, something that government is seemingly hell bent on implementing. The road to here An NHI Implementation Committee on consolidation was established earlier in the year to oversee the restructuring of the industry before the full implementation of NHI. This process includes consolidating schemes with fewer than 6 000 members into larger schemes. According to the recently released Alexander Forbes Health Diagnoses, the merging with public sector schemes reduces the number of benefit options offered by the remaining schemes. Two schools of thought There seems to be two schools of thought regarding the consolidation issue. Speaking at the launch of the 2017 Health Diagnoses, Alison Counihan – an actuary with the Technical and Actuarial Consulting Solutions (TACS) Team at Alexander Forbes Health – said that there are very specific reasons why government feels that consolidation may be beneficial. It is important for the industry that medical schemes remain profitable. When evaluating the performance of medical schemes, factors to consider include a few key aspects. The first is size and scale. According to Counihan, larger schemes tend to have a more stable and more predictable claims experience. They should also have greater negotiating power when setting prices. “Government feels that the major advantage of consolidation – bearing the above aspects in mind – is membership growth. Increasing membership reduces the volatility of a scheme’s claims. Further, it 8
improves the schemes profile as new members tend to claim less than the average member in their first year of membership,” said Counihan. She added that the third aspect involves the scheme’s membership profile. Claims experience will be more favourable for younger members with lower chronic prevalence. “The final two aspects are related to the scheme’s financial performance. When consolidation is taken into account, the trend in a scheme’s financial results illustrates the adequacy of their pricing. The other benefit of consolidation relates to solvency levels. Although the current statutory solvency level of 25% of gross contribution income may be inappropriate, each scheme should have sufficient reserves after considering each of the previous factors,” said Counihan. The other side of the coin Also speaking at the launch of the Health Diagnoses, Roshan Bhana, Branch Head TACS, was a lot more cautious when it comes to the consolidation issue. One of the factors of the industry at the moment, where there is very little consolidation, is that there is a significant amount of capital sitting in reserve. This would change if consolidation is sought. “In future, schemes will likely seek liquidations rather than amalgamations. If this is the case, these reserves will be lost from the system,” said Bhana. Added to this is the fact that restricted schemes usually offer income rating of contributions to compensate for lack of choice; Bhana pointed out that these members will now face high costs or lower benefits following consolidation. The game changer Perhaps we are looking at this debate without addressing the game changing issue. The cost of healthcare in South Africa is high and puts medical schemes under immense pressure in terms of profitability. This quandary is often passed on to clients in the form of premium increases. Bhana added that the gap between medical scheme contributions and consumer inflation (CPI) continued its downward trend in 2017. “Over the past 17-year period, medical care and health expenses inflation has been on average 7.6% per year while CPI inflation averaged 5.8% per year. This results in a shortfall of 1.8% per year. During the same period, average medical scheme contribution inflation was 7.5% per year, resulting in actual increases in medical scheme contributions per principal member exceeding CPI by at least 1.7% per year. Headline increases announced by schemes over this period are between CPI plus 2.5% and CPI plus 4.5%,” said Bhana. FA News I 6 August 2018| By Jonathan Faurie 9
Government pension fund has R1.6bn in unclaimed benefits The government is urging former public servants and their beneficiaries who may be owed benefits by the Government Employees Pension Fund (GEPF) to contact the fund. The GEPF owes R1.6 billion in unpaid and unclaimed benefits. Last week, Public Service and Administration Minister Ayanda Dlodlo said that, as of May, there were 44 190 cases of unpaid and unclaimed benefits. The Government Pensions Administration Agency (GPAA), which is responsible for administering pensions on behalf of the GEPF, says it has 26 919 cases of unpaid benefits, amounting to R907.1 million, and 17 271 cases of unclaimed benefits, valued at R698.9m. Most of the unclaimed and unpaid benefits (R514.1m) are owed to the beneficiaries of people who used to work at national government level. One of the reasons benefits have not been paid is the submission of documentation that contains incorrect information about the identities of beneficiaries, as well as incorrect tax and banking details. Dlodlo called on all stakeholders, including government departments and trade unions, to notify public servants about their benefits and that they need to apply for them. The GPAA says it plans to work with community workers to track down beneficiaries. It will also hire 20 full- time tracing agents and 10 external service providers to trace beneficiaries. Other intervention strategies, such as the deployment of mobile vans and national road shows, are being explored. “The minister calls on family members or beneficiaries of deceased former public servants to contact the GEPF to ascertain whether they are entitled to any unclaimed pension benefits,” the department said. Former public servants or their beneficiaries should visit their “closest regional walk-in centres of the GEPF in all nine provinces” to apply for their benefits. Unpaid and unclaimed retirement fund benefits have been a problem for many years. The Financial Sector Conduct Authority estimates that more than R20bn is due to more than three million people. Personal Finance| 6 August 2018| Thandisizwe Mgudlwa 10
INTERNATIONAL NEWS Pension ‘dippers’ face tax relief shock Record numbers of over-55s withdrawing cash from their retirement funds Thousands of over-55s who dip into their pension pots while continuing to benefit from workplace pension contributions are at risk of shock tax charges, experts warn. The warning came this week after official figures showed record numbers of over-55s were taking cash from their pensions, potentially slashing the tax relief on their future pension contributions. Normally, tax relief is available on pension contributions of up to £40,000 a year, known as the annual allowance. But if an individual aged 55 or over has taken money out of a “defined contribution” type pension, this may trigger a reduction in their standard annual allowance from £40,000 to £4,000. The saver will be hit with a tax charge if contributions from themselves, their employer or others exceed their annual allowance, whether this is the standard £40,000 amount or reduced £4,000 money purchase annual allowance (MPAA). This charge effectively claws back any excess tax relief on contributions, so applies at either 20 per cent, 40 per cent or 45 per cent. Pensions experts are stepping up their warnings about the MPAA following news this week that a record 264,000 individuals had accessed their pensions flexibly in the three months to the end of June this year. They withdrew a record £2.3bn, putting them at risk of triggering the reduction in their annual allowance. “I have a major concern that many of the people taking cash from their pensions will be inadvertently exposing themselves to the MPAA tax trap,” said Malcolm McLean, senior consultant with Barnett Waddingham, the professional services firm. “These will be people still in work, perhaps in their mid-to-late fifties or early sixties, who choose to take advantage of the new flexibilities to draw down some cash from their pension pot while they are still in work, with a view to continuing to contribute to their pension until they retire. “By drawing as little as a few pounds out of their pension (other than the allowable tax-free cash element) they will be immediately caught by the MPAA which effectively limits both their and their employer’s future contributions to a total of £4,000. This has not been well publicised and will come as a severe shock to those hit with it.” Pension providers are required to warn their customers that they may trigger the MPAA if they are looking to take money from a defined contribution pension pot. But advisers say complex rules on how the MPAA is triggered could leave the unadvised at risk of tripping up. 11
“We are regularly approached by people with plans to withdraw cash from their pensions who clearly are totally unaware of the tax take on withdrawals which exceed the tax-free cash or the impact of the MPAA,” said Kay Ingram, director of public policy with LEBC, a firm of advisers. The MPAA only applies to defined contribution-style pensions, which include Flexi-Access Drawdown, which has boomed since the pension freedoms in 2015. The drawdown arrangements allow people to take pension cash as and when they wish. The MPAA does not apply to payments from defined benefit or final-salary type pension schemes, held by millions of public and private sector workers. “It is possible to access pension benefits without triggering the MPAA and so people can still be entitled to the full annual allowance of £40,000 plus the option to use carry forward of any unused allowances in the previous three years,” said Patrick Connolly, chartered financial planner with Chase de Vere, the financial adviser. “This can be done, for example, by taking the tax-free cash allowance, a small pots payment or buying a lifetime annuity. This gives quite a lot of flexibility for many people.” Mr Connolly said those who are planning to access part or all of their pension need to ensure that they fully understand the implications of doing this. “They should also review how much they want to invest into pensions going forwards, if they want to ensure that any further contributions they make are fully tax efficient,” he said. “Decisions people make with their pensions are often too important to get wrong and so if they’re not sure what they’re doing, they should take independent financial advice.” Financial Times| 5 August 2018| By Josephine Cumbo Forecast pensions surplus brings payout hope for thousands of retirees ‘War chest’ estimated to be worth billions of pounds, says Pension Protection Fund Hundreds of thousands of people tipped into a UK pension lifeboat after the collapse of their company retirement schemes are on course to gain from the carve-up of an expected funding surplus. Oliver Morley, new chief executive of the UK’s Pension Protection Fund, flagged the prospect of pensioners benefiting from a distribution of the surplus by the PPF if it met its long-term target of financial self-sufficiency by 2030. Pension experts, who have dubbed the anticipated PPF surplus a “war chest”, estimate it could amount to billions of pounds. About 240,000 people have had their pensions transferred to the PPF following the collapse of companies. These individuals include former members of retirement schemes operated by BHS and the UK arm of Toys R Us, which went into administration in April 2016 and February 2018 respectively. The PPF, which was established in 2005 and is financed by a levy paid by the UK’s 6,000 defined benefit pension schemes 12
that are backed by companies, is on course to become one of the UK’s largest asset managers. Funds
under management are expected to grow from £30bn now to £37bn by 2021. Pensioners and schemes
could share payouts Mr Morley suggested that both the pensioners who are members of the PPF and the
retirement schemes paying the levy could share its anticipated funding surplus.
“If the PPF delivers on its plan, there is every chance that a surplus will be available for potential
redistribution to levy payers and members,” he said in his first interview as PPF chief executive. Mr Morley
added it was too early to say how any distribution might happen, but options for what to do with the funding
surplus would be examined by the PPF board over the coming year. “This is definitely one of the questions
that we need to answer,” he said. “We are looking to develop a new strategic plan and this is one of the
things that I want to work on with the board.”
Mr Morley rejected the idea that the expected surplus at the PPF should enable a levy holiday for defined
benefit pension schemes, saying “we would still need to collect levy after the 2030 point”. PPF assets to
exceed liabilities easily in 12 years However, the distribution of any surplus would be attractive to people
who have had their pensions transferred from their former employers to the PPF but have yet to retire. This
is because these people face a 10 per cent haircut to the retirement benefits they were promised by their
ex-employers under the PPF arrangements. Those already in receipt of pensions when the PPF assumes
responsibility for their retirement benefits have their income preserved. However, there is no uprating of any
benefits accrued before 1997 to take account of inflation.
With the number of defined benefit pension schemes backed by companies likely to continue to dwindle
over the next decade, the PPF has set out a strategy to be self-sufficient within 12 years. This is when the
PPF’s assets are meant to comfortably exceed its liabilities. At March 31, the PPF had assets worth
£29.9bn and liabilities valued at £29.6bn. Full Report: https://www.ft.com/content/5bca39bc-9726-
11e8-b747-fb1e803ee64e
Financial Times| 7 August 2018| By Josephine Cumbo
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