The Financial Planner www.fpi.co.za Telephone: 086 1000 FPI (374) Tsholofelo Dihutso, CPRP Marketing and Communications Manager (011) 470 6050 Postal address: PO box 6493, Weltevredenpark, 1715 Street Address: Palms Office Court, Block A, Ground Floor, Kudu Avenue Allenâ€™s Nek, Gauteng, South Africa Membership Queries firstname.lastname@example.org Published by COSA media www.comms.co.za Advertising: Luke Gray email@example.com 0861 555 267
Contents Letter from the CEO | 04
FPI is raising the bar | 06
King 111 and its possible effects on PF130 |12 How to become a financial life planner |14 The Net Replacemnet Ratio |16 RA for Estate planning | 20
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Letter from the CEO Announcing the enhanced FPI strategy that will benefit you… and your clients
s the leading independent professional body for financial planners in South Africa, the FPI is committed to advancing and promoting the profession of financial planning in this country.
To achieve this objective, we strive always to set the highest standards of education, competence, trust and ethics for professional financial planners in South Africa. While we have successfully been doing this for the past 30 years, we are the first to acknowledge that the financial planning industry is a highly dynamic and fast-changing environment, which is constantly subject to the rigours of legislative changes and evolving client needs. Against this backdrop, if the FPI is to remain the relevant and effective driver of professional industry standards, the institute
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must evolve along with the industry it serves. This is why the FPI board of directors recently undertook a comprehensive review of the institute’s entire strategy. This will change the direction of the industry’s future and will be implementing a number of strategic enhancements from June 2012. June 2012 marks the culmination of nearly two years of effort devoted to formulating a comprehensive plan to provide ongoing direction for FPI. This plan ushers in a new era of professionalism and is designed to move FPI to pure professional body status. Individual financial planners will be at the centre of its focus, acting in the interests of all South Africans who entrust their financial future to an FPI member. It’s the start of a journey for us all to rebuild trust in our community and communicate the importance of professional financial planning that demonstrates that FPI members are the
ones who stand up and commit to taking ultimate responsibility for delivering on the core promise of professional and ethical behaviour. It requires all FPI members to not only act in the public interest, but to be seen to do so. It also means that as a professional body we will continue to set the pace for the profession and support its growth through awareness campaigns; a commitment to higher standards; and our expectation of our members adhering to a strict and comprehensive code of conduct. Strategic positioning is best achieved when there is a good understanding of an organisation’s value proposition and capturing its attributes so they are easily conveyed to and recognised by all its stakeholders.
Our progress will be marked by a constantly changing business environment and the increasing value of financial planning professionals offering competent and trusted services in the market place. The board and staff will reevaluate the plan regularly in light of emerging trends affecting the financial planning profession as well as the environment in which it operates. To that end, we will seek an open, ongoing dialogue with our members and all other stakeholders as we strive to achieve the plan’s goals.
Like you, the FPI leadership understands the key questions to unlock an organisation’s potential for differentiation: Who are we? What do we do? Why does it matter? Further, we understand the power of these questions is revealed when your audience answers them for you. In that spirit, we reached out and have been honoured to hear from many members and other stakeholders throughout the strategic planning process. We must acknowledge that our ability to invest time in this effort is borne by our 30-year legacy of quest for excellence in financial planning and the dedication of our past board members, current board of directors and staff. We hope our exhaustive efforts have resulted in a clear path for FPI to the years ahead. However, we recognise the natural ebb and flow that will occur as the plan’s strategies and tactics are deployed. Our progress will be marked by a constantly changing business environment and the increasing value of financial planning professionals offering competent and trusted services in the market place. The board and staff will re-evaluate the plan regularly in light of emerging trends affecting the financial planning profession as well as the environment in which it operates. To that end, we will seek an open, ongoing dialogue with our members and all other stakeholders as we strive to achieve the plan’s goals. Since 1981, FPI has bulldozed pathways for financial planning professionals to establish solid careers in the financial services industry. Today, with FPI’s restated vision of professional financial planning for all, we look to take the financial planning profession to even greater heights. A strong FPI and the successful positioning of the CFP® mark
as the pre-eminent symbol of excellence in financial planning will support the public’s understanding of the value of financial planning and advice from a CFP professional. The primary focus of FPI’s strategic realignment centres on strengthening the relevance of the Certified Financial Planner ® designation it bestows on its members. The economic challenges of recent years have highlighted the dire need for consumers to have access to highly qualified and trustworthy financial planners and it is our intention to ensure that by dealing with a professional financial planner with a CFP designation, they can always know, without any doubt, that this is exactly the level of professionalism they are getting. For you, as a member of FPI, this revitalised strategic thrust to raise the prominence of the Certified Financial Planner ® mark holds many benefits. The strategy will see FPI significantly raising awareness of the value of professional financial planning and the importance of ensuring that such planning comes from a highly trusted source. At the same time, the CFP designation will be highlighted as the most respected and trustworthy professional certification available to financial planners in South Africa. The strategy to enhance the profile of FPI members will be accompanied by a strong focus on raising positive consumer awareness and perceptions of FPI designation generally via strong customer advocacy. This will include consumer representation by the FPI on various financial bodies and the development of a comprehensive online body of educational materials accessible to the public at no cost. To enhance consumer’s benefit, we are pleased to announce the appointment of Paul Roelofse, as the FPI’s lead consumer advocate. Roelofse is set to work on systematically projecting the value of CFP certification to consumers and also educate CFP professionals on consumer expectations of them. Roelofse has written further around this initiative on page 9. We have made a strong commitment to effective consumer advocacy and education forms a vital component of the recently enhanced FPI strategy. While the main aim of this strategy is to improve the quality, relevance and consumer
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“We have reformed the FPI’s vision of ‘Professional financial planning for all’ to better encapsulate the public benefit mandate as a professional body. This is borne out of the belief that all South Africans at some stage in their lives need and deserve the benefit from professional financial planners.”
appeal of the certifications that are available to FPI members, the effectiveness of this strategy relies heavily on our ability to simultaneously raise the profile of the FPI. The new strategy will further position the FPI as a thought leader and proactively seek opportunities to influence or challenge legislative decisions, advocate for the financial planning profession, and continually raise the profile of its members. Through the combination of superior technical competency, extensive resource availability and committed member advocacy, the FPI’s technical services aims to play an increasingly prominent and important role in unlocking greater value for FPI members and advancing the profession of financial planning in the years to come. Almo Lubowski has elaborated more on page 8. All of this effectively means that your membership of FPI and, particularly your CFP designation, will become recognised by consumers, employers and your industry peers as your professional mark of excellence and integrity. This strong customer value proposition should, in turn, translate into significant potential to expand your client base, maximise your sales and service income, or secure the employment opportunities you desire. We have reformed the FPI’s vision of ‘Professional financial planning for all’ to better encapsulate the public benefit mandate as a professional body. This is borne out of the belief that all South Africans at some stage in their lives need and deserve the benefit from professional financial planners. In order to further position the institute and its members, we have also altered the FPI’s tagline from ‘Setting the Standard’ to ‘The Professional Standard’.
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Obviously, a bold and comprehensive strategy like this takes time to implement fully, which is why FPI has set itself a roll-out plan over the next four years. However, while the full implementation of the strategy will take a number of years, we are confident that FPI members will start experiencing the incremental benefits immediately. The FPI Approved Professional Practice™ brand can be bestowed on professional practices in which at least 75 % of the financial planner or advisory staff are CFP professionals or on the way to becoming CFP professionals. This certification has the potential to bring about a change in the way practices position themselves and the level of engagement they enjoy with their clients. By reinforcing the fact that they subscribe to the highest possible professional standards, their appeal will be significantly enhanced. Anthony Campher covers these new exciting changes on page 6. We will share more about this multi-pronged strategy in the forthcoming weeks and months as well as in future issues of FPI publications and welcome your suggestions to further enhance the many benefits we are sure it will offer you and your clients. Please send your comments or suggestions to firstname.lastname@example.org
Godfrey Nti CEO: Financial Planning Institute of Southern Africa
Once again, FPI is raising the bar “The Financial Services Advisor™/ FSA™ certification effectively enables individual financial advisors to once again differentiate themselves from their competitors via compliance with a rigorous code of ethics rather than merely adhering to a general code of conduct.”
By Anthony Campher, CFP®, Head of Membership and Certification: FPI
While the revised FPI strategy sets out a professional membership growth target of 80 % over the next four years, the success of the institute is less about member numbers and more about consistently increasing the levels of financial planning professionalism and competency. This has been the mandate of the FPI since it was first established some 30 years ago, and in that time, the institute has seen the financial service environment undergo a number of transformations.
Setting the scene Arguably, one of the most significant regulatory changes to the financial planning industry in recent years was the introduction of the FAIS Act in 2004, prior to which it was not a legal requirement for anyone giving financial advice to have an official qualification in this field. Despite this lack of a minimum competency requirement, the FPI worked tirelessly in those years to raise the standards of financial planning and advice, by ensuring that its members attained at least a minimum certification of Registered Financial Planner™/RFP™– the entry-level certification
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that demonstrated a level of competence that set FPI members apart from their competitors in the industry. This designation was part of the pathway to CFP® certification. The introduction of FAIS in 2004, however, meant that all those who provided financial advice or planning services were required to meet a similar level of competence. In the years since the introduction of FAIS, this general competence requirement has had the effect of gradually eroding the perceived value of the RFP certification from the FPI. In addition to this competence requirement, the introduction of FAIS had the effect of closing the once vast qualifications gap that existed between financial advice and financial planning. The recent announcement of the FPI’s enhanced strategy represents our response to this devaluation of the RFP certification and the ongoing transformation of the financial advice and financial planning industries. While carrying the RFP mark undoubtedly still adds value to the professional reputation of FPI members, true differentiation from other financial advisers and planners now requires more advanced qualifications and certification. We are currently consulting with employers and individual members in this regard.
Mapping pathways to CFP certification success The fact that the introduction of FAIS had the effect of transforming many of the previous policy salespeople into legitimate financial advisers has meant that the FPI is now in a position to recognise the financial adviser accreditation as a viable step towards achieving CFP certification. As a result, the FPI has introduced, for the first time, a professional designation for financial advice that can be attained by financial advisers on completion of a specifically designed FPI board examination. The Financial Services Advisor™/ FSA™ certification effectively enables individual financial advisers to once again differentiate themselves from their competitors via compliance with a rigorous code of ethics rather than merely adhering to a general code of conduct. A recognised B degree is the minimum qualification requirement for FSA certification. And the benefits of FPI membership and certification do not stop with individual planners and advisers. The institute has also taken the bold step of extending certification to entire practices that meet minimum prescribed professional standards. The FPI Approved Professional Practice certification can be bestowed on professional practices
in which at least 75 % of the financial planner or advisory staff are CFP professionals or on the way to becoming CFP professionals. This Professional Practice certification has the potential to bring about a step change in the way practices position themselves and the level of engagement they enjoy with their clients. By reinforcing the fact that these practices subscribe to the highest possible professional standards, their appeal will be significantly enhanced. This is particularly relevant given that individual and corporate clients are increasingly demanding raised levels of corporate compliance and governance from their advisory partners, as well as depth to their advisory services that goes beyond dependence on single individuals. In addition to raising the professional profile and credibility of these FPI-approved practices, this certification makes them more appealing to prospective clients as they can be assured of continuity of service should the financial planner or advisor they are dealing with move away from the practice. The certification will also help to accelerate the efforts of many practices to develop Certified Financial Planner® professionals. Many practices in South Africa are already committed to helping develop future talent in the industry, and the Professional Practice certification will enable them to overcome many of the barriers to progress that they may previously have faced in this regard. By creating these various pathways to recognised higher levels of professionalism, the FPI has effectively extended its available certification opportunities to a far greater number of professional financial advisors and planners in South Africa. Importantly, the way we have achieved this has not diluted the value of the FPI certification or compromised the high standards for which the institute has become known over the past 30 years. In so doing, the FPI is once again positioning itself as a key contributor to the continued professionalism, integrity and high ethical standards of the financial planning industry, thereby not only protecting the consumer, but also affording its members a significant advantage in what is becoming a highly competitive marketplace. As a result, while the FPI’s focus is certainly not just on growing its member numbers in the coming years, we are confident that our strategy of raising the bar for professionalism and consumer value, the natural consequence will be an inflow of professional members that could very well make our 80 % growth target seem conservative by 2016.
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Leading the way through technical excellence and member advocacy mark, as the pre-eminent mark of financial planning expertise, demands a particular focus on the continued advancement of the technical competence of its members. The very fact that our members are required to meet such high standards of technical competence is what makes them stand out as exceptional participants in the broader financial services industry. It’s also the reason that the FPI is committed to being more than just a member organisation, but is also determined to strongly advocate for the high levels of professional respect and recognition that those members deserve.
Almo Lubowski, CFP®, Technical Manager: FPI
Whichever way you look at it, financial planning is a technical business. While success as a financial planner undoubtedly requires strong interpersonal skills and an ability to translate long-term goals into short-term actions, delivering and maintaining a top quality financial plan requires a level of technical skill and competency that can be achieved only through extensive study, relevant experience and access to appropriate resources, research and information. Membership of the FPI, and particularly the attainment of Certified Financial Planner® designation, affords financial planners in South Africa access to all three of these success components. The FPI recognises that sustaining the CFP®
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Of course, this financial planning advocacy goes hand in hand with a strong commitment to enabling our members to be the best at what they do. In truth, the FPI can be an effective advocate for the financial planning profession only if it is fully confident that its members are a cut above all those operating in the advice business of the industry. This is why the organisation strives to be the primary source of information, research and technical knowledge for its members. To achieve this, the FPI technical services department takes a very hands-on approach to understanding the professional and practical needs of FPI members and developing the resources, tools and advisory and research capacities to answer those needs. This makes the FPI’s technical knowledge and abilities a key part of the institute’s member value proposition; which is why the enhanced FPI strategy pays particular attention to bolstering this technical offering. Our members have a right to expect the professional body to which they belong to be willing and able to help them with their practices, highlight their qualifications and certification as a means of attaining competitive advantage, and generally promote financial planning as a credible, sought-after and highly distinguished profession. The FPI is absolutely
committed to doing all of this, particularly through continually strengthening the quality of its technical input, leveraging its international reach through Financial Planning Standards Board (FPSB) to inform its policies and technical expertise development, and proactively seeking out opportunities for member advocacy both in the industry and the consumer markets. There are a large number of components that make up this strategic approach to technical and professional advancement. These include the continued raising of professional and certification standards through integration of local and international advances, and the provision of easily accessible knowledge, tools and templates – across all areas of specialisation – that can add tangible value and credibility to the businesses of FPI members and enable them to grow the effectiveness and profitability of their practices. In addition to requiring access to these and other elements of technical support, the FPI recognises that it needs to take every opportunity to be the voice of its members by representing their professional interests on forums that may influence or impact the financial planning profession, and demonstrating thought leadership around current issues within the financial planning profession. The FPI’s new strategy will see it position itself as such a thought leader and seek opportunities to influence or challenge legislative decisions, advocate for the financial planning profession, and continually raise the profile of its members. Through this combination of superior technical competency, extensive resource availability and committed member advocacy, the FPI’s technical services department aims to play an increasingly prominent and important role in unlocking greater value for FPI members and advancing the profession of financial planning in the years to come.
Putting FPI firmly on the side of the consumer By Paul Roelofse, CFP®, Consumer Advocate: FPI
raise the profile of the FPI as a whole. This means educating consumers on the process and purpose of financial planning, and raising the likelihood that when they seek out such financial planning services, they ensure that they are offered by a suitably qualified and certified professional. For consumer advocacy to achieve these objectives, it must start by debunking the myths and correcting the many misperceptions that still exist regarding financial planning across all sectors of South African society.
Consumer advocacy is generally understood to mean any action taken by an individual, body or group to promote and protect the interests of the buying public. As a professional body, the FPI has a very particular objective to deliver consumer benefit by raising the status and standards of professional financial planners in South Africa. Achieving this objective requires more than merely setting certification standards; it also means that the FPI must take on the role of educator and, in many ways, representative of the consumer, who is, after all, the end user of the services our members provide. For this reason, a strong commitment to effective consumer advocacy and education forms a vital component of the recently enhanced FPI strategy. While the main aim of this strategy is to improve the quality, relevance and consumer appeal of the certifications that are available to FPI members, the effectiveness of this strategy relies heavily on our ability to simultaneously
Far too many consumers in this country still consider financial planning to be the exclusive domain of the wealthy. Nothing could be further from the truth and if the FPI is to raise the profile of its members, it needs to first make sure that their prospective clients understand that the professional services they offer translate into significant wealth creation and protection benefits for all. The challenge, of course, is to achieve this re-education of consumers without cheapening the value – perceived or provided – of the financial planning process. To overcome this challenge, FPI is undertaking a multipronged approach; one that focuses both on educating the consumer about the benefits of financial planning and, at the same time, empowering the financial planners themselves to be more accessible and
available to this growing customer base. While the current strategic realignment and enhancement of the various certifications offered by FPI (dealt with elsewhere in this publication by my colleague Anthony Campher) will serve to accomplish the latter, the process of building the financial planning customer base and raising awareness of the value offered by FPI Certified Financial Planner® professionals forms part of the consumer advocacy strategy. Given the diversity of the current and prospective financial planning market in South Africa, this consumer advocacy strategy involves numerous initiatives and activities. In addition to the obvious use of print, radio and electronic media channels to proactively position the need for financial planning and the ability of FPI members to meet that need, the FPI is developing a comprehensive online financial planning information portal that will be made available to all South Africans free of charge. This valuable and extensive personal financial resource will empower consumers to gain a far better understanding of the principles of financial planning, the value it can unlock in terms of their future financial security, and the actions they can begin taking to work towards that future. Far more than a sales tool, this FPI online consumer resource will enable visitors to take
concrete and effective steps towards the development of their own financial plans. Of course, once they understand the value that financial planning holds for them and their families, there is every likelihood that they will want to take the process further – at which point they will have instant access to a database of Certified Financial Planner professionals who they can approach to help take their financial planning efforts to the next level of success. To further support the role of the FPI as consumer advocate, the strategy will also focus on strengthening the institute’s strategic partnerships and increasing representation by FPI on forums, committees and working groups that have the potential to impact on the personal finances of South Africans. As part of this endeavour, the FPI was recently admitted as an associate member of the Organisation for Economic Development’s (OECD) International Network on Financial Education and also has representation on National Treasury’s Consumer Education Steering Committee. The institute also plans to host various consumer financial planning clinics, partner with relevant consumer bodies to promote financial literacy, and is even planning a national financial planning week initiative to raise awareness of the need for, and value of, financial planning as an enabler of people’s aspirations and goals.
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King III and its possible effects on PF130 Carla Letchman, FPI Research Analyst
“The most fundamental and overarching change in King III in comparison with King I and King II is that it applies to all entities regardless of the manner and form of incorporation or establishment – it is therefore applicable to pension funds as well.”
King III is the foremost document in South Africa that provides guidelines on corporate governance and PF130 is an industry-specific circular that provides guidelines on corporate governance for the retirement fund industry. This article purports to provide a glimmer of insight into King III and its possibleeffects on PF130. King I and King II are inevitably the basis on which the industry-specific PF130 circular is premised. This is due to the fact that there was no prior document in SA which dealt with corporate governance. King III was published in November 2009 and was necessitated by the new Companies Act 71 of 2008 and changes in international governance trends. The most fundamental and overarching change in King III in comparison with King I and King II is that it applies to all entities regardless of the manner and form of incorporation or establishment – it is therefore applicable to pension funds as well. The approach adopted by King III has also changed from its predecessors: the approach opted for what is called an apply-or-explain
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approach, whereas previously the comply-orexplain approach was advocated. Some argue that his new approach will place a greater degree of pressure on companies to improve their corporate governance. There are three distinct additions to King III that its predecessors did not encompass: IT governance; business rescue and fundamental and affected transactions.
IT governance The concept of IT (information technology) governance is intended to enhance the protection of confidential information. Information systems have become a lot more integrated in the core of business and its strategy. Companies spend a great deal of money on IT and it has become part of the systems and processes of most companies, which have in turn become increasingly more reliant on IT. The reasoning provided by the King Committee on why IT presents an everincreasing risk towards corporate governance is due to its evolving nature and the way we have
Client Engagement come to do business and share information. The King Report aims to create greater awareness, at director level, of IT governance. There is an increased risk that confidential information might leak when the IT of a company is outsourced, which has become a disturbingly frequent practice. Retirement funds have confidential information that needs protection, which is acknowledged in PF 130 under Principle 5: Internal Controls/ Governance Mechanisms. Although the protection of information is acknowledged, PF 130 does not mention how or which areas of the fund should be monitored. By listing IT governance as a specific aspect to be governed it does reduce the fundâ€™s risk by narrowing its focus or targeting it towards a specific goal instead of simply making a bold statement.
Business rescue Business rescue can affect funds directly and indirectly: for a member to lose their job because of a companyâ€™s liquidation is an example of an indirect effect and does not form the basis of concern for a fund in this context. A fund being mismanaged to the verge of liquidation could make use of the business rescue option: this is an example of a direct effect of this provision on a retirement fund. This option would also be in the best interest of the members because members are not considered preferred creditors and therefore do not always retrieve their entire contributions, not to mention the growth on their contributions, by the end of the liquidation process.
report process and an annual assessment of internal financial controls by internal auditors to the board and to the audit committee. The report makes a number of further recommendations that will not be canvassed in this article; these recommendations build on the existing guidelines contained in the two previous King reports. Irrespective of whether PF130 is amended in accordance with King III, I would urge pension funds to take cognisance of the changes and to develop their governance accordingly. Pension funds should always keep in mind the principles espoused by the King reports in conducting their business, which is to develop and implement policies in line with the social, economic and environmental context within which it exists.
Update [The article was first published in the IRFocus March/April 2010 issue] The Financial Services Board (FSB) has always intended to amend PF 130 to bring it in line with King III. This goal has not yet been achieved by the FSB and is still something it endeavours to do. We now await a draft PF130 from the FSB for comment.
Fundamental and affected transactions The provision aims to ensure that directors are aware of their responsibilities and duties for mergers, acquisitions and amalgamations. This aspect could find applicability in terms of the trend for funds to become incorporated into umbrella funds. I would suggest that PF 130 incorporate guidelines for umbrella funds and the movement of a fund to an umbrella fund. This would be more in line with the concept of an amalgamation.
General There are further new areas mentioned in the King III Report, one of which is alternative dispute resolution (ADR). This aspect envisages that directors must ensure that disputes are resolved as effectively, efficiently and expeditiously as possible. The board is therefore required to adopt appropriate dispute resolution policies, including adding ADR clauses into various contracts. The report also introduces the concept of a risk-based internal audit
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HOW TO BECOME A FINANCIAL LIFE PLANNER Kim Potgieter, CFP® Chartered Wealth Solutions
There is an increasing demand among qualified CERTIFIED FINANCIAL PLANNER® professionals to consider some sort of financial life planning qualification as a way of adding depth to their interactions with their clients. Financial life planning takes into account a client’s life situation, their hopes and dreams and brings these into play when planning their finances. Very popular in the US and UK, financial life planning is steadily becoming accepted by the South African financial planning community. Kim Potgieter, a CFP® professional from Chartered Wealth Solutions, who has been championing the case for financial life planning in South Africa for several years, explained, “I get asked on a regular basis by financial planners who have an interest in life planning how they go about qualifying as a financial life planner. The route I chose was to study with one of the pioneers, namely George Kinder. I completed a course with the Kinder Institute in the US and qualified as one of only two registered life planners in South Africa.” Potgieter acknowledges that practically and financially this may not be an option for everyone. She does, however, have advice for financial planners who want to grow their skills set without heading overseas to complete a formal qualification.
Industry newsletters and blogs “A good place to start is to go to George Kinder’s website (www.kinderinstitute.com) and the website of Mitch Anthony (www.mitchanthony.com). Both of these financial life planning industry stalwarts have good, comprehensive websites. Both also offer a free subscription service to their individual newsletters and blogs, which is an excellent way to keep up to date
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with ongoing developments within the life planning industry.”
Self-study Potgieter also recommends self-study in the form of the multitude of books available on the subject. Key books include The Seven Stages of Money Maturity by George Kinder, Clients for Life by Mitch Anthony, and The Next Step by Roy Diliberto. These books are all available through Amazon or Kalahari.
Do a life coaching course Taking a client through the financial life planning process has much in common with the work done during the initial stages of a life coaching programme. Financial life planners, like life coaches, help clients to focus on their values and motivations and assist them to clarify the goals and objectives they have. Financial life planners then take the concept of life coaching one step further and use these values, motivations, goals and objectives to guide the financial planning process and provide a framework for making decisions that have financial and non-financial implications. It therefore follows that doing a life coaching course can greatly benefit CFP professionals in
Client Engagement their interactions with clients. There are many life coaching courses available but it can often be difficult to tell the professional life coaches from amateurs as the industry is unregulated. A good place to investigate life coaches and courses on offer is www.life-coachdirectory.co.za. Alternatively ask around to get a recommendation from colleagues or friends.
Do a course in psychology
money, a template-style plan no longer works. That is why a more in-depth discovery meeting will give any financial plan the substance that is required in the industry today.” Use your intuition and empathy Potgieter advises professionals to bring their intuition and empathy to their meetings with clients. This is crucial in the initial stages of any new client interaction and will greatly
assist the financial planner to develop a meaningful financial life plan for clients. This is after all the goal of the financial life planner. Potgieter also encourages planners to change the conversations that they are having with clients. “My growth as a life planner has come from seeing that what I do changes lives and I want all financial planners to experience that, too,” she said.
Financial life planning requires that the financial planner explores their client’s relationship with money. “We all have our own, often dysfunctional, relationship with money and what it means to us. These deeply held beliefs stem from our very earliest interactions with money in childhood. Any degree or course in basic psychology can therefore be valuable to financial planners as it will help them in understanding the complex, at times unconscious, relationship their client has with their money,” said Potgieter. “I became a financial planner because I have always had a fascination with people’s relationships with money, and I soon realised that there were fundamental flaws in the way planners did their jobs. The conversations which financial planners were and are still having with their clients, were too focused on the money and not enough on getting to know the client. The relationship a client has with money will tell you a lot about how they save and spend, and what investments they are comfortable with. So getting to really know your client seems like the most obvious first step when creating a financial plan and this is where financial life planning comes in. “Asking clients the right questions enables the planner to create a more customised financial plan. Because every client has different ideas as to how they would like to spend their
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THE NET REPLACEMENT RATIO Natasha Huggett-Henchie, NMG
Natasha Huggett-Henchie Consulting Actuary, Valuator of Retirement Funds and Director of NMG Employee Benefits gives insight into the concept of the Net Replacement Ratio (NRR), how much contribution is required to attain the targeted NRR and gives an alternate way of viewing it, to make it easier for a member to understand if they are on target to retire with adequate benefits.
The Net Replacement Ratio (NRR) is a measure of the amount of pension that you are likely to get at retirement by converting the lump sum payment received from the fund into a pension, and measuring this as a percentage of salary earned in the year immediately prior to retirement. It is generally regarded that a NRR of around 75% of salary is suitable to allow you to largely maintain your standard of living after retirement.
a total gross contribution of 15% of salary. After deducting administration expenses and risk premiums from the employer contribution, the net retirement funding contribution is 12% of salary.
Conventional wisdom dictates that a net retirement funding contribution rate of between 12 and 15% of salary, over your working life time, is required in order to achieve this 75% target. Let’s examine this further to understand why it is recommended.
The table below illustrates the NRR that results at different retirement ages. For comparison purposes, we have also shown the NRR at different contribution rates. Note that the contribution rates are the combined member plus employer net retirement funding contributions, i.e. after deducting costs of administration and risk premiums. To determine the gross total contribution, an additional three to 5% of salary needs to be added, depending on fund structure.
Take a typical member who starts working at age 25. They get inflationary increases in salary over their working lifetime, and are able to earn a real return of 4% above inflation, on average each year, on the investments in the fund. They contribute 7.5% of salary to the fund, and the employer does the same, i.e.
We have colour coded the results to show an NRR above 70% in green (you’re safe), 50–70% in yellow (not quite there, a few more contributions or a delay in retirement age is required to get you to the safe zone), or red for NRR below 50% (you are in trouble, and need to make an urgent plan).
CONTRIBUTION RATE FROM AGE 25
From this you can see that at a contribution of 12% towards retirement savings from age 25, the targeted NRR of 75% is attained somewhere between age 63 and 65, call it 64. However, if you want to retire earlier than age 64, you need to contribute 15% of salary to attain the recommended NRR at around age 61 or 62. If you start to contribute a little earlier, say at age 23, the picture changes as follows, with a greater probability of being able to retire a little earlier.
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employer benefits NRR
CONTRIBUTION RATE FROM AGE 23
However, delaying contributions by as little as five years, to age 30, has a dramatic impact, reducing the proportion in the ‘safe zone’ to very few.
The impact of compound interest is clearly shown, with the NRR increasing over time. In other words at age 50, the NRR is 26.3% and at age 51 is 28.3%, an increase of only 2% achieved by delaying retirement by one year. However, at age 63 the NRR is 67.9% and at age 64 it increases to 73.1%, an increase of 5.2% is achieved by delaying retirement for one year. Remember that this is 5.2% more income for the rest of your life, including provision for increases on your pension at 100% of inflation in retirement, a five-year guarantee period and a spouse’s pension of 75% of your pension in the event of your death.
CONTRIBUTION RATE FROM AGE 30
From this we can see that the old adage of a required contribution rate of between 12 and 15% of salary, over your working life time, required in order to achieve this 75% target, holds true. We can also show the progression of the NRR over time, based on a 12% contribution starting at age 25 in accordance with the assumptions outlined above.
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The source of the increase resulting from the delay is three fold, obviously an additional year’s worth of contributions, investment return on the amounts you have previously contributed (plus previous growth), and the fact that you need to live off your pension for one year less. These last two factors have the biggest impact, which is why the return earned in the last few years prior to retirement is critical to your investment.
How much do I need to contribute to retire with an NRR of 75% of salary? Another way to look at saving for retirement is to say, if I start contributing at age 25 or 30 or 40, etc, what is the required contribution rate as a percentage of my salary that I need to make in order to achieve the NRR of 75% of salary at my chosen retirement age. This is shown in the table below.
CONTRIBUTION RATE FROM AGE 30
We have similarly colour coded this to show green for required contributions below 12%, yellow for the 12–20% range and red for above 20%. Obviously, if you have been contributing at a different rate in the past, your ultimate benefit will differ from the targeted 75% of salary, and the effect of this will need to be shown in an individualised NRR statement that you can request from the fund.
Another way of looking at the NRR – the TMS It is often conceptually very difficult to know how much to be saving to achieve your required NRR. We are accustomed to saving for known amounts, i.e. a new car, renovations on the house, an overseas holiday. These are quantifiable lump sums which give a target to aim for, whereas the NRR seems to be an intangible amount which is difficult to track. It is, however, possible to convert the NRR into a targeted lump sum or targeted multiple of salary (the TMS), which members can easily calculate for themselves, and see how they are doing.
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Let’s look at the TMS for different targeted NRRs and different retirement ages.
For example, if you want to retire at age 60 with a 75% NRR, you need a lump sum (usually represented by your share of fund) equal to 12.8 times your salary. Therefore, if your salary is R100 000 (at retirement), you need a share of fund of R1 280 000 (at retirement). If you are currently age 40, and your share of fund is R320 000, compared to a current salary of R100 000, you seem to have accrued 25% of your target. In other words, R320 000 divided by R100 000 is 3.2 times salary; 12.8 divided by 3.2 is four, therefore you appear to be a quarter of the way there; or are you? It is difficult to judge if you are on track, because how will that amount of R320 000 grow to retirement to achieve the targeted NRR. Your salary will change between now and then, you will earn growth on the investment and make additional contributions. Are you really a quarter of the way there, or more or less? What we can do is devise a targeted multiple of salary (TMS) of where you should be at a certain age, assuming a 75 % targeted NRR at age 60, 63 and 65 for example. This multiple assumes that the future contributions will be at a rate of 12% of salary (net retirement funding contribution), and that the other actuarial assumptions will be realised in practice. The results are as follows:
employer benefits Let’s look at an example of a member aged 40, with a salary of R100 000. According to the graph, the recommended multiple is 3.7 times salary for a targeted NRA of 60, three times salary for a targeted NRA of 63, and 2.6 times salary for a targeted NRA of 65. If the member’s share of fund is R320 000 (or 3.2 times salary), he or she will then know that there is not enough money to retire at age 60, but that it looks like retirement at age 63 (or perhaps a little earlier – 62 maybe?), might be possible. Another advantage of this method of viewing the NRR is that it gives a tangible targeted shortfall which the member can (hopefully) easily do something about. The targeted amount at normal retirement date seems to be an awfully big number which can never be obtained and therefore members often give up. (Depending on your age and salary, the projected multiple in Rand terms can look like a Hong Kong telephone number.)
However, if at your current age of 40, you can see that the shortfall is R50 000, that becomes something you can work with. Saving an extra R50 000 is the same as saving for a car or an overseas holiday. You can work out the extra contributions that you need to make monthly to achieve topping up the shortfall over the next one, five or 10 years (i.e. your investment horizon). Alternatively, you can work out the additional amount that you can afford each month, and see how long it will take to make up that shortfall. On an annual basis, you can track how your additional savings are measuring up, by comparing your updated share of fund with the required multiple of salary at age 41, etc. Obviously, using the example above, if your shortfall is R50 000 and you don’t pay off the R50 000 in one year, then a year later your gap will be R50 000 plus growth, less the actual additional contributions that you have made.
because the money is ‘locked away’ and inaccessible in the event of an emergency. However, in this way you can see that your retirement plan is made up of not only your company-sponsored pension or provident fund, but also your other savings. If you decide to make an additional contribution to help your to top up towards retirement, these contributions can be made into a unit trust or other savings vehicle, and you can keep track of them in the way outlined above. But this also means that in the event of a rainy day, the money is not necessarily locked away permanently. As a tip: Don’t be lulled into thinking you are saving for retirement if every five years you empty your unit trust for an overseas holiday. Make a deal with yourself that of any additional contribution that you make for retirement, at least 50% will be locked away permanently; or put another way, don’t spend more than 50% of your rainy-day fund on items other than retirement.
However, in so doing, and by repeating this exercise on an annual basis, you can gradually work towards achieving your goal. A second advantage of relating the required lump sum to a multiple of salary is that it allows you to include other savings that you have in determining how on track you are for retirement. In the example above, if you are R50 000 short between the actual and required amount at age 40, but you have R20 000 in a retirement annuity that you took out when you started your first job, and R5 000 saved in a unit trust, then in fact your retirement shortfall is not R50 000 but only R25 000 (assuming the R5 000 in your unit trust is not going to be spent on an overseas holiday). Members often don’t want to make any additional contributions towards their retirement fund
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Tiny Carroll, CFP® Estate Planning Specialist, Glacier
RA for estate planning Excess contributions can be:
Additional contributions to a retirement annuity (RA) provide opportunities for astute financial planning. While the focus with retirement annuities is usually on income tax, what about estate planning? Two of the essential elements of estate planning are: o Reducing the planner’s exposure to taxes (estate duty, donations tax, capital gains tax). o Ensuring that the planner and/or his surviving family members have sufficient income to maintain their standard of living.
o Rolled over to subsequent tax years. o Thereafter they may be used to increase the tax-free portion of any lump sums at retirement. o If still not fully utilised, they may be deducted from income after retirement as if they were current contributions.
Accumulative investment Since the abolition of retirement fund tax, the build-up in retirement annuities is totally tax free. Consider the following implication: A wellconstructed investment portfolio will have exposure to the following asset classes: cash (fixed interest and long-term bonds), equity and property, with an element of offshore exposure for further risk diversification. When looking
at an investor’s exposure across these classes, the opportunity arises to hold the asset classes with a higher tax exposure, usually cash and property, in the retirement annuity in order to earn a tax-free investment on these assets. Note that retirement funds are also exempt from the 15% withholding tax on dividends as well as capital gains tax.
Age not just a number The old rule that the member had to retire from a retirement annuity at age 69 has fallen away. This has a two-fold benefit for persons over the age of 69: o They may now join a retirement annuity fund to reduce the tax on the monthly taxable income. o They may reduce the dutiable value of their estate from an estate duty perspective.
How does an RA measure up?
TAX EXPOSURE REDUCED Contributions Contributions are tax deductible within the following limits: The greater of R1 750; or R3 500 – allowable pension fund contributions; or 15% of non-retirement funding taxable income. Note: This formula may change from 1 March 2014, following the announcements in the 2012 Budget Speech.
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Retirement (and death) At retirement, the member will have the option of electing up to a third as a cash lump sum. Lump sums taken at retirement will be subject to the following tax concessions: TAXABLE PORTION OF THE LUMP SUM
RATES OF TAX
R0 to R315 000
R315 000 to R630 000
18% of the amount over R315 000
R630 001 to R945 000
R56 700 plus 27% on the amount over R630 000
R945 001 and above
R141 750 plus 36% on the amount over R945 000
It is important to note that the benefit to be taxed includes all taxable benefits accrued to the member, including withdrawal benefits taken in earlier tax years as well as retrenchment benefits received or accrued after 1 March 2011.
Estate planning NOTE: Upon death, the full benefit may be taken in the form of a lump sum. Where the beneficiary or beneficiaries elect to take any benefit in the form of a lump sum, the lump sum will be deemed to have accrued to the deceased member on the day before his death and will be taxed in accordance with
the above table in the deceased's hands. The beneficiary will bear the tax liability, if any. Assuming that all contributions qualified for a deduction at a 40% marginal rate, the table below indicates the tax saving.
EFFECTIVE TAX RATE
R1 000 000
R1 500 000
R8 000 000
*Any disallowed contributions could lower the overall effective tax rate even further.
Annuity income Retirement annuities will provide a protected income source for the member and/or his dependents at death or retirement. Annuity income from the retirement annuity is taxed at the recipient’s marginal rate of tax. The incidence of tax on the annuity can be lessened by the following: o Selecting an income percentage rate from as low as 2.5%. o Deducting the remaining excess contributions from the income after retirement. o Spreading the annuity income across a number of nominated beneficiaries upon the death of the planner, which may reduce the overall tax burden.
consequence of membership of a retirement fund will be excluded from the deceased’s estate for estate duty purposes. Therefore, in addition to the income tax advantage, the contribution to the retirement annuity will reduce the dutiable value of the planner’s estate by the contribution. Any growth on the contribution also takes place outside of the planner’s estate.
CGT The combination of estate duty and CGT (capital gains tax) payable at death poses an enormous threat to the value of a client’s estate. Retirement annuities are not subject to CGT (or estate duty). Living annuities
Contributing to an RA will allow the contribution to be taken out of an estate without attracting donations tax, but with the added benefit of an income tax deduction.
For planners with the correct profile, investing in a single contribution retirement annuity and then electing a living annuity can be likened to being a beneficiary of a trust. The amount applied to buy the annuity does not form part of the member’s estate for estate duty purposes. A living annuity has the following additional benefits:
Upon the death of a member, any benefit (including lump sums) payable in
o A living annuity is protected against creditors in the case of insolvency
or divorce. With divorce, it’s important to note that this does not apply during the build-up phase. o Beneficiary/beneficiaries can be nominated to receive an income upon the death of the investor. o The investor can select the underlying assets in which the annuity is to be invested. o No capital gains tax, income tax or retirement fund tax is payable on the assets backing the living annuities. o The percentage and frequency of payouts can also be selected. This means that the investor can regulate income flows annually on the anniversary of the contract. The income percentage on all new contracts concluded after 1 March 2007 may not be less than 2.5% simple interest rate of return calculation and may not exceed 17.5% simple interest rate of return calculation – subject to the condition that the annuity will be for the life of the annuitant. A retirement annuity provides a planner with the opportunity to make additional provision for their retirement, together with the potential for saving income tax, estate duty and CGT, as well as ensuring that the member and/or his dependents are provided with a protected income source at death or retirement.
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Government sticks to its guns on health insurance reform The government released its draft regulations on the demarcation between medical schemes and health insurance policies in March. Since then much has been said and written including plenty of grumbling from health insurers. The government responded with a second statement in April. Comments from the media and public suggest the lines are still somewhat blurred. 23 April was the final date for comment on the draft regulations. This month we review how the different sectors see the unfolding matter.
The why and wherefore National Treasury said that the aim of the draft regulations was to find a better balance between medical schemes and health insurance products, with the ultimate aim of protecting medical schemes from anti-selection based on age and health profiles. The draft regulations are the end result of consultation between Treasury, the Department of Health, the Financial Services Board (FSB) and the Council for Medical Schemes (CMS). The government believes health insurance products should not infringe on the Medical Schemes Act of 1998. The principles enshrined in the act advocate social and not individual welfare. The government believes this principle is beneficial to consumers. While health insurance products are intended to act as top-up or gap covers to medical
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aid, the government holds the view that many members see these products as offering the same protection as a medical scheme, encouraging healthier members not to join medical schemes until their health situation deteriorates. The draft regulations provide that a health insurance policy must not be directly linked to the cost of medical care and not cause harm to the medical schemes environment. Any product that is deemed to be doing the business of a medical scheme or that is deemed harmful to the medical schemes environment will be outlawed. An example of an acceptable product would be a product that pays a lump sum benefit a day, aimed at taking care of contingency expenses. The new regulations aim to wipe out medical insurance products for day-to-day healthcare, and retain them only for loss of income, travel, emergency travel, HIV/Aids and frail care. Therefore, the government will limit consumer choice and with no gap cover there are many who may find themselves at risk.
Blow by blow More and more medical scheme members are finding gap cover to be a healthy add-on to their medical needs as medical schemes often do not cover all expenses. Managing director of Xelus, Michael Settas, said that the regulators have painted all health insurance products with the same brush,
HEALTHCARE sweeping out the good with the bad. “The dramatic restructuring of existing products that will be required under these draft regulations, such as gap cover products which offer valuable supplementary benefits to medical scheme members, mean that premiums will increase and that the shortfalls between medical scheme benefits and actual costs incurred may not be met for major events such as hospitalisation and surgery,” said Settas.
Younger and healthier people often opt to purchase gap cover as it’s more affordable, this adversely affects medical schemes that rely on healthier people to join, in order to keep costs down. Certain healthcare products are under threat as the department looks to root out health insurance which does not keep up with the principles of social welfare, solidarity and cross subsidisation found in medical schemes. “The effect of income on the cost of healthcare cover is blatantly apparent at the extreme ends of the membership pool, i.e. first entrants and pensioners. When first entering the workforce on a basic income, a young person is more likely to purchase a lower cost option and then adjust their cover upwards as their income increases, while the reverse holds true as the person reaches retirement. The decision is not solely driven by their need, but by what level of cover they can afford,” said John Cranke, regional manager for PSG Konsult Corporate. South Africa has a working population of more than 37 million people and less than 22% of citizens belong to a medical scheme. This is largely attributed to the costs involved in belonging to a medical scheme. The buy-down theory states that members purchase gap cover products in order to complement the medical scheme option they can afford. Medical aid premiums have risen on the back of escalating costs of private medical care in South Africa since the late 1990s, while failing to achieve the crosssubsidisation principle of having younger healthier members subsidise older ones who claim more often. “The existing medical schemes regulatory structure is by far the single biggest impediment to achieving the stated aim of risk pooling and cross-subsidisation,” said Settas. He challenged the government’s assertions by saying that medical scheme regulations had failed to achieve their goals and pushed up the price of medical care, which necessitates the intervention of health insurance or gap cover. He referenced an annual report by the CMS, which cites that only 50% of private hospital admissions are for conditions covered
under PMBs, making gap cover essential if consumers want comprehensive in-hospital cover. “Hopefully some sense will prevail and a more inclusive and articulate set of regulations will be structured that provides the protection necessary for medical schemes but also does not leave the consumer exposed to unaffordable private medical costs.” Clayton Samsodien, managing director of Genesis Healthcare Consultants, was similarly nonplussed, calling the draft regulations disappointing and biased in the way it positioned health insurance policies. Medical schemes have reduced the rate of reimbursement for hospitalisation over the past years, blaming specialists for charging higher rates. “The only party that is disadvantaged in this environment is the consumer. Schemes are decreasing cover, specialists are charging more and, without gap cover, the consumer has to pay out of pocket,” said Samsodien. Meanwhile, the South African Medical Association (SAMA) has laid the blame for rising costs at the feet of medical schemes’ bloated administrations, who have in turn hit back, blaming medical practitioners. “SAMA says inflation is driven by medical aid schemes, not doctors. However, the most significant portion of a medical scheme’s budget is spent on hospital and pharmaceutical costs, which can run as high as 40% and 25%, respectively. These are downstream costs driven by the medical practitioners,” said Graham Anderson of ProfMed, the medical aid scheme for graduate professionals. “The way forward would be to acknowledge the role that insurers play in this sector, to combine all resources and available knowledge and expertise and agree that we will need a tiered benefit structure to cater for all.” Should the reforms be put in place, it would be interesting to see what options are available to those who currently have gap cover but no medical scheme cover. The prevailing economic climate would suggest that consumers will have their finances stretched even more, amplifying the role of financial planners, who will need to find a solution to best fit the pockets of their clients.
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Financial realities of decent healthcare Alan Seccombe, Tax Partner, PWC
The phased introduction of South Africa’s National Health Insurance (NHI) system – launched in April 2012 in the form of 10 district-specific pilot projects – is expected to impose a financial burden on both employers and employees, according to professional services firm PricewaterhouseCoopers (PwC). The NHI is also set to increase the administrative burden on taxpayers, particularly corporate finance departments. A significant paradigm shift is expected in how employers and employees plan and finance their future healthcare benefits. If designed, implemented and managed properly, the planned new NHI could bring the benefits of essential, world-class medical support and public healthcare to a far greater percentage of South Africans. While this is a welcome advance at a time when the government appears to be working towards bringing greater social and economic benefits to a larger percentage of South Africans, the long-term viability of the NHI will demand vast and sustainable taxpayer funding. While there is no definite indication at this juncture of the likely cost burdens for employers and employees, the national government is poised to more than double its public health budget over the next few years.
Funding phases According to the NHI Green Paper, the NHI funding will be increased in phases, starting at about R125 billion in 2012 and more
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than doubling to R256 billion in 2025. These amounts factor in traditional public health service costs that have been part of the government’s annual budgets in recent years. The government, according to Professor Di McIntyre, associate professor in the department of public health and primary healthcare at the University of Cape Town, is set to spend more than R112 billion in public health services for the current 2011/12 fiscal year and is expected to increase this slightly to R120 billion for the 2012/13 fiscal year. This suggests, in time, that taxpayers (directly or indirectly) would have to fund an additional R112 billion annually during the NHI’s startup phase. Assuming there are eight million taxpayers, this suggests an average additional individual tax burden of about R14 000 a year (almost R1 200 a month), which is significant. It is also likely that the burden will fall on middle- to high-income earners as opposed to low-income earners and therefore the monthly contribution by that sector of society will be much greater.
Possible financial burden Many South Africans already endure significant tax burdens, both direct and indirect. Besides having to pay up to 40% of their salaries in personal income tax and 14% value add tax (VAT) on most products and services, many people are subject to other taxes, levies and excise duties. These include fuel levies, customs and excise duties imposed on certain imported goods, capital gains tax, municipal rates,
healthcare vehicle registration and licensing fees, carbon tax (applicable to certain motor vehicles) and, possibly in the near future, toll-road fees. The real challenge lies in developing an affordable and sustainable NHI funding model. This is especially sensitive given the complex global and regional economic crises and trends that have emerged since the financial crisis of late 2008. Besides many companies being forced to reduce their staff complements and, in many cases, place a moratorium on the hiring of non-strategic staff, many have had to implement other cost-cutting programmes. Consumers, too, have been experiencing greater financial pressures over the last three years, with continuing inflation being felt the most through (far) higher food, fuel and electricity prices. The government risks prodding the proverbial nerves of taxpayers and it will have to devise a funding model that remains below the pain threshold of taxpayers.
Moving forward South Africans, however, need to appreciate that the country is moving in line with global trends. Most developed and developing countries have some form of national healthcare/social security system to which employers and employees contribute. While European countries are known for their national health systems, among them the United Kingdom (UK), France, Germany and Sweden, and the high cost of these to their working population and employers, a number of African countries also have social security schemes. Social security rates in Europe tend to be significantly higher than in Africa due largely to the various developed countries’ superior healthcare infrastructure, skills and services provided to beneficiaries. In the UK, employees contribute 12%
on earnings between £7 225 and £42 775 (about R550 000) and 2% thereafter. Employers contribute 13.8% on amounts above £7 225. The highest rate of personal income tax in the UK is 50%, although the maximum applicable rate is 40% for most employees. In France, the highest rate of personal income tax is 41% with a social security surcharge of 12.3%. French employers can contribute up to 50% of the employee’s salary and the employee contribution is around 20%.
This amount, however, is capped at R124 per employee each month and, therefore, is a minimal expense for employers. Employers must contribute 1% of remuneration to the national Skills Development Fund through the skills development levy. Employees have to fund their own social benefits through their contributions to medical schemes and retirement funds. Tax relief on medical and retirement fund contributions has reduced the effective cost of this for employees.
In Mozambique, employers pay only 4% of the remuneration cost (with no cap) and collect 3% from the employee (also without a cap) for their social security contributions. In Zimbabwe, both employer and employee contribute 3% by way of social security. This is in addition to the 3% Aids levy imposed on individual taxpayers. Botswana and Namibia, according to PwC, have minimal social security contributions.
Tax reforms, actual and proposed, are eroding the tax benefits associated with such contributions in the form of a capped tax credit for medical expenses and a proposed cap on the amount allowed as a tax deduction for retirement fund contributions. South African taxpayers may feel aggrieved that tax relief on medical and pension contributions are being eroded and also concerned about the impact of the State medical fund. However, we need only look to other countries to realise that while the amounts are not yet known, the government appears to have little choice but to fund NHI and further social reforms from the pockets of employees and their employers.
Up until now, South African employers have made minimal direct contribution to the social welfare of their employees through a 1% levy on remuneration made to employees to the Unemployment Insurance Fund (UIF).
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Four challenges for the South African retirement fund industry Richard Morris, Associate Director, PwC
n economics professor was once asked by his students what might come up in the forthcoming examination. He replied; â€œThe questions are always the same. It is merely the answers that change.â€? So it is with the retirement fund industry. The issues and challenges are not new, but the quest remains to produce better answers and better outcomes.
Four current challenges for the industry are: 1. How to promote a savings culture. 2. How to provide more economic efficient and effective solutions. 3. How to treat fund members fairly and with proper transparency. 4. How to manage the risks effectively. This article considers the first challenge.
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How to promote a savings culture Based on recent industry surveys, it is clear that retirement fund members generally donâ€™t achieve optimal retirement funding. The proportion of final salary as an annuity income during retirement is typically less than half of what would be desirable.
Defined contribution funds The first key reason for this is that for many defined contribution funds, the contribution rates are inadequate to secure retirement benefits at the same level as in defined benefit funds. The benefit that a member receives from a defined contribution fund is, apart from investment performance, directly proportional to the rate of contributions that they put in for retirement funding. Halve the contribution rate and the benefit on retirement is halved. Double the contribution rate and the benefit doubles. So the contribution rate is critical. There is also the opportunity that, under current legislation, the South African Revenue Services (SARS) effectively funds a significant part of the contributions, as these can generally be made out of pre-tax income or a tax deduction can be obtained for member contributions from after-tax income.
investments Yet many funds set the contribution rates too low to fully utilise this tax benefit. Even where funds offer the option of higher contribution rates, these are seldom utilised as the members appear blissfully unaware of the tax benefit that is being missed. Utilising the tax benefit is an obvious choice. The vast majority will experience a drop in income at retirement. When our income drops, so does the extent of the income on which you pay top up or so-called marginal tax rate. It is therefore beneficial to deduct contributions at a higher marginal tax rate and then, on retirement, pay tax at a lower marginal tax rate. Your contributions into the fund, which include the tax benefit, accumulate in the retirement fund and earn investment returns which are tax exempt. Despite this being a fairly simple truth, many financially literate people do not utilise this benefit.
The solution to this problem is to raise awareness among consultants, fund trustees and fund members. There are many channels available to do so, i.e. industry publications, news media, web pages or intra-net pages of funds, faceto-face briefings of fund members and employers’ human resources managers. Differing communication channels may prove more or less effective, it is therefore critical that the content of the message is clear and tangible. This could be achieved with easy to follow numeric examples and diagrams that illustrate the fundamental impact of different contribution rate scenarios, including the impact of the tax benefit.
Cashing in withdrawal benefits The second key problem is that there is massive leakage from the system. This is because members typically cash in their withdrawal benefits. Based on recent research, the rates of preservation of benefits are extremely low. The outcomes are poor even on retirement because where there is choice, the bulk of fund members opt for living annuities and then don’t have the discipline or financial acumen to limit the draw downs to a sustainable level. The money runs out and they put themselves in the queue for the government pension. The means test on the government grant for pensioners creates a significant disincentive for members of funds to preserve benefits on withdrawal, as doing so may tend to disqualify them from obtaining the pension. Accordingly, industry stakeholders should lobby government to do the following:
• Phase out this means test so that those who save responsibly are not penalised for doing so. • Amend the Pension Fund Act to make preservation of a significant part of any withdrawal benefit mandatory. If at least 50% of any withdrawal benefit were transferred to an approved preservation or retirement annuity fund where the amount could not be accessed until the member reaches the age of 55, this would be a good start. These two simple actions would greatly assist in promoting and enforcing a proper savings culture. Hand in hand with the above, it is desirable to remove the option of housing loans or housing loan guarantees from retirement funds, as this tends to create a hole which reduces the likelihood of adequate accumulation/ preservation of retirement funding at member level. Improved communication on the adverse effects of non-preservation of withdrawal benefits need to be regulated. Benefit statements should be required to include a projection showing the effect at retirement date if a portion of the current benefit is withdrawn at the statement date without preservation.
Action is essential to maintain relevance Players in the industry who wish to pursue excellence should continue to innovate and achieve better results. The focus must stay on doing everything practical to assist members to achieve their reasonable retirement aspirations. Those players who fail to embrace positive change can expect to lose relevance and ultimately their customers.
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ETFs and some of the pitfalls to consider Exchange traded funds (ETF) have gained much popularity recently. They are being made use of extensively in many investment portfolios, but there are dangers or pitfalls that need to be considered. It is quite simple to see why ETFs have become so popular. If we look at the statistics that about 80% of asset managers are not meeting the benchmarks that they have set for their funds, there would be obvious concerns. Add to this the cost that must be paid in the hope that an actively managed fund by an asset manager will beat the benchmark, compared to the much lower costs (total expense ratios) associated with simply tracking an index, it’s no wonder that investors start asking questions and looking for options. Those options have come in the form of ETFs in recent years. Almo Lubowski, CFP®, Technical Manager: FPI
As much as this is great for investors, there are some considerations. The liquidity of ETFs is ultimately linked to the liquidity of the underlying securities. Therefore, the underlying securities still need to be considered and matched to an investor’s needs. As mentioned the total expense ratios of ETFs are more favourable than traditional actively managed collective investments. From a pure cost perspective, switching from actively managed funds to index tracking funds will already assist in curbing costs. However, for longterm positions, investors and advisers need to drill down and compare costs, or rather total expense ratios, of similar ETFs. Some evidence suggests that investors and advisers rely heavily on the name of an ETF as a guide to the underlying securities, but this can be fatal. Even the most educated of us can be fooled by clever marketing. When considering international ETFs, the most readily available
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ones consist of very large-cap equities and often don’t give exposure to the actual local economy. Exposure to that local economy, from an emerging market exposure perspective for example, is often what an investor is looking for. A South African example would be a SABMiller share that gives little exposure to the local South African market considering the company’s international interests. Most ETFs are market cap weighted and therefore can give a false sense of diversification. Again taking a South African example, the ALSI Top 40 is heavily weighted towards resources. This is not good diversification and could also be quite risky. The alternatives that have already been introduced in the ETF space are equally weighted funds. This way an investor is still getting direct exposure to the index, but hedging it by equally weighting the underlying securities. For example, an ALSI Top 40 equally weighted ETF would invest 2.5% in each of the top 40 shares on the JSE instead of their market cap weighting. Lastly, although ETFs seem simple, they can be complicated. The different tax treatment, depending on the underlying securities, often requires expert advice and planning. Investors and adviser need to make sure that this area is not neglected when choosing and advising on these investments.
thinking outside of the box Carla Letchman, FPI Research Analyst
Themed funds have become increasingly prevalent with investors abroad and, if you are not aware of the concept, it is suggested that you quickly become acquainted; especially in light of global trends. Themed funds are essentially funds that are geared towards a specific goal or are structured in line with an investor’s subjective view. In this instance, we are discussing funds with an environmentally-friendly mandate, hence the term ‘green investment’ is often used when referring to a themed fund premised on sustainability and the environment. The concept of themed funds is especially contemporary given the focus on environmental issues as highlighted at the G8 Summit on sustainable development. South Africans should not look at green investment as a far-fetched concept. It is a reality that requires action, according to the principles of King III which advocates corporate governance in terms of sustainability. Most investments envisage long-term investment. Therefore, the choices you make today will inevitably affect your investment in the future. Cognisance
must be taken of all contingencies including sustainable development, and more generally the environment. At the current rate of global warming, this aspect will become more widespread and as an investor it is best to be pre-emptive rather than reactive. There is already a move by governments to legislate minimum sustainability requirements that will have ramifications for non-compliance and could affect investments negatively if you, as an investor, have an interest in the stocks of the particular noncomplying company. When contemplating a themed fund, do not view it through a narrow frame, but rather look at it holistically; a themed fund does not envisage only green investments but it also contemplates broad sustainability initiatives such as water resources, building a dam and agriculture. Themed funds could be the solution to the investor’s search for something different in terms of diversifying portfolios. This has become of particular concern since the onset of the global financial crisis. We could even argue that it would be a safe long-term investment because we know that the ozone layer is not exactly healing itself and any hope of repair or maintenance of the status quo would mean a rollout of sustainability initiatives.
Water – popular themed investment fund Themed fund investment choices require initiative. Investment in water resources is a popular themed fund investment, requiring you to know the different mechanisms involved in supplying drinkable water to consumers. There has been significant global fiscal stimulus funding directed towards investment in water. The global fiscal stimulus packages have surpassed the US$3 trillion level. China and the US have set aside a huge portion of their spending to water development (refer to Steve Falci of KBC Asset Management’s, Water investment strengthened by global trends and current market environment.)
Agricultural investment opportunities The global population is increasing at an exponential rate and consequently more food is required to feed the ever-increasing population. Climate change might also require scientific intervention to adapt agricultural products to survive the threats of changing weather conditions, insect infestations and spreading disease. Good investment opportunities in this context would include research and development for new seed varieties, more efficient fertilizers and best practices for higher yields, transportation, logistics, storage and distribution, and the growing application of advanced business methods to small-scale agriculture (see Pictet Asset Management’s, A new ‘green’ opportunity in the world’s oldest investment.) This encourages thinking outside of the box; however, in years to come this type of investment will become the norm, encouraging investors and stakeholders to become more active in securing and becoming well-versed in long-term investment options. [published first in the IRFocus March/April 2010]
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Proposed law will have substantial effect on financial markets “This is likely to have the result that many of South Africa’s OTC derivatives market participants will be required to report their trades to a trade repository.”
The Financial Markets Bill, recently tabled to parliament by the National Treasury, will have a significant effect on South African markets, according to Kelle Gagné an executive at ENS. Kelle Gagné | Ewxecutive at ENS
Gagné says among the bill’s purposes are to conform the legislation to the Companies Act, 2008; lay the groundwork for over the counter (OTC) derivative regulation as contemplated by the G20 countries’ recommendations and align South Africa’s financial markets regulation with international norms. “These international norms include the International Organisation of Securities Commissions’ (IOSCO) policies and the International Institute for the Unification of Private Law (UNIDROIT) Convention on Substantive Rules for Intermediated Securities,” she says. She explains that the bill, which was developed by the National Treasury and the Financial Services Board in consultation with the JSE Limited and Strate Limited, will replace the existing Securities Services Act, 2004. One of the major effects of the bill is that, in accordance with the recommendations agreed among the G20 leaders and their Financial Stability Board, trade repositories have been established in a number of overseas jurisdictions. “This is in an effort to provide greater transparency in respect of prices,
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information and other elements of the OTC derivatives markets. As a member of the G20, South Africa is also committed to the recommendations,” Gagné says. The Financial Markets Bill provides for the establishment and licensing of trade repositories in South Africa. “This is likely to have the result that many of South Africa’s OTC derivatives market participants will be required to report their trades to a trade repository.” Similarly related to complying with South Africa’s G20 and IOSCO commitments, Gagné says for the first time in South Africa the bill provides for the establishment of independent clearing houses that are not directly appointed by an exchange. “The purpose of independent clearing houses will be to eventually facilitate central clearing of OTC derivatives.” The bill in its current form does not regulate the OTC derivatives market by, for example, setting out which types of OTC derivatives must be reported to a trade repository or stipulating which market participants are obliged to report OTC derivatives. “Rather, the bill expands the definition of ‘securities services’ to extend regulation to OTC derivatives so as to enable the Registrar
investments of Securities Services to set standards and conditions for the OTC derivatives market in accordance with the regulations to be promulgated by the Minister of Finance.”
Meanwhile, in terms of foreign direct investment, Gagné says the bill provides definitions for external authorised users, external central securities depositories, external clearing houses, external clearing members, external exchanges and external participants. “These foreign entities’ ability to participate in South African financial markets will be phased in subject to regulation prescribed by the Minister in terms of section 5(6) of the bill and to the discretion of the Registrar to determine requirements for the various categories’ participation in South African financial markets.”
T he bill tightens the insider trading provisions, including by limiting the currently available defences, narrowing the definition of published information to require wider dissemination prior to legal dealing by insiders and extending the liability of persons trading on behalf of others.
Gagné advises that the bill provides for a number of other technical changes, described below: •
urrently, central securities depositories (CSD) are able to hold C central securities accounts only for central securities depository participants (participants). The bill would allow other entities, such as external CSDs, to open central securities accounts with CSDs.
SDs will be obliged to assist the Registrar with enforcing the C provisions of the bill should it be enacted.
ew issues of listed securities may only be made in N dematerialised form, in line with South Africa’s policy of moving towards full dematerialisation for listed securities.
T he bill amends the definition of ‘securities’ to clarify that the legislation will apply to both unlisted and listed securities, as required by the G20 and IOSCO recommendations.
ominees who open accounts with authorised users of N exchanges and nominees who open accounts with participants will be subject to the approval of the Registrar.
T o give effect to UNIDROIT, the bill makes certain changes to the ways in which securities are transferred, given as security and/or attached.
T ransfers of securities will be able to be effected only by CSDs and participants.
nder the current Securities Services Act, 2004, security U cessions (pledges) are governed by section 43, which provides for certain notations to be made in the relevant securities accounts (at central securities depository or central securities depository participant levels). The Bill amends the definition of ‘securities account’, with the intended effect of providing for such notations to be made at the level at which the securities are held.
ttachment of securities will similarly take place at the A level at which the securities are held, against the securities of the relevant affected person.
According to Gagné, the Financial Services Board has indicated that it would like to see the bill take effect by the end of the year.
“This is in an effort to provide greater transparency in respect of prices, information and other elements of the OTC derivatives markets.”
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Retirement reforms must be sustainable
It is critical that government’s planned retirement reforms are structured in a sustainable manner over the long term. This is according to Willem Loots, Head of Umbrella Fund Solutions at Liberty Corporate.
“Sustainability has different meanings; in order for a retirement system to be sustainable, it should ensure broad access to many South Africans,” said Loots. “With this in mind, government has already made a number of positive retirement reform proposals that should benefit most South Africans. These include making the preservation of savings compulsory and a State contribution subsidy that enables low-income earners to save.”
Looking abroad He said it is important that government looks to other nations for guidance when structuring any new retirement funding model as there are lessons that can be learned, particularly from countries such as the US and Greece. “In these countries, social security works on a pay-as-you-go defined benefits basis, which simply means the contribution of a worker today is used to pay the pension of a retiree today,” Loots explained. “This makes the system heavily dependent on a country’s demographic balance, so the more people retiring relative to those working, the less the system is able to adequately pay those who reach retirement age.
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“Such systems are easily prone to political influence. For example, a government can promise citizens an earlier retirement with more benefits, without actually having to fund this benefit. If this promise cannot be afforded, it sows the seeds for a government-funding problem such as we are now seeing in Greece.” In 2010, Greece suggested raising the average retirement age which caused a number of violent riots among its citizens. “If you relate this back to South Africa, we are at the cusp of reforming our retirement system and the issue of sustainability needs to be kept in mind at every step,” noted Loots.
Making it work at home Loots said the structure of the National Social Security Fund will be core to the success of the proposed reformed retirement system. “The system needs to be flexible enough to cater for a number of unanticipated shocks (such as economic and demographic) and be able to respond to these without the need for political intervention. Therefore, consideration must be given to a funded defined contribution system as a more sustainable solution.
This is a simple savings account that is very easy for citizens to understand.” A defined contribution system may be workable for South Africans, as it not only promotes a culture of saving, but also provides a platform through which individuals can be educated on the benefits of personal saving. “This kind of system can provide a savings vehicle for those who aren’t formally employed, as well as providing a better solution to others who are either unable to work or not able to work continuously,” said Loots. “Ideally, the benefits an individual accrues from a retirement system should be proportional to that individual’s contribution towards it; but in a country like South Africa it is essential to have some kind of social protection floor in place for those who are not able to participate.” But the question remains, who will pay for this type of social protection and what impact will it have on savings schemes already in existence?
Potential scenarios Ray Middleton, certified financial planner® professional at Hereford Group of Companies, thinks that pension schemes might be affected but doesn’t think that a national savings scheme will impact on retirement annuities. “Companies will most likely be unable to contribute to private pension schemes and a national savings scheme,” said Middleton. Alternatively, payments to
the former will be reduced in order to support the latter. “However, there is not enough assurance that the central government will be able to run a national savings scheme efficiently,” noted Middleton. “While the political will might be here, the expertise is not necessarily on a par.” Over and above this, a small group of people is unable to support millions and government may end up doing more harm than good. More entrepreneurs are needed to create wealth and jobs and perhaps government needs to look at lending more support to such initiatives. Loots acknowledged that the solution will be difficult to come by due to the difficult demographic problems South Africa is facing that need to be resolved. Nevertheless, initiatives to improve the lives of all South Africans should be supported.
Should you ditch the difficult clients? Ian Middleton, Managing Director of Masthead
In light of the growth of social media, when a client becomes difficult, you as an independent financial adviser need to know how to manage the situation or your business could suffer. Irrespective of whether or not a client is justifiably dissatisfied with the services of your business, the reputational damage that can be caused by negative word of mouth could pose a serious threat to your business. Statistics reveal that clients will share a good service experience with approximately seven people and a bad service experience with about 15. With social media, this statistic is likely to multiply exponentially, which may cripple your business if you do not address client fulfillment and reputation management in your business strategy. When initiating a relationship with a client, it is not always possible to determine whether the client will be difficult to deal with in the future. There will always be picky clients, know-it-alls, egocentrics, faultfinders and constant complainers, but if you meet client expectations and your business validates their importance, clients are usually satisfied. Clients become dissatisfied and difficult when their realistic or unrealistic expectations are not – or cannot – be met. They may form unrealistic expectations in the absence of clear and transparent service levels, ill-defined adviser/client responsibilities, or a lack of client feedback at the outset of the relationship and during review meetings. When the client’s expectations are not met, your business may unintentionally project an attitude of indifference. The client responds by becoming unhappy or angry, upset and emotional. Unhappy clients may leave your business without giving a reason for their exit. Those who take the time to discuss poor service usually desire to remain your client despite the incident, in return for your commitment to improved service delivery. The benefit of their feedback is that your service shortfalls are revealed and you have the opportunity to address those gaps quickly and effectively before the balance of your clients become dissatisfied. It is thus vital to manage client expectations by documenting service level agreements, systemised
service deliveries and your ongoing engagement with the client. Be sure that you understand what your client needs in terms of financial planning and lifetime objectives, then design and document segmented service offerings to effectively meet those needs. Finally, revisit the client experience at agreed intervals. By building a service level discussion into your financial planning and review meeting agenda, you can also set expectations, define and allocate responsibilities and agree on objectives and the frequency of future communication. At your meetings, you and your client can determine if the relationship is, or continues to be, a suitable fit and if it is in your client’s best interest to continue receiving your financial advice and services. Many advisers fear terminating client relationships because it ends the potential to earn future income from these clients. It is, however, more costly to retain and continually fulfill the needs of clients who require a disproportionate amount of resources and costs to consistently meet their expectations, which could often be well beyond the service and operational capacity of your business. If the cost of retaining a client exceeds the value of that client, it is time to review the relationship. Should your revised service levels not appeal to the client, it may be in both your and your client’s interest to end the relationship. If you are looking to enter a longterm relationship with a professional partner who understands independent financial advisors and their businesses, please speak to your nearest Masthead Regional Consultant or visit www.masthead.co.za.
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New era practice management Rob Glenister, Business Development Manager at Celestis Rob Glenister is the business development manager at Celestis. He has vast experience in the financial services industry and business management. You can contact him on email@example.com or read more of his articles at www.celestis.co.za/blog.
“Yet, in the process you develop the most intricate and powerful business relationships possible.”
The facts are simple. If it doesn’t enhance your profitability in the short term and add value to your business over time, then it effectively represents practice mismanagement. This is to be the principle that we base this column on in the months ahead.
Here is the real benefit of practice management. As you improve your efficiency, you enhance your service delivery. An investment of time and effort on your behalf has the potential to generate material benefits for you, your staff and your clients.
Practice management has been a buzz phrase in the industry for years and has taken on a variety of shapes and forms. For us, practice management is all about how to best run your business. It’s about doing what you do even better, making money and satisfying your clients. Whether you are a sole proprietor working alone or a member of a large corporate or banking group, as a financial adviser, we regard you as running a practice. It makes you a business owner in our eyes, and our commitment is to provide you with information that will make it that much easier, and more profitable.
Growing the biggest asset you’re ever likely to own
An investment that is selfsupportive Like anything else in life, practice management comes at a price. Even free advice has an implementation cost. With this in mind, the immediate aim of practice management is to assist you in generating additional revenue. With a focus on efficiency and effectiveness, what you do in the name of practice management should translate into an addition to your bottom line.
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As a financial adviser, you present a unique business unit. What you offer is an intangible product: advice. Yet, in the process you develop the most intricate and powerful business relationships possible. This is the long term, sustainable value of your practice, a network of relationships that is founded on mutual integrity, trust and respect. It is this asset that practice management seeks to quantify and multiply by means of international best principles that work for you. If retirement is the pinnacle of financial planning then succession planning is the ultimate responsibility of any successful business owner. You owe it to yourself, your staff, your successor and your clients. Effective practice management means that what you do to achieve immediate objectives must simultaneously augment the long-term value of your business.
KEY REASONS TO INVEST IN LISTED PROPERTY Ian Anderson, chief investment officer at Grindrod Asset Management
Over five years the sector returned an average of 14.3% per annum, again outperforming bonds (8.6%), cash (8.5%) and equities (8.1%). During the first quarter of 2102, the sector offered an attractive 8% forward yield (first yearâ€™s income), giving investors an opportunity to benefit from growing rental income streams. With the main drivers of performance from the past five years persisting, appealing returns of 12 to 16% per annum can be comfortably attained from listed property over the next five years. With returns comprising a yield of some 8% and a forecast growth in distributions of 6 to 8% per annum, listed property offers investors the opportunity to earn an inflation-beating return with a high degree of certainty.
Listed property, with an impressive track record spanning the past decade, remains an attractive option for both discretionary and retired, income-dependent investors for a number of reasons. During the past 10 years to 31 March 2012, the listed property sector, which boasts a market capitalisation of R160 billion, returned an average of 26.7% per annum, exceeding inflation by about 20% per annum for the period. It outperformed the traditional asset classes over most reporting periods dating back to 1 April 2002, surpassing the FTSE/JSE All Share Index (15.1%) and All Bond Index (11.6%) over the decade.
Although listed property has achieved excellent returns over the past five years, we are of the opinion that the sector remains fairly priced, especially as valuations remain at a similar level to that of five years ago. This means an investment of R100 made in listed property in 2007 would have achieved income of R8 in one year, as the yield was 8% per annum back then. Today, a R100 investment in listed property would also achieve income of R8 because the yield remains unchanged. This indicates that income growth has driven price growth over the period, as opposed to listed property having rerated, which would have set a new, fair-priced starting point. In addition, the outlook for the property market is improving with decreased property vacancies since 2011. This provides a predictable income stream driven by rentals, which grows as the underlying leases escalate. Listed property has a relatively low correlation with other asset classes, offering investors the benefits of portfolio diversification. The sector is therefore often considered the fourth asset class and is as integral as equities,
bonds and cash to any diversified investment portfolio. Investors can expect equity type returns with lower volatility from listed property investments. In the past, these investments have offered a significant yield premium over equities, which pay dividends, and have also matched the income yield from local government bonds. But unlike bonds, listed property yields have the potential for growth. Returns are driven by a high initial income yield and inflation-beating income growth. Listed property is thus ideal for incomedependent retired investors, as well as those with a conservative to moderate risk profile. Investors receive a potentially high level of current income, paid to them as a regular income stream through quarterly or bi-annual distributions, as well as inflation-hedged growth in that income over time. Investors have the option to reinvest distributions to compound a growing income stream. Moreover, income is taxed in the hands of investors as interest, at their appropriate tax rate, which is likely to benefit older retired investors. Investors in a living annuity, preservation fund or retirement annuity enjoy the full benefit of the high income, as no tax is deducted in these investment vehicles. Currently, listed property appears far more attractive than bonds, which offer yields of 7.8% with no prospects of income growth; and cash, which provides negative real yields. Investors wishing to mitigate the volatility of the equity market or seeking defensive investments may also consider increasing their exposure to listed property. How much should a person invest in listed property? We are of the opinion that the optimal exposure to listed property should range from a minimum of seven to 25% of the portfolio. Investors should be prepared to invest in listed property for the long term and keep their investments for at least five years.
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Navigating a new tax risk landscape Arguably, the time has never been riper for tax controversy. Nor has the tax enforcement landscape been more difficult to negotiate. More than ever, companies must take care that their own tax risk management models are sufficiently mature, robust and embedded to ensure that the risk of tax controversy, like any other business risk, is subject to consistent control and reporting at the appropriate levels. There are a number of factors that are working together to make the tax environment a trickier one to negotiate. These include the commitment on the part of tax administrations to join forces (evidenced by the Convention Administrative Assistance in Tax Matters and the establishment of ATAF (Africa Tax Administration Forum)), the sharing of taxpayer data and information, and the increase in joint audits. The increased collaboration between tax administrations and the rapid and tangible rise in enforcement is attributable in large part to the financial crisis with governments being forced to source revenue to balance their deficits. A recent Ernst & Young survey found that 75% of tax directors in large multinationals have experienced a rise in the aggressiveness of tax audits. Supporting this is the findings of another survey on global compliance and reporting where, in the past 12 months, the following percentage of Fortune 500 were experiencing:
• • • •
Unplanned tax audits – 64% Unexpected tax assessments – 45% Penalties – 42% Business interruption due to lack of compliance – 17%
A subtle but important change has also taken place in the social role of companies and the way they manage their tax obligations. As some commentators have pointed out, tax is no longer only a cost of doing business, but has, to a degree, become a social business card. Good corporate citizenship means
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paying – and being seen to pay – a fair share of tax. The environment shift is compounded by the accelerated pace of new regulatory and reporting requirements and the increasingly complex and subjective nature of tax legislation in many countries. This together with the evolving business models and transforming finance functions is presenting global business with new opportunities to better optimise efficiency, control and value. Historic models are no longer sufficient to support the needs of the new business environment. When looking at a business as a whole, tax-related activity is often dealt with by departments other than the tax department (employment, indirect and operational taxes) and will reside outside the tax department’s remit within the various financial (procure to pay, order to cash, inventory management, payroll, fixed assets and financial stamen closure process) and operational processes (supply chain management, customer management, human resources, operations and infrastructure) of the organisation. As the key tax processes relating to these taxes are not always owned by the tax department and often managed within the wider business community, effective tax risk management can be challenging. Many companies are aware that their tax risk management models need to be taken to the next level of maturity so as to operate more effectively in today’s environment. In this regard, the first point to recognise is the fundamental link between the tax risk and corporate governance. It is not sustainable for the tax risk to be shouldered by tax directors or tax departments; the trend for companies to embed tax risk more securely within
tax planning their corporate governance is increasing. According to the Ernst & Young survey mentioned above, the number of companies applying greater internal audit scrutiny of tax controls and processes has increased nearly 30% since 2006. Leading organisations have or are developing, often in line with finance transformations, tax control frameworks that are appropriate for their organisations and support their current tax risk management processes. The control frameworks being developed address three key areas:
business objectives, enhancing operational agility and performance. Given the current existing tax risk landscape, an organisation’s ability to implement and maintain leading tax risk management processes requires ongoing commitment and an approach to tax risk management that is risk-based, controlenabled and performance-led. An efficient and effective tax control framework supports the tax risk management of the organisation in a sustainable manner, allowing tax professionals within the organisation to be forward looking in the mitigation and control of tax risk.
“Many companies are aware that their tax risk management models need to be taken to the next level of maturity.”
• G overnance: establishing an effective governance framework across the organisation, function activities and business processes in terms of tax control. • People: having appropriately qualified and skilled resources to manage the tax function. • Methods and practices: building methods and practices to support efficient and effective ways of implementing, monitoring and reporting tax risk within the constraints of a clearly defined tax control framework. An effective tax control framework allows an organisation to: • C onsider and document the key factors impacting the tax control environment. • Understand the implications of each factor in relation to business strategy, objectives and obligations to key stakeholders. • Decide where it wishes to be in terms of tax control maturity in relation to each factor at any given point in time. • Implement actions to remediate any likelihood of failure to meet its strategy, objectives and obligations. • Regularly assess its performance against each factor, taking into consideration the industry, markets and geographical areas in which the organisation operates. • Develop efficient and effective tax risk reporting to the audit/risk committee and board. • Integrate tax risk into the enterprise risk management of the organisation. Such an approach paves the way for decisions to be made and actions to be taken that are aligned with the group’s overall strategy and
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GOVERNMENT TOUGHENS STANCE ON OUR NEED TO SAVE FOR RETIREMENT South Africa’s retirement industry faces longanticipated reform as government has been considering plans to make retirement saving compulsory for everyone in employment at least since 2004. Government plans to introduce the National Social Security Fund to which all working people will be required to contribute. While waiting for the major proposed changes, some changes will be fast tracked as the Minister of Finance indicated in his 2012/2013 budget speech that the end of provident funds can be expected on 01 March 2014.
Nomtha Mthembu a Professional Assistant in the Employment Law Department at Garlicke & Bousfield Inc
The proposals came about as a result of identifying that when members resign they withdraw from provident funds, usually receiving poor benefits and that they then cash these benefits and consume them before retirement. This results in members retiring with an inadequate means of support. Simply put, the build up of savings is disrupted as members do not retain their benefits in preservation funds when they change jobs. In addition, government seems to have realised that the means test for state benefits acts as a
SA insurance faces upheaval and soaring costs South Africa’s insurance industry is undergoing significant regulatory changes which are dampening risk appetite, stifling growth and slowing the pace of international expansion, according to PwC’s fifth biennial Strategic and Emerging Issues in South African Insurance survey released in June. Tom Winterboer, financial services leader for PwC Southern Africa and Africa says, “In 2012, regulatory and reporting changes are considered the major drivers of change in the insurance industry. “In addition to the Solvency Assessment and Management (SAM) requirements, South African insurers also have to prepare for pension fund, national health insurance and Treating Customers Fairly (TCF) reforms among other changes. An overwhelming majority of insurers believe that they are operating under a heavy burden of regulation, which is expected to increase substantially over the next three years.” The other major drivers of change facing the industry this year are capital requirements - which moved from fifth place in 2010 to second place in 2012 - and consumerism. Two new drivers, changing demographics and internet/mobile technologies, were positioned close behind in fourth and fifth position.
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disincentive against income earners, particularly low income earners, in making retirement provision for themselves. This is so since the means test for old age assistance favours lump sum benefits. When a member resigns or retires from a provident fund, he or she receives a lump sum benefit and once the lump sum has been consumed, the member easily qualifies for the old age assistance without any penalties. The government is therefore seeking to compel income earners to provide for their retirement in the form of pension structures where a member can only consume as a lump sum, a third of the accrued benefit and is compelled to purchase an annuity, or what is known as a pension, with the balance. A member who receives a pension would not meet the means test for old age assistance, and thus would be unable to rely on the state for income. In introducing compulsory retirement saving for all working people, changes in the legislative framework can be expected. From a planning perspective, employers may need to revisit employee benefits packages and revise employment contracts, particularly the cost to company clause in respect of retirement contributions, in order to accommodate these inescapable and imminent changes.
Large companies dodging tax The government has accused large multinational companies of using complex transactions to illegally reduce local tax payments, costing South Africa billions of rand, reports Reuters. “We have detected an increase in the use of cross-border structuring and transfer pricing manipulations by businesses to unfairly and illegally reduce their local tax liabilities,” Oupa Magashula, South African Revenue Service(SARS) commissioner, told Parliament’s finance committee in June. Tax crimes are on the increase due to sophisticated evasion tactics. “A company will always try and actually maximise its after-tax profit... and a 1or 2% movement one way or the other could have a decisive impact on profits,” says Bob Head, a chartered accountant and special advisor to Magashula. “There are some people in the business of trying to help companies not pay tax and they will keep on inventing new schemes,” he adds. SARS has collected more than R5 billion through audits and additional assessments on large corporations, but it was difficult to quantify the exact cost to government, a tax official said. SARS has ratcheted up targeted interventions in high risk areas, including transfer pricing by large businesses, incomes of wealthy South Africans and the illicit cigarette industry.
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