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30 April 2018 |

First for the professional personal financial adviser





Fundamentals remain positive for global growth and corporate earnings

The expenses of the fund should be paid by the fund, and not by the administrator Page 16

Page 13

HOW TO ACHIEVE A SUSTAINABLE RETIREMENT INCOME Retirement portfolios should have at least 50% in growth assets Page 26

SA economy – What’s the worst case scenario?


n their report released last month, President Cyril Ramaphosa achieving entitled Investment decisions: Why the goals set out in his New Deal South Africa, and why now – PwC Plan (the plan he used in his winning economists examined various forward- campaign for ANC party president in looking scenarios for the Ramaphosa 2017) as well as GDP growth in excess presidency over a five-year horizon of 4% by 2022. The country’s ratings towards 2022. improve significantly, In the worst returning to investment PWC SEES A 75% grade, while the ANC is case scenario, entitled Mouldy rewarded with a notable PROBABILITY Mess, PwC increase in support in the OF IMPROVED economists see 2019 elections. There’s a ECONOMIC the Ramaphosa strong rise in FDI (forward presidency as direct investment) and GROWTH achieving only increased competitiveness in limited reforms which keep economic manufactured exports supports the rand growth stuck below 1%. This scenario to an average of R13.30 to the US dollar also predicts another two rounds of in 2022. rating downgrades as well as the ANC At the time of the writing of this losing its outright majority in the 2019 report, following the February State national elections, retaining power only of the Nation Address (SONA) through a fragile coalition. Economic by President Ramaphosa, PwC competitiveness declines, causing the economists viewed the most likely rand to soften to an average of R18.20 scenario as #Ramaprogress. The to the US dollar in 2022. president is able to make reforms In the best case scenario, entitled that push economic growth to 2% in Prosperity, PwC economists see 2020 and 3% by 2022. Fiscal dynamics

improve and there are no further downgrades by major rating agencies. The ANC improves performance at the ballot box in 2019 and ends declining support. Export growth and investment inflows support the rand that averages R15.60 to the US dollar in 2022. As the table on page 2 shows, PwC sees a 25% probability of the next five years delivering economic growth of less than 1.5%. This indicates a one-in-four chance that the election of President Ramaphosa will have no significant impact on the local economy. Conversely, PwC sees a 75% probability of improved economic growth (above the population growth rate) over the next five years. In his SONA speech, President Ramaphosa said land expropriation without compensation must be done in a way that increases food security and agricultural production. Just over a week after the speech, parliament debated an EFF motion that section 25 of the Constitution

be amended to accommodate the expropriation of land without compensation. There were a few changes to the motion by the ANC that the EFF accepted and the motion was passed by a huge majority. It will now be discussed by Parliament’s Constitutional Review Committee and returned to Parliament by the end of August. This move has caught the attention of investors, with some fearing land grabs, and others concerned about how this would impact South Africa’s economy. Continued on page 2

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30 April 2018



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“Events like the ANC and EFF voting together in parliament on the land issue mean that our 25% number for the worst case and downside scenarios is now probably a bit higher,” PwC economist Christie Viljoen told MoneyMarketing. “The ANC’s elective conference at Nasrec in December adopted the resolution of expropriation without compensation, so that’s the party policy that President Ramaphosa needs to implement. He hasn’t explained how he’ll do it, but I think the sentiment is that he wouldn’t be reckless and he wouldn’t like to see chaotic land expropriation,” Viljoen said. “What’s going on at the moment is possibly not what President Ramaposa wanted or envisioned for land reform. He would probably have preferred

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to first try to improve the land reform process – that over the past 20 years has been terrible – before taking this step.” Viljoen added that the role of Parliament’s Constitutional Review Committee needed to be examined. This Parliamentary committee includes members of the National Assembly and the National Council of Provinces. It consists of 24 members, and is co-chaired by ANC MPs, Vincent Smith and Musawenkosi Nzimande. The DA’s Glynnis Breytenbach and James Selfe represent their party on the committee. Other members include the EFF’s Floyd Shivambu, Justice Committee chairperson Mothole Motshekga and Police Committee Chairperson, Francois Beukman. “For investors, the concern is that this committee has made



changes to the Constitution in the past. However, the committee has also denied requests for changes – so this is not a rubber stamp committee. They will do a proper job because after all, this is the Constitution. The process will be a lengthy one and will include all political parties and public consultation. It’s a thorough process.” Viljoen cautioned that South Africans will have to wait for August until they know more. “Like the Mining Charter, one can’t do anything to rush it.”

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PwC economist Christie Viljoen

couple of days before this edition of MoneyMarketing went to print, South Africans received the good news that Moody’s had retained the country’s existing investment rating and had also raised the outlook to stable. No doubt this is due to the election of Cyril Ramaphosa as President of SA, the onslaught on state capture and other types of corruption in the country, as well as the reappointment of Nhlanhla Nene as Finance Minister. SA’s investor roadshow to the UK and US the week prior to Moody’s announcement - consisting of government, business and labour leaders - undoubtedly did a lot of good too in shifting investor sentiment favourably. Moody’s has always been the more optimistic of the three major ratings agencies. Standard & Poor’s and Fitch both downgraded SA to junk status late last year, leaving only Moody’s with SA’s foreign currency and rand-denominated debt at investment grade. While the news from Moody’s is welcome and positive, we mustn’t lose sight of the important policy steps that still need to be taken to bring about higher growth in the country’s economy. These involve amendments to the Mineral and Petroleum Resources Development Act and the Mining Charter – and, of course, the thorny issue of land expropriation without compensation, the bugbear of most investors. In its statement, Moody’s said it remains unclear how the new government will pursue its land transformation objectives, or what impact that will have on agricultural production and security. The ratings agency – and this is important - also emphasised that how the government acts on the land issue will provide important insights into the government’s plans to balance nearer-term economic objectives (to sustain confidence and promote investment) against longerterm social and economic objectives (to address unemployment, inequality and poverty). The land issue is spreading fear and must be addressed. Janice @MMMagza

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30 April 2018


How did you get involved in financial services – was it something you always wanted to do? Growing up, I actually had very little interest in financial services. I always thought I would choose medicine as a career path. It was my father who encouraged me to study actuarial science, and it was through this that I became deeply involved in the mathematics of finance and its application. As I studied this, I realised that financial services is probably one of the most powerful enablers of the betterment of society. It can arguably make one of the most material and positive impacts on people’s lives. What makes a good investment in today’s economic environment? Despite what one may think about having the right short-term investment views to cater for today’s environment, I strongly believe that good investment outcomes rely more on having the right behaviour in place. If you look historically at how much people invest, it’s far too little and it’s predominantly done after the market has already performed well. And then after markets fall, people tend to withdraw their money.

It seems we are hard-wired to make poor investment decisions. A good investment outcome relies on the right behaviours: having a disciplined non-negotiable savings plan, having the right long-term views and sticking to them. It obviously helps if these habits are formed from a young age. What was your first investment and do you still have it? My first investment was when my parents invested R50 in a bank account when I was born. I still receive interest each year.   What have been BITCOIN IS your best – and worst – financial NOT PART moments? OF MY OWN My best moments revolve LONG-TERM around when I see people who have made the right SAVINGS financial decisions upfront STRATEGY and are reaping the longterm rewards. My worst moments are when I see those who had the means, but have delayed or made the wrong decisions for short-term conveniences that they thought were important at the time. They will probably live to regret those decisions for many years.  My focus at Discovery Invest is building incentive structures that encourage the right types of savings behaviour, and it is extremely rewarding to see these having a real and tangible impact on savings levels and outcomes for so many people.   Do you own Bitcoin? If not, why not? I do own a tiny fraction of Bitcoin. From my point of view, I generally invest a very small amount in a range of alternative structures to understand their workings. That said, Bitcoin is not part of my own long-term savings strategy. I think that currently, it should not be considered part of a responsible financial plan.

UPS & DOWNS Amazon has passed Alphabet and is now second to Apple in the list of the most valuable companies in the world. Last month, Amazon’s shares rose, lifting its market value to $768bn. Meanwhile, Alphabet shares dropped and the company is now valued at $762.5 bn. While tech mega-caps have rallied in the past year in the US, Amazon’s performance was the best – its stock has surged 85% over the last year. Amazon has been popular amongst

investors who believe that its growing cloud computing business will supply the cash needed for investments in original content, physical stores and warehouses.

Facebook’s Mark Zuckerberg lost $6bn in stock value the day after Cambridge Analytica’s data misuse was disclosed last month. Cambridge Analytica uses data mining, data brokerage and data analysis with strategic communication for the electoral process. The company was involved in Donald Trump’s presidential campaign as well as

the Leave.EU campaign for Britain’s withdrawal from the European Union. In March, media in the US and Britain reported on Cambridge Analytica’s use of personal information, tied to 50 million Facebook users, without permission.

VERY BRIEFLY The Hollard Insurance Group has announced the disposal of its stake in Cedar Employee Benefits to NMG Benefits, the South African arm of the international NMG Group. “Cedar is a profitable and very well managed employee benefits business that provides valuable services to retirement fund and healthcare clients throughout South Africa,” NMG’s CEO, Jacky Mathekga said. “I look forward to welcoming the Cedar management and all its employees into NMG, and to working together for the benefit of all our customers.” The combined NMG Benefits and Cedar businesses will have over 1 000 corporate clients, with some 450 staff looking after around R200bn in retirement fund assets. This makes NMG the second largest employee benefit operation in the southern hemisphere. Metropolitan Health Group (MetHealth), Thebe Health Group (Thebe Health), Workerslife Group (an affiliate of the PGC Group of Companies) and Validate (a group of healthcare industry players) have entered into a strategic partnership where Thebe Health and the Validate/ Workerslife consortium will own a 49% stake in MetHealth. MetHealth (a division within the health solutions environment of MMI Holdings Limited) administers the Government Employees Medical Scheme and provides wellness services to a number of clients, covering over 1.8 million lives. The key strategic focus of MetHealth is to achieve financial wellness for public sector communities by enabling and delivering sustainable integrated outcomes-based healthcare solutions as a transformed organisation.   Aon South Africa has acquired Niche International Brokers, an independent specialist trade credit brokerage with operations in Johannesburg, Cape Town and Durban. The deal sees a transfer of Niche’s client accounts and team of trade credit specialists to Aon, effective 1 March 2018.  Niche’s current owner, Ken Jedlinski is also joining Aon, providing continuity for clients and colleagues alike.  Sanlam Private Wealth has announced the appointment of three new nonexecutive board members. Karabo Nondumo, Thobeka Sishuba and Anton Raath have joined the company’s board in line with its strategic objective of transformation and of growing the business in new markets. Daniël Kriel, Chief Executive of Sanlam Private Wealth, says the new board members bring a powerful mix of skills and expertise and he looks forward to working with them to steer the firm – that manages assets worth R240bn and has a global footprint in five countries – into the next phase of its growth.



30 April 2018

Use a Will to cement longterm client relationships

D Protecting an estate's heirs


id you know that approximately 850 new estate matters are filed with the Master of the High Court, valued at between R2bn to R3bn, every month, according to statistics released by the Fiduciary Institute South Africa? Research shows that more than 70% of estates suffer liquidity constraints that impact their timeous and effective winding up, and only an estimated 23% of estates have Wills. The balance are wound up intestate, meaning that a client’s wishes regarding the distribution of his or her estate may not be fulfilled and, in particular, any minors interests would need to be catered for through the Guardian Fund. With these facts in mind and when reviewing what is currently available, it is clear that there is a dire need for a comprehensive solution to address these issues. It is for this very reason that Clientèle has launched its Estate Preservation Plan.  The Clientèle Estate Preservation Plan was developed by a small team with 145 years combined industry experience between them. This bespoke solution not only addresses the need for an executable, accessible and relevant Will, but also provides a level of financial protection for an estate’s heirs during the process of winding up the estate. The cover provided under the Plan includes benefits related to immediate cash needs, administrative costs, executor fees, minor debtors as well as funding assistance in terms of ongoing monthly expenses which beneficiaries may require while the estate is being wound up. INTERMEDIARY  “The Estate Preservation Plan is BROKERS ARE a unique offering which provides a vital link between the client, fiduciary GOING TO BE specialists and financial advisers, as A NEW KEY all parties involved are aligned in terms of their interests. This plan, STAKEHOLDER combined with a first to market FOR US online underwriting capability, is dedicated to assisting financial advisers. This means that Clientèle Life is well positioned to enhance the value proposition to clients,” says Bart Wouters, Head of Distribution, Estate Division, Clientèle Life.  “We are very proud to be launching the Clientèle Estate Preservation Plan. A tremendous amount of work has gone into preparing this ground-breaking product. This is a new market for us and we are very excited about it. Intermediary brokers are going to be a new key stakeholder for us and we look forward to forging strong relationships with them. Safeguarding our clients’ world with compassion will remain our top priority and the Estate Preservation Plan truly embodies this,” says Basil Reekie, Group Managing Director, Clientèle.

rafting and advising someone on a Will not only has the potential to protect precious family relationships and save money, but can vest a critical advice relationship between an intermediary and a client. David Thompson, Legal Adviser at Sanlam Trust, says there are few client interactions as profound in gaining personal information about a client as the drafting of a Will, and herein lies the opportunity. “The contents of a Will have split families, turned siblings against each other and have led to the wasting of  inheritance money on unnecessary court battles. And, whereas people often draft a Will because they want to avoid inheritance battles, a well thought through Will plays a major part in anyone’s financial planning. If poorly drafted it can cause disputes and unimaginable trauma.” Thomson says clients, in an attempt to express what they would like to happen to their possessions after their death, have to disclose a lot of personal information to their intermediary. In taking the instructions to draft a Will, intermediaries have an opportunity to establish the foundation for a longterm relationship with their client, and build lasting trust. The opportunity will also lend itself for further discussion about the client’s investment and insurance portfolio too. Intermediaries can use this discussion to prepare the ground for proper estate planning. The most likely solution from an estate planning exercise is pure life cover to ensure liquidity within the estate to pay executor’s fees, estate duty, debt, CGT & other taxes. In addition, he says, intermediaries should be encouraged to discuss with their clients the possible need for an inter vivos trust and to clearly explain the difference between an IV trust and a testamentary trust. “Furthermore, you will do well to advise your clients on the safe custody of the original Will to offer peace-of-mind.”  Thomson encourages a discussion on potential executor’s fees and who to appoint as executor and/or trustee. Clients don’t always understand the responsibilities of an executor and the time consuming effort it takes to finalise an estate. Appointing a

family member or friend without the necessary expertise, might not always be the best decision. In addition, clients with loved ones living overseas will have questions about foreign inheritances and exchange control. The exemption from estate duty on retirement funds is also an important aspect of estate planning. “Clients will, generally, welcome a simple calculation showing their potential exposure to estate duty and capital gains tax and whether they have the means to pay for these expenses and taxes. Most intermediaries have access to a liquidity calculator or software to help them calculate this.” He says the importance of having sufficient cash available to the estate and the trust set up, for example, to look after minor children cannot be underestimated. Funds may have to be provided for a lot longer than the client initially believes – experience has shown that to be the case quite often. “Proper estate planning will give you a much better idea of how to address these concerns,” Thomson adds. Intermediaries may offer holistic estate planning services or have access to legal consultants to help them do this.  Apart from the abovementioned, other questions may arise from the financial statements (personal or business) of the client. “Any debts and liabilities of the client should be settled when he or she passes away, and there are a variety of insurance solutions for this”.   However, Thomson cautions against overwhelming clients, as the priority is to prepare the Will and get it duly signed and witnessed. “Thereafter you can prioritise some of the other important issues in a follow-up meeting. Once an estate analysis and plan has been compiled most of the work has been done as it can conveniently be used as a basis to update the clients’ information.”

David Thompson, Legal Adviser, Sanlam Trust

30 April 2018

RICHARD RATTUE Managing Director, Compli-Serve SA



SLAs not a ‘nice to have’


well-prepared Service Level Agreement (SLA) sets out the expectations between a client and the intermediary, helping define the relationship between the two parties. With an ever-mounting barrage of legislation generally in favour of clients, an SLA is no longer a ‘nice to have’. It is the cornerstone of how the intermediary sets and maintains commitments to clients and is essentially a binding contract. An SLA further incorporates clearly defined promises, and thus reduces the chances of disappointing a client. Under the existing FAIS General Code, it’s important to ensure that the relationship with the client is documented to an extent that both parties are aware of their individual duties and obligations. An SLA is a two-way street and allows an intermediary to set out what they expect from a client, for example, through disclosure, reading the documentation supplied, or by informing the intermediary of any change in financial circumstances. An SLA should address the following important aspects: • What the intermediary is promising • How the intermediary will deliver on any promises made, as well as what happens if a promise isn’t kept

• Any costs involved • How delivery will be measured • Any relevant limitations. The SLA should be reviewed every six months and updated accordingly, and the client should be asked to review and approve the changes. Segmenting can sort it all The challenge for a smaller intermediary firm is to get the relationship right between what is promised and the firm’s resources. An SLA can’t be created in a vacuum and must be designed with the available infrastructure and resources in mind. Of course, a relationship exists between what is promised and the costs to deliver. A good place to start is to use a segmented service model. Some clients need higher levels of availability and are willing to pay more. They would have various spheres of service incorporated into the SLA. Segmenting service offerings with different pricing for different service levels benefits both provider and client, in that the provider widens its target market and the client only pays for what he or she needs. If an intermediary is charging fees, then this becomes even more important.

Key performance indicators will come into play when assessing how a quality improvement process can be integrated into the SLA, so these should be determined upfront. By tying a problem resolution process to an SLA, improved customer service satisfaction stays a clear objective. As an SLA links the client requirements to infrastructure requirements, it creates the ability to link service levels to service cost, and as a result profitable pricing can be set. It further sets the standards to which the intermediary is committed, and as a result a set of common goals can be managed and measured for both parties. When creating an SLA, one must keep the agreement simple and measurable, set realistic goals and keep penalties limited to serious offences only. In the post RDR world, a client SLA is highly recommended.

How to talk to your clients about market volatility With volatility expected on global markets throughout this year, financial advisers will have to settle clients’ nerves during market pullbacks. While advisers see these declines as being a part of investing, how do they convince clients not to panic during downturns?


merican financial planning guru, Michael Kitces, says that following market volatility, “client nervousness begins to rise… along with outright phone calls and emails from some clients. This simply means that now is the time to get proactive in communicating with them.” Claire Akin of California-based Indigo Marketing, a firm serving top independent financial advisers in the US, suggests that it’s your job as a financial adviser to keep clients calm and informed during volatility. She even suggests that downturns can be powerful marketing opportunities because an adviser’s campaign about volatility is likely to get twice as many views and shares as their other campaigns. Also, there is an unprecedented urgency to act during an uncomfortable market decline. “Your clients hire you to not only help plan for their financial future, but to educate them in good times and in bad. They are eager to hear from you

to get an explanation of what’s going on, and receive some guidance on what they should (or shouldn’t) do about it.” Advisers should stop clients from selling when the market is down. “We all know that behaviour is an important component to long-term investment success and when clients are feeling the urge to sell when the market is low, it’s your place to remind them of their long-term plan.” Akin adds that staying in touch actually results in fewer phone calls and panicked clients. “If you’re able to act quickly, clients are more likely to trust that you’re prepared for the volatility and they’ll feel they’re in good hands. This results in less time spent educating and calming individual skittish clients.” She thinks that most advisers wait too long to communicate during market swings, “because they know that each event is different and they’re waiting to fill in the specifics.” The markets may correct after a big decline, but advisers key messaging should be the same, no matter the specific situation: • This market behaviour is to be expected. Explain that you have been anticipating volatility and that it’s a normal and healthy part of market cycles. • Your portfolio is not down as much as the market. Remind clients that while the equity market may be down, their accounts are not invested in the index and have therefore declined less than the market. • Don’t sell now. Explain that no one can consistently predict the right time to get in or out

of the market. It’s human nature to lose patience and sell at or near the bottom of a downturn. Even if you were able to get out early in a decline, you’d still have to guess when to get back into the market and you’d likely guess wrong. • You have not realised any losses yet. It’s normal to feel uncomfortable when the market is down, especially if you’re approaching retirement. However, each time in history that the market has gone down, it has come back up again. Average downturns of 10% are likely to return to normal within about 115 days, based on historical data. • Focus on the long-term. Tell clients that you’ve built their financial plan and investment strategy for the long-term, with short-term volatility in mind. While a correction can be unsettling, there’s no reason to deviate from their long-term financial plan. Akin explains how financial advisers can use volatility to get referrals. “Now that you’ve proactively communicated with your existing clients, it’s time to use the market downturn as an opportunity. Downturns bring precious urgency that we don’t find at any other time. Prospects who have put off financial planning for most of their lives are not easily pushed into action when times are good. But when times are bad, things get very uncomfortable and they’re more willing to talk.” She suggests advisers should offer a deal for clients’ friends and family as well as remind clients that they’re never too busy to help them. “Encourage them to forward your market update email to their network.”



30 April 2018

PETER-JOHN MARAIS Independent Financial Adviser, Progressive Wealth

Diary of a financial adviser

MoneyMarketing asked Peter-John Marais of Progressive Wealth to share an account of a week of his life as an IFA. Monday I arrive at the office knowing that Asian equity markets are fairly positive so far for the day – fingers crossed this rubs off on the local market. My business partner and I briefly share the details of our week ahead. We discuss client queries and servicing issues with our admin team and then we head off to our desks to tackle emails and to prep for upcoming meetings. The first meeting of the day with one of our investment consultants is quick but informative. It’s good to hear that yet another asset manager is rather (cautiously) optimistic on SA equities. I then have a gap to return calls from two clients – a tax query and a partial withdrawal request (the cost of living is taking its toll yet again). I head off to my next consultant meeting: another enlightening chat and some defensive comments around the asset managers’ recent performance. (I suppose the stronger rand took many by surprise). Back to my desk for some final client meeting prep. The local currency hasn’t done anything frightening today and markets close on a positive note. Tuesday The day starts fairly early with a client meeting at one of the local coffee shops – certainly a second office for many financial advisers. The meeting goes well with some time spent on catching up on our KARL BLOM Associate and DANIEL VALE Candidate Attorney, Webber Wentzel


hen someone’s personal information has been leaked, what legal redress is available to them? Under South Africa’s current laws, people are often left without a practical way to enforce their rights. However, once the long-delayed Protection of Personal Information Act (POPI) comes into force, people in South Africa (including companies) will finally have a practical tool at their disposal to protect their personal information. The current position South Africa’s Constitution and its common law recognise the right to privacy for all people (including corporations). As a result, people who violate another person’s right of privacy can be held liable. Privacy (in these instances) typically refers to the right of a person to choose, within reason, the information they wish to keep hidden from the public. A person’s right to privacy is typically infringed in one of two ways:  • When a person deliberately intrudes upon another’s personal affairs

personal lives and then moving on to discuss the state of SA politics. The remainder of the meeting covers the client’s investment and financial portfolio review. My last meeting for the day is with a new client (a referral from an existing client). The meeting is a good one and the client asks to schedule a follow up meeting. Wednesday I’m at my desk first thing in the morning. I engage in a retirement and tax discussion with my business partner, and then head to the boardroom for the day’s first client meeting. The client is pleased with his portfolio review and generally feels more upbeat about SA’s prospects. He is, however, slightly concerned about all the ‘land expropriation without compensation’ talk across various political parties. Back at my desk for a few minutes of reading – market insights, headlines for the day and a summary note from one of the asset managers. Then it’s into our quarterly investment committee meeting for a full update and discussion on markets, an overview of our portfolio holdings and debate around possible changes to the portfolios. Unlike the minor adjustments made in the last quarterly meeting, we leave the portfolios unchanged as we all agree that our views have remained the same.

Thursday I pop down the road for a client meeting about tax free investments – they certainly seem to be gaining popularity. Perhaps we should market the benefits to clients on a more regular basis? Back to the office for a meeting with a new client. He is pleased that we can assist with his pension money, following his retrenchment a few days earlier. Although pleased to pay an annual percentage of investment capital with respect to fees, the client is happy to hear that we also offer fixed annual fees. I then join our junior financial adviser for a meeting with one of his new clients. The meeting goes well and I am very pleased with how our most recent addition to the team handled the discussion. Friday I’m glad I declined that golf day invite a few weeks ago, because it is going to be a busy day. Following some of the usual daily admin and two client review meetings, it’s off to Sandton for an asset manager presentation. I manage to discuss Capitec (post the Viceroy report), with one of the portfolio managers. I return to the office to meet, together with my business partner, one of our longest standing clients (a retired couple). It’s a great way to end the week with clients that have been able to see the rewards of investing for the long term (and who have followed our advice by not acting on emotion). Then it’s back to my desk to load my monthly CPD points onto the FPI website and the day – as well as the week – is complete.

Personal information leaks - what legal redress is available? without permission or justification • When a person deliberately shares another’s personal information without permission or justification. In the case of the recent data leak by prominent realty agencies in SA, people who have had their personal information exposed could potentially rely on one of these grounds. Typically, of the two possible claims, the stronger claim would be based on the unlawful publication of a person’s personal information (a large scale data leak is a blatantly unlawful publication of personal information to the public without their consent). However, illustrating intention (ie that the sharing was deliberate) will always be a challenge as claims based on the negligent (ie careless) disclosure of personal information are rarely successful. Importantly, it falls to the person whose information was shared to demonstrate that the invasion of their privacy was intentional. One could argue that the person disclosing the personal information had foreseen the possibility that they were sharing

someone’s personal information and that they had reconciled themselves with that possibility (the nowfamous dolus eventualis debate) however, this is also difficult.  Even if you are successful in proving your claim, the monetary relief obtained by a person to compensate them for the violation of their privacy rights varies. Nevertheless, the damages awarded by courts are typically low (especially when factoring in legal fees, which may exceed the damages awarded). This, along with the difficulty in establishing a claim (ie that the breach must be deliberate), are shortcomings of the common law.   As a consequence, there has historically been little incentive for most companies to adopt stringent safeguards in relation to the personal information in their possession.    The future – POPI Under POPI, the collection, processing and publication of personal information will be stringently regulated, including the manner in which personal information must be

safeguarded. This is because POPI prescribes specific requirements as to how personal information may be stored and transferred (among other things). When a person fails to adhere to these new rules, they could suffer significant penalties.  POPI does not require that personal information be made public in order for liability to arise. Similarly, a person does not have to intentionally breach another’s right to privacy in order to be liable – POPI imposes liability in the event of either an intentional or negligent non-compliance.  The penalties for non-compliance with POPI are severe. In particular, a person that fails to safely secure and/ or process personal information can be held liable for a fine of up to R10m or even face imprisonment.   However, the majority of POPI’s provisions are not currently in force – its commencement having been delayed for a number of years. Until such time that POPI becomes fully effective, people who have suffered from the exposure of their person information in the recent data leak are left with limited recourse.


The Discovery Balanced Fund has enjoyed top quartile performance over one, three, five, seven and ten years. Pretty impressive, and consistent, for a ten-year old. Speak to your business consultant or visit for more information about the fund.




Source: Profile data as at 28 February 2018 Discovery Life Investment Services Pty (Ltd), branded as Discovery Invest, is an authorised financial services provider (registration number 2007/005969/07). Product rules, terms and conditions apply.




30 April 2018

WILLIAM FRASER Portfolio Manager and Institutional Business Development, Foord Asset Management

Since the 2009 global financial crisis market lows, share investors worldwide have benefited from the after-effects of quantitative easing. Massive American, European, British and Japanese central bank stimulus found its way into markets, lowering volatility and boosting share and bond prices. Central banks also lowered interest rates to near or below zero percent. Negative real rates forced savers to seek capital growth elsewhere. Share and high-yielding corporate debt markets became the default asset class for investors. Consequently, real earnings’ yields fell over the now almost nine-year bull market as prices rose. Market valuations, measured by price-earnings ratios, surged above their long-term means. Sectors geared to faster economic growth experienced outsized gains and companies exposed to the knowledge economy ballooned.

Protecting against risk of loss in late stages of a bull market

Old economy stocks, with more predictable, but slower, earnings growth, lagged. But it wasn’t all about prices. As the economic cycle progressed, lower interest rates and steady employment gains augmented company earnings. As sentiment and consumer demand recovered, manufacturers boosted output, increasing demand for commodities. Soon, capacity became constrained and companies borrowed cheaply to build more factories or invest in new machines. Wages finally rose as skill shortages became endemic. Investor confidence improved and more capital became available for business and stock markets. And so, the economic cycle found a natural rhythm not unlike those that came before. It is typical for share prices to lag the cycle in its early stages when investor sentiment is low. This provides

a good entry point for long-term investors. But it is also common for excessive share market exuberance at the end of the cycle, particularly as investors chase returns in specific sectors or themes. In our view, we are slowly nearing the end of the secondlongest economic expansion in living memory. But despite the rich valuations, markets may continue to advance as investors extrapolate favourable conditions, increasing the risk of permanent capital loss. Given current valuations, global share market returns should be muted over the next five years (on some metrics, the US S&P500 index is the third most expensive in its 120-year history). The bull market in developed market bonds is already over. In South Africa, macro-economic headwinds imply great difficulty for SA Inc. companies to grow earnings meaningfully.

Foord’s South African portfolios are accordingly conservatively structured. Share weightings within portfolios are below long-term averages, while SA bond and cash holdings are higher. Within equities, we have avoided companies on very expensive market multiples in preference for companies with more stable earnings’ prospects and much lower risk of loss. This investment strategy will under-perform in the late stages of an economic cycle when investor exuberance is highest. Long-term Foord investors will recognise the current relative under-performance patterns and approve the strategy. The calendar year returns of Foord’s equity portfolios provides evidence of its success: the FTSE/ JSE All Share Index has suffered seven negative calendar years since 1984, while Foord investors have braved just two.

SA Private Equity performance resilient against listed markets


he latest third quarter RisCuraSAVCA South African Private Equity Report (as at 30 September 2017), reveals that private equity’s performance relative to listed markets remains steady. The quarterly report, which tracks the performance of a representative sample of South Africa’s private equity funds, reveals that this industry outperformed the FTSE/JSE All Share Total Return Index (ALSI TRI), the FTSE/JSE Financial and Industrial Index (FINDI TRI) and the FTSE/ JSE Shareholder Weighted Total Return Index (SWIX TRI) over the three-year reporting period. In terms of all periods analysed, private equity performed better than both the ALSI TRI and SWIX TRI.  The report also shows that the private equity industry delivered a 10-year (in rand terms) internal rate of return (IRR) of 12.9% at September 2017. The five-year and three-year IRR remained relatively stable over the quarter at 13.6% and 13.7%, respectively.  USD IRR declined over the 10-year and five-year time periods, reaching 7.6% and 2.5% at September 2017, respectively. Conversely, the three-year IRR showed a large increase from 5.6% at June 2017 to 7.1% at September 2017.



“Despite a slight strengthening of listed market returns, private equity’s performance against these indices over the three-year

period continues to be solid. This can be observed by the positive direct alpha and a public market equivalent (PME) of greater than one,” comments Tanya van Lill, SAVCA CEO. “This was all achieved amidst turbulent market conditions as well as last year’s prevailing uncertain economic and political environment.” Kelsey Tanner, Senior Private Equity Analyst, at RisCura acknowledges that while newer fund vintages continue to have the lower IRR compared to older fund vintages, the 2013-2015 vintage funds have seen a small increase in IRR and a small improvement in unrealised times money over the quarter. “The data shows that funds that have performed the best in terms of IRR, are characterised by older vintages and smaller fund sizes, particularly in the under R500m bracket.”  According to van Lill, “The future economic outlook, particularly when it comes to investor and business confidence, certainly looks positive (given recent political developments, including Zexit and the cabinet reshuffle); creating and enhancing industry growth prospects. No matter which way market dynamics shift, there is no doubt that private equity players will continue to be flexible and resilient – weathering ongoing storms, whilst still providing competitive investor returns.”


30 April 2018

INSIDER CHRONICLES ADRIAN MEAGER General Manager, Warwick Asset Management


n the 14th of February, Jacob Zuma resigned as President of South Africa and since then, we have witnessed a welldelivered and encouraging State of the Nation Speech by President Cyril Ramaphosa, followed by a tough, but necessary budget speech and a major Cabinet shuffle. We believe that these key events may be enough to prevent Moody’s from downgrading South Africa to junk status. Should we avoid a downgrade, this will add materially to the the sense of optimism in the country since the Mandela presidency. Given the potential that these tectonic changes hold for us as South Africans, we have outlined some of the effects on the South African economy and consumer, and how these developments may impact on our clients’ investments. Leading up to the budget speech which was delivered on 21 February 2018, our financial markets already saw signs of life, with foreign investors showing renewed confidence in South Africa by increasing investment in the local bond and equity markets. We often view our own markets’ strength through the eyes of foreign market participants and as things stand, they clearly like what they see. The South African 10-year government bond rate, which is often used as the benchmark to gauge the government’s ability and willingness to repay its debt, has reached a level last seen at the beginning of 2015. The rand has also benefitted, not only by appreciating in value, but by stablilising against major currencies. This is not to say that there are only opportunities within our borders, even though SA Inc. will surely benefit from the improving economy. Globalisation has placed us in a fortunate position where we can seek investment returns not only on our door step, but in markets offering opportunities, which may not be available locally – and share in the new era of synchronised global growth. The budget speech delivered by then Finance Minister, Malusi Gigaba was, as expected, filled with some hard truths. South Africa is not out of the woods yet, but we finally have a game plan on

A change for the better how to improve our fiscal deficit, turn state-ownedenterprises around and allocate money to projects that will ultimately benefit us as South Africans. These improvements, along with many others, paint a positive outlook for our economy and citizens; one many of us would have thought near impossible just a few short months ago. Given the remarkable changes that have unfolded over the last three months and the direction in which the local and global economy are heading, we have made some subtle changes to our clients’ portfolios. Notably, over this period, we have increased our weighting to South African banks and retailers. This decision was made to take advantage of the renewed consumer confidence, lower inflation and potential interest rate cuts (boosting disposable income), and stronger GDP growth, all of which could result in higher earnings revisions. We also reduced our exposure to some of the rand hedge healthcare stocks, as we believe there are better opportunities in South African-exposed companies. Although we believe the country is turning the corner and we will look to capitalise on the opportunities that present themselves, it is important to note a couple of things: 1. South Africa makes up a tiny fraction of the global economy and global stock market and at Warwick, we still believe that a well-diversified portfolio should include companies which have revenue streams not dependent on one geographic region alone. 2. Even though the South African economy is poised for a turn around, it is important that we weighup the fundamentals of an investment/potential investment versus the markets’ expectations of that investment/potential investment and identify any potential upside or downside risk. At present, there is lot of optimism around the South African economy and market expectations can often run ahead of fundamentals, exposing investors to unnecessary downside risk. It is our job to identify those opportunities that look attractive, versus which opportunities are attractive. Getting these calls right will be to the benefit of all of our clients.

Is the world embarking on a trade war? Last month, US President Donald Trump targeted tariff policy at China as he announced a 25% tariff on up to $60bn worth of Chinese imports with high intellectual property content. “This step was taken in response to a report by the US Trade Representative that concluded that China’s unfair trade practices pressured foreign companies operating in China to transfer technology,” Barclays economists say. “At the same time, the Trump administration added the EU, Australia, Argentina, Brazil, and South Korea to the list of countries that are exempt from the recent steel and aluminium tariff. These actions clearly focus US tariff policy on China, targeting approximately 15% worth of Chinese exports to the US,” Barclays adds. The Chinese Ministry of Commerce retailiated, announcing planned tariffs on 128 US products, covering approximately $3bn of US exports to China. A 15% tariff will cover 120 products (including steel pipes, fresh fruit and wine), while a 25% tariff would be imposed on pork and recycled aluminium. “As our economists noted from their China investor trip, while China hopes to hold constructive talks with the US to settle trade issues, the country’s Foreign Ministry has stated that China is not afraid, nor will it dodge a trade war. But the dollar amount of Chinese tariffs on US Imports is still 20 times smaller than US tariffs on Chinese imports,” Barclays says. “Overall, we expect a trade skirmish rather than a trade war for now. President Trump’s pattern thus far has been to take an aggressive public position, dominate the news cycle, and then soften the language in the details of a policy once financial markets react. “White House adviser Peter Navaro rejected the idea of exemptions to the steel tariffs and was then contradicted by the President. This pattern, together with China’s desire to maintain a constructive dialogue, suggests that a return to the US trade wars seen before 1950 is unlikely for now,” Barclays adds.



ANDREW PADOA Portfolio Manager, Sasfin Wealth

30 April 2018

Consequences are more important than probabilities

“In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximise return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn. The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. Once you’ve been right for long enough, you don’t even consider reducing your winning positions. They feel so good, you can’t even face that. As incredible as it sounds, that makes you comfortable with not being diversified. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance.” Peter Bernstein Blaise Pascal was a 17th Century French mathematician who laid the foundation for probability theory. He lived a life of sin earlier in his life, but later converted to Christianity and retired in a monastery. Pascal invented what probability theorists now call ‘Pascal’s Wager’ – which is all about probability theory and decision making under uncertainty. Pascal’s Wager uses the following logic: God is or God is not. Reason cannot determine the answer. This is an important question for most people. There are two ways Pascal looked at the situation. If God does not exist, and you live a virtuous life,

MARCEL ROOS Fund Analyst, PSG Wealth


oncentration risk is the opposite of diversification, where your investments are concentrated in relatively few assets. When a portfolio is concentrated in relatively few assets, or one or two assets make up a disproportionately large chunk of your portfolio, it gives rise to concentration risk. This is an important aspect of investing that is often ignored in the active-passive debate. Nobel prize-winning economist Harry Markowitz famously said that diversification is the only free lunch in investments. Diversification allows investors to reduce risk by spreading their portfolio investments over various assets. Some of the events that swayed markets recently and last year were prime examples of concentration risk. These include the election of Cyril Ramaphosa as president of the ANC, the resignation of key Steinhoff board members, and Naspers, which continued to outperform thanks to its holding in Tencent. In these scenarios, some investors will have benefitted, while others may have been impacted negatively. Either way, concentration

refraining from pleasures and luxuries, your loss would only be small But if God does exist, and you have lived a life of sin, the consequences would be dire. The moral of the story of Pascal’s Wager is that there are many decisions in life where the consequences matter more than the probabilities. Pascal’s Wager can be used in all kinds of decision making where there is uncertainty. This is especially true in investing – particularly with Naspers’ weighting in the All Share Index.

An unusual behemoth

The rise of Naspers in our market has been nothing short of speculator. Many thanks to a decision that then CEO, Koos Bekker made in 2001. Naspers purchased a $32 m stake in Chinese gaming company Tencent. This investment is now worth well over $130 bn, making it one of the best investments the world has ever seen. The value of Tencent has increased in value so exponentially, that Naspers is basically now a proxy for Tencent. The share price is now just under R3 000 and this phenomenal growth vs a very anaemic JSE has resulted in its weighting in the All Share Index growing to a hefty 20%. Perhaps you believe the probability of Naspers rallying to R5 000 or more is very high, however this doesn’t mean it will happen.

Are probabilities the be all and end all?

Although Naspers is an excellent share, its weighting in the All Share is no longer appropriate, and as such, the All Share Index cannot be looked at as a suitable benchmark for clients. We, as stewards of our clients’ wealth, cannot justify a 20 or 25% weighting in any stock. Looking at Naspers through the lens of Pascal’s Wager, it reminds us that the consequences matter more than the probabilities. Holding any share at 20-25% of a portfolio, can have catastrophic consequences if the outcome is unfavourable. Sometimes we have to take a step back and ask ourselves: “What if we are wrong? What if we have a high conviction stock (such as Naspers) with a weighting of 20 or 25% in our portfolios, and something goes wrong?” Being wrong is part of life. We can’t get every investment decision correct. It doesn’t mean we are incompetent, but it means we need to look at the consequences of being wrong.

Concentration – A risk that requires an active solution risk has been brought to the forefront in portfolio construction discussions.   Active fund managers have a twofold responsibility of outperforming their benchmark, while effectively managing risk, including concentration risk. To do this, they research assets thoroughly and allocate investors’ money to assets that they believe will provide good returns, while not exposing the investors to undue risks. Passive funds track an index, so there is no interference by the fund manager, except to ensure that the composition of the fund reflects the mandated index. The JSE offers far fewer stocks, less sector diversification and is far more concentrated than some other stock markets overseas. To illustrate this point, the ten largest stocks in the FTSE/JSE Top 40 Index make up around 66% of the total index market cap. In contrast, the top ten constituents of the S&P 500 Index make up only 20% of the total index’s market cap. Some of the positive diversification benefits of index investing are therefore lost in the local context and a possibility of high stock-specific risk exists. It is important to note that merely owning

many shares, such as the top 100 shares in the ALSI, does not result in efficient diversification, especially when an overly significant percentage is held in a handful of stocks. Naspers’s astronomical growth over the last decade has seen the company dwarf the other counters on the local broad market index, accounting for over 23% of the FTSE/JSE Top 40 index at the end of last year. In comparison, the S&P 500’s biggest holding, Apple Inc., was only 3.81% of the index. Naspers’s exposure alone makes the FTSE/JSE broad market indices too concentrated and potentially overly volatile for most investors’ liking. Naspers’s overly concentrated position in the index has counted heavily in favour of investors who chose to invest in index trackers. The company returned 45% annualised per annum over the last five years. All too often risks are identified well in advance, but attractive returns cause investors to ignore these risks. So why are so many investors ignoring this obvious risk? Not being able to counteract emotional investment behaviours like greed or panic usually tops the list.

Concentration risk is not just relevant to individual stocks, but also pertains to sectors. Active managers are able to over- and underweight sectors. They can even use currency derivatives to mitigate the effects of uncertain events, tools which are not available to passive managers. The growth of passive investments may be compounding concentration risk by indiscriminately buying the stocks with the largest weight. The increase in demand for these stocks pushes the price up and in turn increases the representation of the stocks in the index. Passive managers are often quick to highlight that only a relatively small percentage of active managers consistently outperform their benchmark indices. What is not mentioned, and which is highly relevant to the local context, is that active managers might be taking less risk, especially concentration risk. They also have discretion to move into defensive shares and sectors when broad market valuations are high, offering some protection should a market correction occur.


30 April 2018

GAVIN KYTE Business Development, Laurium Capital

MICHAEL MOYLE Head of Multi-Asset, Prudential Investment Managers

Asset valuations signal ‘middle of the road’ returns ahead


oming off of a strong year of above-average investment returns in 2017, investors can currently expect to earn somewhat lower returns over the medium term that are generally more in line with their historic averages. This is indicated by our assessment of the latest valuations across most asset classes, which are neither very cheap nor expensive, but broadly trading around their longer-term fair values. For example, an investor in the Prudential Balanced Fund could expect a return of around 4% to 6% above inflation (or low double-digits including inflation) over the next five years or so – a common return target range for high-equity multi-asset funds. When it comes to our latest ‘house view’ on fund positioning, offshore exposure remains an important diversifier, we believe. Prudential’s model portfolio weighting is around 25% currently, while considering the new 30% offshore limit. This is largely held in global equities, where valuations have fallen nearer their long-term averages after the sharp market correction in February. Despite recent concerns over the possibility of more aggressive interest rate hikes in the US and other major economies this year, fundamentals remain positive for global growth and corporate earnings. Meanwhile, we continue to avoid global government bonds, which still offer very low yields compared to history. In South Africa, equities are our preferred asset class. On a price-to-book-value basis they are slightly cheap at 2.0x compared to their longer-term median value of 2.1x, while on a 12-month forward price-to-earnings metric they appear somewhat expensive at 14.9x versus their 14.5x longer-term fair value. This gives us a valuation near their average; yet their prospective real return of 6.3% is still attractive relative to other local asset classes. Local bonds, meanwhile, have rallied substantially in 2018 amid positive sentiment arising from the new ANC President, the improved budget, falling inflation and diminishing chances of further credit rating downgrades. The yield on the benchmark 10-year government bond, for example, has fallen from 8.6% at the start of the year to 8.1% at the end of February. While this level is close to longer-term fair value, longer-dated bonds are more attractive, such as the 20-year bond which is offering 8.9%, ample compensation for the risks the market faces. We are moderately overweight longer-dated bonds in our model portfolios. Finally, the listed property sector was badly hit in January and February, returning -9.9% in each month on the back of rumours of accounting irregularities and share price manipulation within the Resilient group of companies. These four companies accounted for over 40% of the market capitalisation of the SAPY index at 1 January. Consequently, SA listed property valuations as a whole fell to relatively cheap levels. However, other property companies’ share prices rose approximately 5% over the period, meaning that the broader valuation does not accurately reflect the fundamentals of the asset class (which would otherwise be trading around its longer-term fair value). At the same time, there is some doubt about a recovery in the Resilient companies’ share prices. As such, we have opted to maintain our neutral positioning in SA listed property in the absence of further information. To conclude, it’s important to stay invested. Although investors could expect to earn average returns over the medium term (based on current asset valuations), we never know exactly when these returns will be delivered – everyone should expect them to come unevenly, with a significant amount of volatility in the shorter term.

Laurium Capital builds a solid track record in multi-asset fund category


FIGURE 1. CUMULATIVE PERFORMANCE AND RISK VS RETURN aurium Capital, an independently owned asset manager based in Johannesburg, is building a strong case for inclusion of their multiasset funds in your investment portfolio. After building an excellent track record in hedge funds since 2008, Laurium Capital entered the unit Source: Morningstar, 28 Feb 2018 trust space in February 2013 with the launch of the Laurium Flexible Prescient Fund. Having Being the competitive team that we are just celebrated its fifth anniversary at the end at Laurium Capital, we are extremely proud of January this year, the Laurium Flexible of our top quartile performance, and our Prescient Fund has delivered a net return of clients have benefited by supporting us and 15.0% per annum, and was ranked number including Laurium funds in their portfolios. one in the South African Multi Asset All our funds are underpinned by a common Flexible Sector up until the end of February investment philosophy. 2018 since inception. One of the key differentiators as a firm has To put this solid portfolio management been our Africa (ex-SA) research capability. into perspective, the Laurium Flexible The African continent has an exciting longPrescient Fund has outperformed the term growth story underpinned by attractive All Share TR Index, which has delivered demographics and the rise of a middle class, a return of 10.6% per annum over the which we have been tapping into for the last same period, by 4.4% per year, and more nine years with much success. While Laurium’s importantly at a lower risk (Source: African Equity Fund is not approved for sale Morningstar, 28 Feb 2018). to investors in SA, it has gained support from After a successful start in the Multiinternational investors, who have been well Asset Flexible category with the Laurium rewarded, with the fund outperforming the Flexible Prescient Fund, Laurium decided African markets by 10% per annum since to launch a Multi-Asset High Equity inception on 1 January 2014, deserving its (Balanced) Fund, which is managed very place as one of the top performing African similarly to the Laurium Flexible Prescient funds over this time. The relevance of this Fund, but with a lower equity allocation capability for South African investors is that to comply with Regulation 28 restrictions. some of our best African ideas are included The SA Multi-Asset High Equity Sector, in our Multi-Asset Funds, which have added more commonly known in the retail alpha over time. In addition to this, many market as the balanced fund sector, has South African companies have a strategy over R600bn of assets under management, into the rest of Africa, which gives us a split across over 150 different funds. This better understanding of these companies e.g. is a very competitive sector, dominated by Standard Bank, MTN, Nampak, Tiger Brands, the larger managers. Absa, Anglo Gold Ashanti and AB Inbev. The Laurium Balanced Prescient Fund was Laurium Capital has a team of experienced launched on 9 December 2015 and is off to a investment professionals that invest alongside great start. The consistent rankings speak for the funds. We believe our differentiated themselves: approach, combined with our Africa-ex SA • 1 Year – ranked 6th out of 159 Funds coverage and consistent performance, will • 2 Years – ranked 3rd out of 159 Funds ensure that Laurium Capital will continue to • Since Inception – ranked 8th out of 140 provide clients with superior risk adjusted Funds returns for years to come.




30 April 2018

Passive investors are the ultimate long-term investors


hen Vanguard created the first index mutual fund in 1976, indexing was considered a curiosity, says the company’s Chairman and CEO, Bill McNabb. “Critics wondered why someone would settle for owning the market instead of trying to outsmart it. Some proponents of active management even called indexing un-American.” The case for indexing is now widely known and embraced, with millions of individual investors using low-cost, broadly diversified index funds and ETFs to save for retirement, education, new homes, and secure financial futures. McNabb says the protests of high-cost active managers have grown more ‘desperate’. “Last year, one firm published a report claiming that indexing is, “worse than Marxism.” The latest attack on indexing comes from two professors at the University of Chicago, M Todd Henderson and Dorothy Shapiro Lund who wrote in the Wall Street Journal that no passive investor cares much about governance of a particular company. “American investors are increasingly acting on the realisation that a broad-based indexing strategy is superior to investing in individual stocks or actively managed funds. That’s great news for investors, who will pay less and get better returns. But it has troubling implications for corporate governance.” Henderson and Shapiro Lund argue that, “the impact on an index when a single company underperforms is usually either slight or offset by gains from its competitors. It may be rational for index funds to ignore governance, since the money they spend on improving it benefits not just them, but also rival funds that invest in the same stocks.” They add that it’s a problem when these investors control voting outcomes for the companies they invest in. “This is often the case, since 88% of public companies count one of three large institutional investors – State Street Global Advisors, Vanguard, and BlackRock – as their largest investor. All investors have a stake in companies being well-run, but they aren’t always willing to pay higher fees for

monitoring or governance. “And because there is no such thing as universally good governance, the blind application of one-sizefits-all governance solutions across vastly different companies often has negative effects.” Henderson and Shapiro Lund even go so far as to suggest that index funds should give up their voting rights. Vanguard’s McNabb says the

they’re more likely to perform better over the long term. If a rising tide of good governance lifts all boats, that’s good news for all investors.” Nerina Visser, CFA and ETF strategist at says that measures by shareholders to push companies towards action around issues such as climate change, economic inequality and unfair labour practices have long been thought to be the

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proposal is careless. “We care deeply about governance. Index fund managers must care as much as – if not more than – anybody else. We essentially own stocks forever, because we can’t sell out of a stock listed on an index. So we’re indifferent, for example, about how shares of Coke performed vs. Pepsi last quarter. Therefore, Vanguard’s vote and our voice on governance are the most important levers we have to protect our clients’ investments.” When Vanguard detects material risks to a company’s long-term value (such as bad leadership, poor disclosure, misaligned compensation structures, or threats to shareholder rights), it acts with its voice and its vote, McNabb adds. “When companies are governed well,

exclusive domain of active investors. “It’s been said that so-called passive investors – index-tracking fund managers – have no role to play, and just ride on the coat-tails of active investors, all the way from price discovery to engaging with management to demand change when necessary.” Yet recent evidence to the contrary has started to change perceptions, she adds and there is now growing acknowledgement of the activist role – both actual and potential – played by passive investors. She cites the latest annual letter to the CEOs of all S&P500 companies, from Larry Fink, CEO and Chairman of Blackrock, the largest asset management company in the world, and issuer of more than a third of ETFs

globally, under the iShares brand. “His message to the CEOs and their boards couldn’t be clearer: start considering the societal impact your company has, or ultimately lose the license to operate from key stakeholders, such as Blackrock and other significant investors,” Visser says. Fink wrote that investors’ increasing use of index funds globally is driving a transformation in BlackRock’s fiduciary responsibility and the wider landscape of corporate governance. As an active manager, BlackRock can always choose to sell the securities of a company if it is doubtful about its strategic direction or long-term growth. In managing its index funds, however, BlackRock cannot express its disapproval by selling the company’s securities whilst that company remains in the relevant index. As a result, its responsibility to engage and vote is more important than ever. Visser says this confirms a trend previously identified in research by the Wharton School, pre-eminent business school of the University of Pennsylvania. “In a 2015 paper, Passive Investors, Not Passive Owners, they reported finding that passive investors have increasingly becoming more proactive in their proxy voting, as they effectively pressed for shareholderfriendly policies like increasing the number of independent directors and removing poison pills and dual-class share structures. “In their subsequent 2016 paper, Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism, they show how passive investing leads to more aggressive shareholder activism than there would be otherwise, as index fund firms add their clout to campaigns waged by activist investors. Further evidence is that the larger passive institutions have built extensive in-house governance teams to oversee the governance issues in their larger holdings, and actively participate in proxy voting and other shareholder activism actions.” Visser believes that in this sense, index investors are the ultimate longterm investors, “providing patient capital for companies to grow and prosper, but in a financially and socially sustainable way.


30 April 2018


Increased limits for offshore investment welcomed


s the JSE makes up around only 1.5% of global equity markets, the announcement made in February’s budget that the allocation to diversified offshore investments would be increased, has been widely welcomed. National Treasury increased the limits for offshore investments by collective investment schemes, investment managers and long-term insurers from 35% to 40%. Limits for investment into Africa were hiked from 5% to 10%. It is this allowance that CIS Managers use in their funds that have offshore exposure, including rand-denominated feeder funds, and explains why managers are required to close their feeder funds to new investments when the allowance has been exceeded. Importantly, this change to the offshore investment allowance also has the effect of immediately changing Regulation 28 of the Pension Funds Act, which sets the asset allocation limits for individual retirement funds. As a result, the maximum offshore exposure for a Regulation 28 fund will increase to 30% and 10% to Africa. Quaniet Richards, Head of Institutional at Nedgroup Investments says the increased limits, “open up the opportunity for retirement funds to further diversify offshore and gain access to sectors and currencies they would not have access to locally – especially in terms of the technology and consumer electronics sectors, healthcare and pharmaceuticals companies, airline industry (such as Rolls Royce and Airbus) and renewable energy.” Research has shown that, the optimal allocation to offshore assets is more than the somewhat arbitrary 25% previously allowed in terms of Regulation 28. BNP Paribas has shown that for real return mandates from inflation plus 4%, a strategic allocation of at least 28% to foreign assets, rising to 50% as the required return above inflation rises, is optimal. While the optimal strategic allocation to foreign assets will depend on each investor’s personal circumstances, risk profile and longer-term financial planning objectives, the evidence suggests that, for many, it is at least a third of their assets. Many institutional investors, however,

have not reached the limit of 25%. This is evidenced by considering that the offshore exposure of the average multiasset high equity fund is substantially underweight this limit at approximately 15% (and exposure to Africa is negligible). Therefore, while this additional flexibility is to be welcomed, it appears that many institutional investors still favour South African-domiciled assets – which may themselves derive

a quality offshore component to a SA portfolio provides complimentary exposures,” Rossouw says. “This forms an integral part of diversification. Aside from the complementary exposure benefit, we are finding superior quality businesses offshore that have proven their ability to deliver high-quality profits, sustainable growth in earnings and cash flows, and high returns on invested capital.”

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differing degrees of offshore revenue. The Investec Opportunity Fund, however, is at maximum offshore exposure, as high quality global equities remains Portfolio Manager, Clyde Rossouw’s favoured investment. These shares represent a balance between old economy staples like Nestlé and Johnson & Johnson, and exciting higher growth opportunities like Visa and Priceline (the owner of Booking. com). What these businesses have in common, apart from their prodigious cash generation and exceptional returns on capital, is an ability to grow with a lower dependence on the economic cycle than the average business. “As investors are exposed to a narrow and concentrated opportunity set in South Africa, we believe that adding

While not strictly a fair comparison as a number of equity unit trusts funds have domestic-only mandates, it is interesting to note that the Investec Equity Fund currently has 19% invested in offshore assets. This is because, even though SA exposed equities (banks and retailers) are currently offering a great investment opportunity (thanks to our positive political developments and foreign investors looking favourably at South Africa again), the focus is on building a well-diversified equity portfolio with a combination of the best opportunities available. Co-portfolio manager of the Investec Equity Fund, Hannes van den Berg explains: “The South African FTSE/JSE All Share Index is a small and narrow Emerging Market

index relative to global Developed Market indices. Having exposure to global equities gives the fund access to unique opportunities not available in our local market, which complements the investments already in the fund. “The next time there is a real global growth scare, where all Emerging Market currencies come under pressure, we are going to want to have money offshore that will benefit from the rand weakness that will then follow.” While welcoming the increased offshore allowance, van den Berg notes that “there is a lot of momentum currently behind South Africa, and that inflow from foreign investors can continue to support a stronger rand for some time. As a result, we will not be increasing our offshore exposure in the Investec Equity Fund as yet.” Interestingly, Ashburton Investments believes that South Africans should utilise the new increased limits for offshore investment by allocating some of their retirement funding to African equity markets. Ashburton says that some of the reasons are: • Investing in a region that is growing quickly and where the economies are transforming their infrastructure, middle class consumers are growing and they are industrialising too • Getting returns from a region that is not as connected to global events and markets as most other investment destinations, which allows you to diversify your returns • The improving investor sentiment that is emerging for the continent will mean increased focus on these markets and share prices should recover from oversold positions providing additional returns over and above the strong growth outlook • Taking advantage of the current strong rand to US dollar exchange rate to invest in offshore assets • Choosing an experienced manager who knows the continent. We believe that South African (and other) investors should diversify their returns by investing in the rest of Africa (even if some people call them sh**hole countries),” says Paul Clark, Africa Equity Specialist at Ashburton Investments.


JONATHAN MORT Jonathan Mort Inc

30 April 2018

Umbrella fund supervision needs improvement

This is an excerpt from the paper presented by Jonathan Mort, of Jonathan Mort Inc, at the recent Pension Lawyers Association Conference in Cape Town.


t the outset, the type of umbrella fund that I will be discussing is that which is sponsored by a commercial entity such as an asset manager and with which there is a commercial proposition involved. These commercial umbrella funds are the type of fund to which most of the standalone occupational funds are migrating which is very much in line with what our regulatory authorities want in order for there to be fewer funds to regulate. What I say may apply to a greater or lesser extent or even not at all to the umbrella funds in which many in the retirement fund industry are involved. The umbrella fund is established on the terms decided by the sponsor. The clear objective is not altruistic but to enable the sponsor to profit from it. There is nothing inherently wrong with the profit imperative, but it is important to bear this in mind in considering the arrangements put in place by the sponsor in relation to the umbrella fund. Those arrangements typically entail using as many of the sponsor’s products and services as possible, on each of which the sponsor makes a profit. Again there is nothing inherently wrong with that: the service providers to a stand-alone fund would also make a profit. What is problematic are three aspects of this arrangement: firstly, that the arrangements are not concluded at armslength; secondly, that it is clearly understood that the trustees do not have a discretion to put substitute arrangements in place with third parties; and thirdly that it may be questioned whether all or some of these arrangements are necessary or appropriate




(such as requiring that the costs of the investment choice platform be paid by the members, most of whom will never use it because they are placed in the default investment option). These aspects may or may not be appreciated by a participating employer, which, whether or not that is so, is nevertheless problematic. And this is all compounded by the fact that typically the independent trustees of such funds are in the minority, may be appointed by and able to be removed by the sponsor, and may be remunerated by the sponsor, any or all of which compromises their independence and that of the board as a whole. Recommendatons for tightening up supervision of umbrella funds We are where we are, and we are all part of it. But how will history see it? That is my question. It would not be helpful if problems only were raised without suggesting some possible solutions, and I do so now. Firstly, the expenses of the fund should be paid by the fund, and not by the administrator. In other words, the sponsor and its subsidiaries should be paid for every specific service rendered to the fund, and it should not be the sponsor that pays the IFAs, but the fund. The IFAs advise the employer and their fees are often hidden in the administration fee. Secondly, the fees paid to the sponsor should be independently benchmarked periodically, say every three or four years, and justified. This does not mean that the fees must be lower than everyone else, but they must be justified. And they must be benchmarked properly. A part of the justification of the sponsor’s fee should be whether certain services are actually necessary: for example, if 90% of the members are in the default investment arrangement, why should they bear the cost of the investment platform necessary for member investment choice? Thirdly, there should be an itemised disclosure to the members and the employers of the costs involved on an annual basis, as part of the

member benefit statement. This should specify how much of the costs relate to the governance of the fund, how much relate to the administration, how much relate to the investment costs, and how much relates to other costs such as IFA fees, etc. If possible, there should be an analysis of the extent of cross subsidisation as amongst the employers. Fourthly, guidance should be given to employers by the Registrar as to what an appropriate form of due diligence should entail, and what the role of the IFA should be in that. For example, that the fund’s financial statements are up to date and unqualified, that the auditor has confirmed the appropriateness of the accounting arrangements for the type of umbrella fund, and so on. Fifthly, there should be strict rules around the treatment of administration errors and their disclosure. Sixthly, there should be no locked in arrangement by an umbrella fund to utilise the services or products of the sponsor, and if the sponsor is not up to it so that the services of a service provider unrelated to the sponsor are used, then there should be no penalty payable by the fund. Finally, the board of the umbrella fund should comprise a majority of independent trustees at least. There are certainly ways of protecting the sponsor’s position without placing sponsor appointed trustees in the awkward situation of owing conflicting duties. And it should not be open to the sponsor to appoint or remove the independent trustees, nor to be seen to be remunerating them.

It’s time for

home • car • business •

life • investments

Hollard Life Assurance Company Limited (Reg.No. 1993/001405/06) is a registered Long Term Insurer and an Authorised Financial Services Provider.

Jonathan Mort, of Jonathan Mort Inc


30 April 2018


Default annuities – are trustees setting up their members for failure?


any trustees are establishing default annuity strategies which inadvertently set up their members for failure by giving them little to no guidance about the sustainability of their income in retirement and by not providing an option to secure a guaranteed lifetime income. This is according to Scott Harvey, Distribution Executive at Just, who says that the default annuity regulations provide the opportunity for trustees to positively engage with the process of offering their members lifetime sustainability of income, rather than treating this as a simple ‘minimum requirements’ compliance exercise. Trustees of all pension funds and of those provident funds that allow the election of an annuity at retirement are required to have an annuity strategy in place by 1 March 2019. The legislation spells out a list of explicit considerations for trustees, but there are also a number of implicit considerations: • The annuity strategy should be appropriate and suitable for members, taking account of the risks inherent in post-retirement income (Regulation 39 (2) (a)) • This should also consider income protection to beneficiaries when the main member dies (also Reg 39 (2) (a)) • Where an in-fund living annuity is chosen, the fund should monitor sustainability and inform members if their rate of drawdown is deemed unsustainable (Reg 39 (3) (b)) A key risk is the risk of a member outliving their assets in retirement. Data shows the average drawdown rate on living annuities is 6.6%, which is above the sustainable drawdown rate recommended by ASISA – and to make matters worse, this average is skewed by the fact that some people with large retirement savings pots draw very little. This means that the majority of living annuitants are drawing at an unsustainable level and there is a risk that trustees perpetuate this scenario in their default annuity strategies if only standard living annuities are offered. Most of the focus to date on improving

sustainability of retirement income has been to use the collective buying power of a fund to drive down fees. This does not guarantee sustainability of at least essential income needs for life for the main member or their surviving spouse. The only way to do this is to pool that portion of the retirement savings pot required to cover essential expenditure, in an insurance pool. “We think essential expenditure includes food, accommodation, utilities, medical costs, transport and insurance – this would be ‘JustEnough’ for survival – and the good news is that there are tools available to trustees to allow their members the option of securing a guaranteed lifetime income to cover their essential expenditure needs, and those of the surviving spouse in the event of their death,” continues Harvey.   These tools are available regardless of the main annuity type chosen by trustees who can provide members with the option to sustain a level of income for life, which will cover, in part or in full, the ‘JustEnough’ level they will need to survive. Without offering this option, trustees will need to find other ways to show they have discharged their responsibilities, such as: A life annuity alongside a living annuity – hybrid solution In-fund PROS: • Provided fund rules allow for this, one can split a retirement savings pot at retirement and/or transfer from living to life annuity at any time post retirement. CONS: • Generally members can’t consolidate other retirement savings pots eg RAs or preservation funds • Trustees explicitly carry responsibility for ongoing sustainability of living annuity drawdown – this is complex to assess, because it should take account of any other sources of income. Out-of-fund PROS: • Can consolidate other retirement savings pots

• Less explicit trustee requirements. CONS: • Once-off option at retirement to split retirement savings pot between life and living annuities • If a life annuity top-up is required post retirement this is either an all or nothing transfer from the living to the life annuity; or if a life-stage hybrid has been selected at retirement, top-ups are set at specific ages or other trigger points and are administratively intense. A life annuity inside a living annuity – blended solution Harvey states that Just has uniquely made lifetime income available as an additional investment portfolio within living annuities. This lifetime income portfolio can be selected at retirement or any time post retirement to guarantee at least essential expenditure needs. Once essential expenditure needs have been guaranteed for life, the balance of the retirement savings pot, used for flexibility and bequests, can be invested more aggressively. PROS: • Can be used as an in-fund or out-of-fund solution • Allows at least essential expenditure to be guaranteed for life • Can split retirement savings pot at retirement and/ or seamlessly top up Lifetime Income portfolio at any time post retirement • Sets a guaranteed minimum drawdown rate (to cover essential expenditure) that can be sustained for life only with the insurance of the Lifetime Income portfolio – without this component, the annuitant is at risk of running out of savings during their lifetime • Introduces a diversifying asset class with a return profile that increases the longer the individual lives – this is known as mortality credits. CONS: • Some of the capital invested in the Lifetime Income portfolio can be lost at death before the member’s life expectancy – but that is why you set two different retirement savings pots within the blended living annuity: one to sustain your essential expenditure for life, and the other for flexibility and bequest.

In an industry that loves complicated, we make things Unexpectedly Easy. With our short forms, our personalised underwriting, and always-there broker consultants, it’s already begun and there’s a lot more to come. Chat to your broker consultant today.



JOHN ANDERSON Head of Client Solutions, Alexander Forbes


30 April 2018

A new category of retirement solutions – defined outcome retirement

etirement fund members are Current Lifestage used to thinking about their frameworks current standard of living in Investment goal Focuses on maximising the terms of income, so why should they member’s account balance. not be doing the same thing for how they would like to live in retirement? Maximum account balance Measure of Let’s not forget what retirement funds success are there for in the first place, namely to Individuals encouraged to source provide you with the ability to maintain Access to their own advice outside of the individual a good standard of living in retirement. fund. In practice, the difficulties of advice This is not the unrealistic picture of the obtaining individual advice using elderly couple on a yacht or sitting on a traditional models and the costs beach in an exotic destination. thereof have meant few individuals We therefore submit that the had been able to access advice. appropriate objective and goal for a • Members are often transitioned retirement plan is to provide members Investment into lower equity/higher cash with a stream of income in retirement. strategy portfolios as they approach Theoretically the concept is a retirement in lifestage strategies. sound one that was successfully used • Typically only age is used to by Defined Benefit (DB) funds for differentiate members and decades. However, due to employers trigger transitioning. Higher not being willing to take on the risks cash allocations may not keep relating to these schemes as well as pace with changes in the cost of individuals’ preference to have a say securing an income at retirement in how their retirement savings are managed, there has been a marked shift to Defined Contribution (DC) funds. When these funds were established the Communication Focuses on account balance and focus was on the amount of savings investment returns relative to and not the income (which should have market benchmarks. been the purpose from the outset). We aim to change that. The information and technology that DC funds have, up till now, had at their disposal, has prevented the industry from fully embracing this concept of targeting an income in retirement. to maintain their standard of living in retirement Approaches so far have centred on defining and tailored for the time the member spends a risk tolerance for DC fund members based in the fund. With each member’s income goal on one single parameter – age, which is only in mind, a personalised investment strategy is one key element when defining an individual’s created for each member to give them the best financial circumstances. chance of meeting their goal. The telling statistic from the most recent All communication is framed with the income Alexander Forbes Member Watch™ Survey, which goal in mind and provides members, on a regular show that only 5% of members on the Alexander basis with a gauge of whether they are on track to Forbes retirement platform (of 1.4 million meet their goal and what actions they can take, if members) can afford to retire comfortably, is they are off track. evidence that this system is not working. Alexander Forbes Clarity™ automatically There are many reasons for this, one being that adjusts as various factors impacting an the typical retirement fund has communication individual’s income in retirement change – and solutions structures based on the ‘average’ essentially it is the driverless car of the retirement member. However, as we know, we are all unique. industry. The concept of Alexander Forbes The Alexander Forbes Clarity™ framework Clarity™ has been designed in in line with our aims to provide an automated pre-retirement outcomes-based Living*Investing approach. solution for individuals, focusing on a targeted The Living*Investing framework is a risk-led, income goal at retirement. In designing the forward-thinking investment approach aimed at solution, we focused on each individual to achieving client objectives with greater certainty define their personal income goal at retirement, over their lifetime. instead of adopting a ‘one-size fits all’ approach Our approach in delivering this framework that characterises many retirement schemes in involves assisting clients balance their unique the country. needs across their life journey as they make At its core, Alexander Forbes Clarity™ centres trade-offs in allocating financial resources, on defining a personalised liability as an income with the objective of ensuring they can meet goal at retirement for each member (taking their future income needs into retirement with a unique circumstances into account). level of certainty and dignity. Alexander Forbes The income goal is set so that a member is able Clarity™ is a major step in making use of a

Alexander Forbes Clarity TM framework Focuses on targeting personalised income goals. Maximum chance of meeting income goals Individual advice is automatically built into the solution at low cost as a result of technology and is regulated under the FAIS legislation. Annual reviews are undertaken to ensure the individual is on the right track. Access is provided to call centre support. • Personalised investment strategy that takes each members’ unique circumstances into account. • The factors taken into account are the member’s age, gender, contribution rate, salary progression, retirement age, account balance and future contributions. • The investment strategy includes an allocation, a bespoke annuity hedging portfolio (as opposed to cash) that is expected to track the member-specific cost of securing an income at retirement Focuses on member-specific income goals and whether the member is on track to achieve these goals. Importantly, Alexander Forbes ClarityTM informs members of the corrective action that can be taken if they are not on track to achieve their goals and does so, well before they reach retirement age.

best-of-breed approach to assist our clients in this journey. As opposed to other goals-based strategies, analysis is done automatically within the retirement fund without any intervention required by members, and investment strategies are automatically designed for each member. Other approaches may make generic tools available for members to use, and require members to opt into a finite range of portfolios using information from the tools. Therefore the onus is on the member, to use the tool, correctly and assimilate the output and take appropriate action. Alexander Forbes Clarity™ does not only focus on the assets of a member (accumulated savings) but has an emphasis on including existing preserved assets in the equation but more importantly, human capital. Human capital is the largest single asset most members will have for a significant part of their early working life. Alexander Forbes Clarity™ further improves on current life-stage frameworks as per the table above. Overall, our comprehensive financial well-being ecosystem is designed to assist in improving personal and employer balance sheets over a lifetime. Our solutions are underpinned by global best practice through our partnership with our major shareholder, Mercer.


30 April 2018

REMAY DE KOCK and KEZIA TALBOT Legal Advisers, BDO Wealth Advisers

Retirement annuities – the new trust


onsidering the various legislative changes to Trusts over the past year, a lot of speculation has emerged on the future of Trusts as an estate planning tool. Although Trusts have been placed under the spotlight, the purpose of the Trust and the circumstances of each client should be the determining factors in deciding to create a Trust. When considering the appropriateness of a Trust, the following factors are taken into account in order to determine the suitability thereof: 1.    Growth pegging of assets 2.    Protection of assets from creditors 3.    Tax implications 4.    Circumstances of each person.   If a Trust, however, taking regard of recent changes in terms of Section 7C of the Income Tax Act and the above mentioned factors and costs, does not meet your expectations, then consideration of the use of a retirement annuity (RA) might just tick all your boxes.  RAs have become a popular estate planning tool as a result of not only the tax savings opportunities, but also the benefits of using an RA to achieve growth outside of your estate.    Albeit the fact that both a Trust and RA have a place, taking into account the circumstances of each person, it is worthwhile to mention the benefits of an RA as an alternative to the use of a Trust.  To further argue the popularity of the RA in recent years, an increased tax deduction for retirement savings from 15% to 27.5% has

only made this planning tool more attractive as a substitute for trusts. Take the table below into account to compare the similarities between the two vehicles. Except for the significant difference in structuring of payment, the similarities are uncanny.  The advantages of an RA when compared to that of the Trust confirm that should a trust not be the best suited vehicle, an RA can be the second best, if not, in certain circumstances, the best replacement for your specific purpose.  The Minister of Finance, in his 2018 Budget Speech, announced a longanticipated amendment to the rate of estate duty. With effect from 1 March 2018, estates with a net asset value of less than R30 000 000 will be subject to estate duty at the rate of 20%, and for those estates with a value greater than R30 000 000, the rate increases to 25%. For those persons who fall into the latter category, it may be prudent to take advantage of RAs in order to ensure that, as far as possible and taking into account annual limits applicable to RAs, your dutiable estate falls below the R30 000 000 bracket, so as to reduce your estate duty liability while still ensuring that your dependants are financially provided for.   There isn’t a ‘one size fits all’ answer to the ongoing questions around the future or suitability of trusts, but it might be reassuring to know that there are other options available to suit your specific circumstances.



Retirement Annuity

Growth Pegging

Growth takes place within the Trust

Growth of assets takes place within the RA

Protection from Creditors

Separate legal entity, thus protected from creditors

Protection from creditors in terms of Section 37A and B of the Pension Funds Act

Tax Implications when assets are placed in the Vehicle

1. Subject to Donations Tax at 20% for donations less than R30m or 25% for donations greater than R30m in any tax year 2. Capital gains Tax Implications when sold to the Trust 3. Interest at the official rate on funds loaned to the Trust

Contributions qualify for an income tax deduction: Limited to the higher of 27.5% of remuneration or taxable income, subject to an annual ceiling of R350 000

Tax implications on income received within the Vehicle

• Taxed according to the conduit principle at marginal rate of beneficiary • Taxed within the Trust at 45%

Taxed within the Four Funds Approach at 0%

Estate Duty implications

Separate legal entity – thus no estate duty implications

Does not form part of your estate – thus no estate duty implications


Discretion of Trustees in terms of the Trust Deed to distribute income/capital to beneficiaries

Funds are only available at death, retirement, retrenchment. At death, the Trustees of the Fund have a discretion in terms of section 37C of the Pension Funds Act of distribution of funds to dependants – thus beneficiary nomination not binding



Looking at living annuities


any dream of the day retirement will come, but this too is a time of decisions that will impact the rest of your life. Your full salary will stop, and you will have to invest your retirement capital to earn an income in your golden years. Generally, investors can either invest their retirement capital in a guaranteed income product, or invest the funds in a living annuity, which generally doesn’t offer guarantees. Living annuities have become popular for SA pensioners as they tend to favour the idea of being able to choose how much income to draw, within the limits imposed on these products. Many investors want to leave a legacy behind when they pass away and being able to nominate a beneficiary to receive any remaining capital once you pass away, is a huge benefit of living annuities. If managed correctly, it’s possible to create an intergenerational investment through a living annuity, from which a regular income stream can be provided. As with many things in life, however, there are some drawbacks. Failing to manage a living annuity correctly at the outset, can cause retirement dreams to turn into one big nightmare. The advantage of being able to negotiate your own income is in some instances also the downfall of many living annuities. If the withdrawal percentage is too high, it simply guarantees that the portfolio will struggle to deliver returns and sustain the level of income needed. Filling the gap could lead to attempts to enhance investment growth by taking on inappropriate levels of risk – leading to a mismatch of asset allocation with regards to the needs that should be met. For this reason, care must be taken when determining the income element of a living annuity. Another point that should be addressed is the impact that fees can have on the effective management of the portfolio. The process of retirement is overwhelming, and it can cause investors not to focus on the detail, which could result in them sacrificing growth at the expense of costs. To achieve a successful outcome in a living annuity, all fees should be clear and understandable, making it easier to compare different options. The last point to consider, and most likely the most important, is the asset allocation of a living annuity. Suitable assets that address the relevant needs of the investor must be considered and an investment philosophy implemented, which depicts the short and longer-term asset allocation. Shying away from equity exposure to reduce risk, is in most instances not the answer, just as an over allocation to growth assets is also not suitable for all investors. The most successful outcomes are achieved through the process of planning. I strongly advise that investors contact a Certified Financial Planner (CFP) to discuss the setting up and managing of a living annuity. Failure to do so could result in a different and less comfortable retirement than imagined.



FRANCOIS DU TOIT, CFP® Registered Tax Practioner, Francois du Toit Consulting

30 April 2018

Buying a retirement annuity only to save tax is a bad idea

Buy a retirement annuity to save tax! Retirement annuities are a great way to neutralise tax! Save tax now, buy a retirement annuity! Save tax by investing into a retirement annuity before 28 February! Your last chance to save tax before 28 February!


lost count of the number of times I read the same headlines on social media over the last few weeks. There were many variations – but they all had one thing in common: they all try to seduce clients into putting more money into their retirement annuities (RAs) or buying a new RA to save tax. This is the worst idea ever. Are the headlines lying though? The simple question to ask is: Does a taxpayer receive a tax deduction when contributing to a retirement annuity? In other words, does contributing to a retirement annuity save a taxpayer tax? Well, the answer is yes, it does. So why then do I say that this is the worst idea ever? Intent The intent of the headlines is to help clients pay less income tax. A very noble goal. However, history has proven that where the intent of a taxpayer was to avoid paying tax – more often than not – this has back-fired on clients (and advisers) in the long-term. In our tax practice, clients often ask me how they can save tax. It is clear from many discussions that clients want to pay as little income tax as possible. Whenever SARS is auditing or questioning a taxpayer’s tax affairs, they always look at what the intent of a certain transaction was. If the intent was to avoid income tax, then chances are that a deduction may not be allowed. Clients ask if they should… Clients often ask if they should increase their bond to pay less tax on their rental income. The interest on the bond is deductible against such rental income, reducing the taxable income. Let’s consider the intent and the impact of this.

The intent, clearly, is to reduce income tax. To consider the impact, let’s assume the client earned R100 000 profit from rental income. The tax will at the most be R45 000 (45% marginal tax rate). The client re-bonds the property and now pays interest of R100 000 per annum. This is now an expense that can be deducted from the rental income received, leaving the client with no profit and therefore no tax payable. It looks like the client’s problem is solved. However, before re-bonding the rental property, the client had a net profit and net cash flow of R55 000 after tax. Should the client re-bond the property, the tax will be zero, but the client will now pay R100 000 to the bank for the interest. This leaves the client with zero cash flow. What does this have to do with a retirement annuity? Whatever you do to save tax, you will never save more than 45% of what you spend. Simply put, the client paid R100 000 to save R45 000. Does it make sense? No, it doesn’t. What would have made sense is if a client spent R45 000 and saved R 100 000. Alas, that is not how the tax system works. The same applies to buying a retirement annuity to save tax. At least the money goes to your investment and not to someone else. What is the problem then? The problem Important questions that are not being considered: • What type of retirement does the client envision? • How much does the client need for retirement? • Is a retirement annuity the best (or only) solution? • Should the money used for contributions not rather be applied to other areas of the client’s financial planning? • What if the client requires access to capital, as is often the case for business owners? • How will the tax saving be used? If the only reason is to avoid paying tax, then that is the problem.

The golden rule I have been sharing my golden rule as part of my Personal Income Tax for Financial Planners course: Never do anything to save tax. But whatever you do, do it as tax efficiently as possible. Put differently, the goal is more important than the tax you pay. If a client is not on track to have sufficient provision for retirement, then a strategy or plan must be implemented. It is prudent to consider the options available to the client to boost their provision as much as possible. One of which is the tax deduction that can be claimed when contributing to a retirement annuity. The client can invest the tax refund they receive to further boost their retirement provision. Using the same numbers: The client contributes R100 000 to a retirement annuity and receives a R45 000 tax refund. Most people will view it from the angle that the client only invested R55 000 of their own money and spent the tax refund on something else. However, the client could take the R45 000 and also invest it into the retirement annuity, making their contribution R145 000 for the year. See how this now boosts the client’s retirement provision? The right intent When the intent is to provide for retirement, rather than avoiding tax, a retirement annuity makes sense. Whatever happens to legislation, the intent and goal do not change. The goal is clear, what needs to be done is clear and the client is making the most of current tax breaks afforded to them. Always ask why If the only intent is to avoid tax, then the danger signs must go up. Help the client move their intent from avoiding tax to achieving other goals they have in life. The outcomes will be far better.

ROB COOPER Tax expert and Director of Legislation, Sage

The major 1 changes to retirement funds for 2018

The removal of the provision that employees must join a new pension or provident fund within 12 months of its establishment. Employees are now allowed to join their employer’s fund at any time if the fund’s rules allow it. An employee is allowed a tax deduction on retirement fund contributions (employee


and deemed employee contribution) up to the lessor of 27.5% of remuneration and R350 000 a year. From March 2018, the legislation spreads the R350 000 cap across the year. Any unused portion will be considered on assessment. This will prevent employees from receiving more than a R350 000 benefit should they work

at more than one employer during a tax year and exceed the R350 000 cap at one of these employers, or from experiencing a sudden drop in net pay when the R350 000 cap is reached. The postponement of compulsory annuitisation requirement of provident funds for another year, from March 2018 to March 2019.


The day doubters became believers.


In the last 25 years, we’ve experienced good days, bad days and incredible days like when the world heard our vuvuzelas roar. Through it all, the highs and the lows, Coronation’s purpose has remained the same. Working day in, day out, to earn your trust and make your money work for you.

To invest your money today, visit Coronation is an authorised financial services provider and approved manager of collective investment schemes. Trust is Earned™.



30 April 2018

Default strategy already in place at 20% of funds Head of Annuities at Sanlam Employee Benefits, Karen Wentzel FIA, FASSA, CFP® answers MoneyMarketing’s questions about default annuities What are the advantages of a default annuity? For the last 20 years, individuals in defined contribution schemes were left to make important decisions about their retirement. Too many people, retirement funds and financial advisers focused on building wealth before retirement, paying little or no attention to what should happen in retirement. Members often fell prey to unscrupulous advisers or made the wrong investment decisions. To address this issue, in August 2017, the National Treasury published revised default regulations which set out requirements for establishing default strategies. These regulations stipulate that all defined contribution retirement funds, including retirement annuity funds, will be required to have in place a trustee endorsed default annuity strategy that is appropriate and suitable for the members who will be enrolled into it. The regulations are an ‘opt in’ arrangement, rather than an ‘opt out’ one. The specific requirements relating to a default annuity are set out in Regulation 39 of the PFA Act and are as follows: • The proposed annuity strategy must be appropriate and suitable for the members of the fund. Although there is not one annuity that will be suitable for all members, an annuity strategy may include a few options for members with different risk profiles and income levels. Most members will benefit from having a part of their annuity in a guaranteed income stream for life to cover their compulsory monthly expenses and medical aid contributions. A composite annuity, combining a guaranteed life annuity and a living annuity may be a great option for higher earners. • The fees and charges of the proposed annuity or assets must be reasonable and competitive. Currently individual members don’t have access to institutionally priced annuities, both as guaranteed life and living annuities. Default regulations will force boards of trustees to negotiate reasonable and competitive fees and pricing with insurance companies. This will ensure that members have a cost effective annuity option at retirement to consider with other options available in the market. Sanlam (and some other insurers) have developed a new institutionally priced living annuity to address these requirements. • The annuity strategy needs to be reviewed annually and may include traditional life annuities and living annuities being paid from the fund or an external provider. The investment choice for living annuities is limited to four investment portfolios that are compliant with regulation 28 and 37. The prescribed standard for drawdown rates is in a draft format with the Association for Savings and Investment South Africa (ASISA). • Members are given access to a retirement benefits counsellor not less than three months before their retirement date. Choosing an annuity can be a daunting task. Most members make the choice without enough financial knowledge and insight about financial markets and the effect of longevity (living longer than expected) on their financial planning. Members will at least need to consider a trustee endorsed, competitive priced annuity strategy and will have access to a retirement benefit counsellor, which will hopefully improve retirement

outcomes. These requirements will not only impact on the wallet of South Africans, but will also possibly affect the focus of annuity products and trends in the insurance industry. When the default annuity is adopted by all retirement funds, does this mean that fees will decrease? The default regulations set out that the annuities chosen must have reasonable and competitive fees, which will definitely have a focus on fee structures. In a perfect world, all members may want personal advice and an annuity tailored to both accumulated funds and lifestyle expectations. The ultimate objective is to enable every member in a fund to get as close to this ideal as possible. The key is to balance the level of advice and choice offered with an appropriate fee structure. Another crucial factor is that it should be a scalable proposition that works for the trustees of a fund that has thousands of members. The fund will thus need to realise that the closer their offering is to an individualised retail offering, the closer the fees will also be to retail fees. Some companies are offering different levels of flexibility and choice at different fee structures. Do most funds already have a default strategy in place? From Sanlam’s 2017 Benchmark survey for stand-alone funds in May 2017, around 20% of funds indicated that they have already determined an appropriate default annuity strategy, 26% indicated that they’ve been working on it and the bulk of the funds were waiting for the default regulations to be finalised before starting. During the last six months, after the publication of regulations in August 2017, Sanlam experienced an increased number of requests for proposals for default annuity strategies. According to The Benchmark Survey, trustees named the most important features of a default annuity strategy as: 1. Annuity income which keeps pace with inflation 2. Longevity protection and an income for life Of annuity products selected for a default annuity strategy, the three most popular products were: 1. Living Annuities 2. Inflation linked annuities 3. With profit annuities. The choice of products correlates well with the most important features that trustees want to address. Additional services and features, over and above the annuity products that were important for trustees in appointing a provider for their default strategy, were: 1. The offering of member advice pre-retirement 2. The security of the product provider.

Karen Wentzel, Head of Annuities, Sanlam Employee Benefits

CARLYLE FIELD Pension Law Partner

Boards of trustees face challenge


everal new regulations to the Pension Funds Act became law in August 2017. These ‘default’ regulations have far reaching implications for all funds. All funds registered before 1 March 2018 were granted a blanket 18-month extension, meaning they only have to comply with the requirements by 1 March 2019. The three key pillars of the regulations are: 1. Default investment portfolio(s) – boards of trustees must implement one or more default investment portfolios into which a member’s retirement savings will automatically be invested, unless and until the member opts out and chooses a different portfolio. 2. Default preservation and portability – unless and until a member, who leaves a fund before retirement, instructs the fund to transfer their exit benefit to another fund or pay the benefit out in cash, the fund must retain/preserve the member’s benefit in the fund and convert the member to a ‘paid up’ member. 3. Annuity strategy – boards of trustees must devise an annuity strategy that provides retiring members with pension (annuity) options. Funds may intend to apply for an exemption from a specific provision in the regulations due to the nature of that particular fund, but they need to ensure that the outcome of the exemption application is received well before the implementation date. In assisting funds with their implementation procedures, we have already identified some practical difficulties that require detailed consideration, including: • In what format should exemption applications be lodged? • What will be the impact of the default preservation provisions on deferred pensioner arrangements that already exist in some funds? • What information must be contained in a ‘paid-up membership certificate’ that is intended to follow a member from one fund to another? • How and when is a fund required to conduct ‘retirement benefits counselling’ as required in terms of the legislation? • How will the provisions in the Pension Funds Act relating to the distribution of lump sum death benefits apply to paid-up members or to in-fund living annuitants? • Where do funds stand in relation to cost implications of the implementation of the regulations, particularly with regard to system development by their respective administrators?

Find the right engine today, to drive the results your clients want tomorrow. Employers need financially healthy, engaged employees. Such employee populations are more productive, which means better business performance and a healthier bottom-line. The FundsAtWork Umbrella Funds offer employers a holistic solution to ensure employees are financially healthy and engaged through: • Retirement savings

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It is a finely-tuned ‘engine’ with all the components, solutions and incentives you need to deliver the results your clients want.

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for your financial wellness



SHAUN DUDDY Product Development Manager, Allan Gray

How to achieve a sustainable retirement income


etirees drawing an income face three key risks: Longevity risk – the risk of living longer than expected; inflation risk – the risk that the rising cost of living eats away at their investment; and investment risk – the risk of their investment return not being high enough to compensate for the other two risks. With the first two risks being largely outside of your control, it’s crucial to focus on the third. To do this, you are advised to plan for a long lifespan, structure your retirement portfolios for growth and make sure you draw a sustainable level of income. Planning for a long lifespan Improved medical technologies and lifestyle have seen life expectancies increase, and they are likely to increase further moving forward. Table 1 can be used to get a rough sense of how many years of income to plan for if you want to be either 50% or 90% sure that you will not outlive your planned income stream. A caveat is that these time horizons will continue to evolve as life expectancies improve. As an example, consider a male aged 65. To be 50% sure that he won’t outlive his income, he should be planning for at least 16 years of income, at which point there is still a 50% chance that he will be alive and that he will need more than what has been accounted for. On the other hand, if he wants to be 90% sure, he needs to plan for at least 28 years of income. At that point there is about a 10% chance that he will still be alive and need more income than he planned for. Of course we are all different, but if you want a reasonable level of certainty, you need to plan for at least 30 years in retirement. And that is only half of the story. In each of those years, you will need to increase your income with inflation to maintain your income in real terms. Inflation therefore determines the level of income required in each of the 30+ years and determines the nominal returns required for that income to be sustainable. While we have become quite accustomed to relatively low inflation levels and a reasonably stable inflationary environment, this has not always been the case and may not be the case in future. Portfolios need to be resilient in the face of inflation to generate the necessary real returns. Structure your retirement portfolios for growth Retirement is not a time to shy away from growth assets. Table 2 shows the level of real returns required

30 April 2018

increases, the chances of sustainability reduce, along with the personal return you could expect. As an example, note that the Allan Gray Balanced Fund has sat at near to 10% annual volatility since inception in 1999. At that level of volatility, the average client return would be approximately 9.4% per annum (ie 0.6% lower than the portfolio’s expected return of 10% per annum), resulting in only a 72% probability of real income being maintained over 30 years. This shows that even if a portfolio can achieve the required level of real returns over time, once volatility and drawdowns have been accounted for, you may not enjoy the required level of return. Accounting for these risks, it becomes clear that the achievable real returns and starting income levels are more limited than those shown in Table 2. The reality is that for drawdowns of more than 4%, the odds are not in your favour. Where income sustainability is achievable, how should you invest to manage these risks? The key is to: • Invest for real returns • Actively manage downside risk. This requires an appropriate exposure to growth assets, a focus on total returns and trying not to react to short-term market movements.

for different investment horizons and income requirements. If your starting income requirement is 4% of your current capital, increasing each year thereafter with inflation, and you need 30 years more income, you need to achieve at least 2.2% per annum in real returns. If your starting income requirement is 8% of capital, the required real return increases significantly to 8.2% per annum. At the higher levels of required real return, you would need to take on significant investment risk to stand any chance of achieving those targeted real returns. Make sure you draw a sustainable level of income Unfortunately investment risk means you are not always going to get the level of return you need. Portfolio returns may be lower than required over time and you may need to make income withdrawals during periods when the market is in a downturn, meaning

Our research indicates that retirement portfolios should have at least 50% in growth assets such as equities to generate the necessary real returns. Many believe that the best way to that your personal return may be lower invest for an income drawdown is to than the portfolio’s return and lower focus on income returns over capital than required. While the average return returns. The theory is that by having that is likely to be generated by your income returns cover the income portfolio over time is important, it is drawdown, you don’t have to worry also very important to understand what about capital volatility. This argument your personal return experience in that assumes a portfolio’s income returns portfolio is likely to be: the ordering of can continue to increase consistently your returns, volatility and the timing with inflation with no risk and that the of your drawdowns all influence your portfolio can still generate the same total personal return outcome and therefore returns as other more risky assets. This the sustainability of your income. is not generally the case. We therefore Graph 1 looks at the potential impact believe it is better to maximise total of different levels of return volatility on return, regardless of whether it is income sustainability of income and personal or capital return, and actively manage returns over a 30-year period where the downside risk to achieve a desirable expected portfolio return is 10% per risk-return trade off. To do this, you annum, inflation is assumed to be 6% per can either create a well-diversified annum and you draw a starting income portfolio using building blocks, with which is 4% of capital and increases each the help of your independent financial year with inflation. adviser, or you can pick an aligned With zero volatility, there is 100% multi-asset class fund like a balanced chance of sustainability and you would fund, where the investment manager get the expected portfolio return manages the growth asset exposure and of 10% per year. As the volatility downside risk.


30 April 2018

PETRI GREEFF Executive, RisCura

The future of standalone pension funds: Members most at risk


ith the Financial Services Board intending to reduce the number of pension funds in South Africa to about 200 by imposing limitations on fund size, many smaller pension funds will get swallowed up into umbrella funds. For a variety of reasons, however, many retirement fund members are still facing a future of eating cold baked beans. Perhaps their contributions weren’t effectively invested during their saving years. Perhaps once they retired, they spent their money too quickly. Will reducing the number of pension funds and increasing regulation and oversight alleviate either of these situations? I think not. Many smaller funds are already struggling in dealing with requirements for stand-alone funds. This initiative by the regulator will mean that instead of members being represented by trustees that they share their work lives with, they will be part of an amorphous pool of professional trustees. Further, the member profiles of standalone funds, and the investment strategies that match those profiles, will likely disappear. Customised investment strategies that serve a small, niche group of members are not only bespoke but aligned to investment goals, whereas a large pot of future pensioners may get

exposure to a more generic, off-theshelf offering. Yes, it may be cheaper in the short-term, but at what cost to the member in the long term? One can liken it to the difference between a ‘mom and pop store’ and a supermarket. In the mom and pop scenario, the owners know their customers, stock special items for them, and meld their service offering to their needs. In the supermarket scenario, shoppers have no relationship with the individual store managers, and mainly have to accept the items and brands that a supplier has negotiated with a store to stock. They are also often given an impersonal service at the checkout counter. In the retirement space, trustees of standalone funds are more likely to know their members and care about what happens to them. In the supermarket scenario, members become just a number, service levels slip, and the ultimate outcome – a decent income for the rest of one’s life – is more at risk. While regulation in the retirement space is needed to weed out those funds that are not fulfilling the duty, it does tend to come at a hidden cost, and the member is the one who could end up paying somewhere in the future.

Using an umbrella pension or provident fund to save tax


hile not entirely unexpected, the increase in the VAT rate announced in the 2018 Budget speech has placed employees, already struggling in the current economic downturn, under even more financial pressure. Although personal income tax rates were not raised, no inflationary adjustment for the top four income brackets means higher income earners will be paying more of their salaries to government in real terms. The bottom three income tax brackets were only partially adjusted for inflation. Many South Africans are looking at ways to ensure they make the most of their available means to reduce their monthly tax commitments. One of the steps employers can take to assist is to offer employees financial education programmes. The Momentum/Unisa CFVI research results highlight that poor financial literacy remains one of the most important reasons consumers are financially vulnerable. Many employees are not aware how they can use their retirement fund to reduce the amount of tax they pay. Retirement funds such as umbrella pension or provident funds remain one of the most efficient ways to save for the long term. Retirement funds have an advantage over other savings vehicles such as residential property due to the tax deductibility of contributions. Contributions to retirement funds can be deducted from an individual’s taxable income. For an employee with no income other than his salary, the maximum deduction per year is 27.5% of his remuneration limited to R350 000. While the impact differs depending on salary bracket, the average employee could reduce their tax bill by around R200 for each R1000 contribution they make to a retirement fund. For earners in the highest income bracket, this means that for every R1000 they contribute to a retirement fund, their tax bill could reduce by as much as 45%, saving them R450 a month. Most umbrella retirement funds also allow additional voluntary contributions (AVCs), which are once-off contributions, with the same tax saving benefit as regular contributions. Educational programmes can also help employees get on top of debt and other financial challenges. For example, Momentum’s Motheo Financial Dialogues, an award-winning financial education programme, covers a range of financial topics. Areas include helping employees to understand their payslip deductions, highlighting the importance of retirement savings and how their benefits work, guidance on how to get on top of debt, how to talk to the wider family about money, as well as how to budget. Changing jobs is another area where informed, tax-wise decision making is lacking. For example, an employee who withdraws his retirement savings when changing jobs could be taxed as much as 36%, which means for every R1 000 they withdraw, they lose R360 of retirement savings to the tax man. Failure to preserve is one of the main reasons income replacement ratios at retirement are dismally low. Physical and financial wellness are interdependent. When employees feel more financially secure, financial stressors decline, physical health improves and employees are more productive. Vice versa, when physical health improves, medical and insurance costs reduce and employees’ financial vulnerability strengthens. Employers should ensure that their employees have access to programmes that encourage and reward healthy behaviour. Holistic umbrella retirement funds can offer a solution in this respect, offering engagement programmes that facilitate a healthy lifestyle. Employers and their financial advisers would do well to look towards their retirement funds to soften the impact the recent tax Nashalin Portrag, hikes are likely to have on employees’ Marketing Actuary, Momentum financial wellness. Corporate





30 April 2018

Art requires specialist insurance


here are many reasons why connoisseurs collect art. Whether it is to express an emotion, adorn their homes, support the arts or to find something that truly inspires them, there is no denying the fact that owning a piece of art also comes with a responsibility of protecting and safeguarding such items.   “Art, collectables and memorabilia require specialist insurance because they are appreciating assets and are often irreplaceable, which means they simply cannot be catered for under a standard insurance policy.  It lends itself to a different set of criteria when it comes to assessing the insurable value of these items,” explains Mandy Barrett, of insurance brokerage and risk consultants, Aon South Africa.     Defective art is one of the top risks facing collectors. “Most would interpret defective art as a defect in the condition of the piece, whether it’s Uncle David’s elbow that added an extra feature to a prized collector’s painting or a candelabra that accidentally singed the corner of a priceless carved mask, to name a few. A defect in the condition of

WYNAND VAN VUUREN Head of Legal, King Price


an art piece has an impact on the value of the item, which is why it is crucial to obtain a professional specialist valuation of the item in order to establish an informed and current value at which the item should be insured with a specialist insurer such as Artinsure,” says Barrett.  Defective art insurance also includes defective title that covers art collectors in the event of a stolen art piece that is purchased, or alternatively a replica

that was sold as an original. “It is a very complex risk to consider. The illegal trafficking of cultural objects, especially from war-torn countries, is increasing and it affects everyone in the art distribution channel. It is one of the reasons why any new art purchase must be run through an international art register to ensure that you are not purchasing an illegally trafficked item that could leave you exposed to a lengthy legal battle,” she warns.  Dealing with the right art specialist who has access to a network of adjusters, restorers, recovery agents in addition to a global network of intelligence and law enforcement agencies is an absolute necessity. “A professional broker with experience in dealing with the intricacies of art insurance is an invaluable investment in protecting your art portfolio,” she adds.

Mandy Barrett, Aon South Africa

Engineering insurance offering launched

hen things don’t go according to plan and contractors, developers and engineering teams are left scratching their hard hats, the King Price specialist engineering insurance team has your back. In addition to providing insurance solutions for a wide range of industries, the company is now offering comprehensive engineering insurance.   Officially launched last month at the 2018 BAUMA Exhibition, the King Price engineering insurance offering is professional cover for the niche risks that engineering contracts, plant and works encounter, as well as cover for third party liability.  “We created a specific line of insurance to suit this highly specialised sector. There are particular liability concerns that are specific to the engineering industry, and the risks that come with undertaking big developments can be as sizeable as the civil, building and mechanical engineering projects themselves,” says Wynand Van Vuuren, Head of Legal at King Price.  “For this reason, we wanted to offer a comprehensive risk solution and a wide range of products, to mitigate and safeguard against different types of risk exposure in the course of engineering project rollouts, installation projects, and anything that may affect machinery and equipment,” says van Vuuren. “We know there’s no one-size-fits-all solution when it comes to insurance”.

The offering only works through brokers who are qualified to consult and advise best, in line with this industry’s risks and needs. Eight specific sections of engineering risks are insured: • Contract works insurance, with public liability cover • Plant all risks insurance, with cover for hired items, and public and road risk liability cover • Advance loss of profit insurance • Electronic equipment insurance with

optional extra cover for re-instatement of data and business interruption • Machinery breakdown insurance, including consequential loss, with optional extra cover for deterioration of stock • Machinery movement insurance, with optional extra cover for removal of support and public liability • Transit and erection insurance, with public liability cover • Works damage insurance.


30 April 2018

Why won’t the medical aid pay? Meeting medical scheme challenges through innovation


The medical scheme industry has largely remained stagnant over the last few years, seeing hardly any growth in the number of members covered. In fact, we have seen a reduction in the number of schemes in the industry, through liquidation and mergers or amalgamations. As a result, the remaining medical schemes tend to have an ageing profile, which negatively affects their long-term sustainability, solvency and claims profile. The challenge in the medical schemes industry is to find a way to encourage younger, healthier members to enter – and stay in – the market. This is not an easy task when you consider the costs and increases put through by the medical schemes, together with the less than inflationary increase in medical scheme tax credits, thereby slowly making medical scheme cover less affordable. Innovation and products that offer value for money will encourage younger consumers into the medical scheme market. We haven’t seen many innovations in the medical scheme industry since the introduction of the medical scheme savings account in the mid-1990s. This account offered an in-option savings facility that covered the member’s day-to-day medical expenses. This solution provided an alternative for younger, healthier members who didn’t require extensive medical scheme benefits, but didn’t really offer much flexibility and was rather prescriptive in terms of what the funds could be used for. In addition to this, members who had built up large amounts of money in savings accounts, could not access these funds unless they left the medical scheme or changed their option for another scheme or option without a savings facility. While this money carried over to the following year, the interest offered was low and members could not utilise it to lower their contributions. Basically, it was inflexible. This represented an opportunity to rethink benefit design, and find new ways in which to offer consumers more flexibility and choice with solutions tailored for them and not for the benefit of the scheme. The solution came in the form of a health savings account that sits outside of the medical scheme, allowing consumers a lot more control in terms of how much money they contribute to this account and what they would like to use the funds for, like paying for claims not usually covered by the medical scheme. This savings vehicle also allows for instant access to the funds in the account to pay providers at the point of service, rather than paying upfront and waiting to be reimbursed by the medical scheme from the in-scheme savings. It also allows consumers to supplement their retirement savings or even cover medical scheme contributions in retirement, a far more financially savvy solution when we compare it to the rigidity of the ‘older’ medical scheme savings offering. This new way of thinking about benefit design has also challenged the industry to provide more relevant solutions to consumers, as well as to design solutions that offer value for money. What if your health or lifestyle could fund your healthcare needs? So, the healthier you are the more money you get in your health account. Then, when you need it for medical expenses your previous good health actually funds your claims. This kind of flexible solution could be just what the industry needs to entice the younger, healthier consumers into the medical scheme market, as they are enabled to take charge of their overall financial wellness, not just their healthcare claims and expenses.

here are a variety of reasons for non-payment by a medical aid, says Gerhard Van Emmenis, Principal Officer of Bonitas Medical Fund. He gives the following tips on what may have gone wrong. • Your membership number – It is surprising how often an incorrect membership number is submitted with a claim. • ICD-10 codes – ICD-10 codes are used by medical schemes and healthcare providersto identify specific conditions. These must be correct as they are a diagnosis for specific conditions. • Your contributions are not up to date – Check that your debit order has gone through as non-payment of premiums could result in your bill not being paid. • The claim has expired – Be aware that there is a cut-off date for submitting a claim. • Your benefits are depleted – If you do not manage your medical aid benefits carefully you can run out of benefits before the end of the year. • Waiting periods may apply – When you join a new scheme there is a waiting period of three months and

sometimes, based on your medical history, a twelve month exclusion could be enforced for certain conditions. • Your hospital/doctor is not on the network – Most schemes have hospital and doctors networks who agree on certain rates for their members. If you choose to go to another hospital or a private doctor you could end up paying a large portion of the bill. • You didn’t use a Designated Service Provider – A Designated Service Provider is a specific provider that has been appointed by a medical scheme for a specific service. • Pre-authorisation was not obtained – If you are going to undergo a procedure you need to get authorisation from your medical aid ahead of going to hospital. • You’re using medicine that’s not on the formulary – Every scheme has a formulary, which lists chronic medication approved by your medical aid. These are often generics which are copies of the original medication. • The procedure or treatment may be an exclusion – All medical schemes have a list of exclusions which are not covered.

Be moved! 6 reasons why Momentum Health ...

Provider Choice Saving members up to 40% on their medical aid

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+ Momentum Health members can choose to make use of complementary products available from Momentum Group (Momentum), a division of MMI Group Limited, to seamlessly enhance their medical aid. Momentum is not a medical scheme and is a separate entity to Momentum Health. Terms and conditions apply.

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For more information, visit


GERHARD VAN EMMENIS Principal Officer, Bonitas Medical Fund

DAMIAN McHUGH Head: Health Marketing, Momentum





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MoneyMarketing April 2018  

MoneyMarketing’s April issue contains the latest investing and insurance news as well as a feature on retirement annuities and how to create...

MoneyMarketing April 2018  

MoneyMarketing’s April issue contains the latest investing and insurance news as well as a feature on retirement annuities and how to create...