RETIREMENT
RISK
LOUIS THERON Head: Investments and Annuity Products: Liberty Corporate
Understanding preservation options when every cent counts
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mere 6% of retirement fund members choose to preserve their savings when leaving their employers. The other 94% of members choose cash and must restart their retirement savings journey, often from zero. In this time, when the impact of the COVID-19 pandemic has placed enormous financial strain on families, it has never been more important for members to preserve their retirement savings. Yet, in challenging times, the important decision members have to make when choosing to preserve their funds cannot be underestimated. In an attempt to improve preservation levels, Regulation 38 of the Pension Funds Act has required all retirement funds to make in-fund preservation available since 1 March 2019. This allows a member who has left their employer to retain their savings in the fund while no longer contributing into the fund. Some important differences exist between in-fund preservation and traditional ‘out-of-fund’ alternatives like preservation funds and retirement annuities. Understanding these can make a notable difference to a member’s retirement journey. In-fund preservation options typically charge lower fees Regulation 38 specifically requires that, inside a fund, a preservation member continues to have access to the same list of investment portfolios at the same or a lower price. Fees could be substantially higher for some out-of-fund alternatives. The picture below illustrates the compounding effect that lower fees have on a member’s preserved savings leading up to retirement. Assuming the same investment growth and advice fees for both options, this example shows that the accumulated preserved retirement savings of a 22-year-old member can be 53% higher (i.e. the blue line is above the red line) as a result of the underlying fees charged. The red line assumes an annual investment management fee of 1.5% and the blue line assumes 0.35%. In current economic times, with investment performance under pressure, lower fees can add substantial value to a member. In-fund preservation options do not require transfer forms To choose in-fund preservation can be as simple as ticking a box. As the member remains in the fund, they do not need transfer documentation such as recognition of transfer and Section 14 documents. The COVID-19 pandemic has made face-to-face consultations with members difficult for financial advisers and product providers, so having a more seamless preservation process can benefit all parties. Partial withdrawals and advice fees Out-of-fund preservation options allow members to make a partial withdrawal from their preserved retirement savings. This can be at inception or a once-off before retirement. For in-fund preservation, the preserved member remains a fund member and, as such, is not allowed to make a partial withdrawal until a claim event happens, such as retirement, death or withdrawal. Both in-fund and out-of-fund preservation options allow a member to pay negotiated advice fees to their financial adviser. In the case of in-fund preservation, it is up to the fund trustees to approve the facilitation of any advice fee payments as an expense from the fund. With an out-of-fund preservation option, legislation dictates the usual commission and ongoing adviser fee limits. In current economic times, it is important to carefully consider any payment from a member’s preserved retirement savings against the value gained from doing so, and the longer-term impact it has on the member’s ability to retire comfortably. A financial adviser can assist a member to better understand these trade-offs.
28 WWW.MONEYMARKETING.CO.ZA
31 December 2020
DONALD DINNIE Director, Norton Rose Fulbright
D&O insurance and reflective loss claims
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t common law, when a wrong is done to a company only the company can sue for the damage caused to it. That does not mean that the shareholders of the company may not consequentially suffer any loss (what is known as a reflective loss). Any negative impact the wrongdoing has on the company is likely to affect its asset value and the value of its shares. The shareholders, however, do not have a direct cause of action against the wrongdoer. The company alone has the right of action.
DIRECTORS OWE A FIDUCIARY DUTY TO THE COMPANY AND NOT ITS SHAREHOLDERS A shareholder cannot recover damages merely because the company in which they are interested in has suffered damage. They cannot recover a sum equal to the diminution in the market value of their shares or equal to the likely diminution in dividend because such a loss is ‘merely a reflection of the loss suffered by the company’. This common law position has been confirmed in two recent judgments, the Supreme Court of Appeal case of Hlumisa Investment Holdings (RF) Limited and Others v Leonidas Kirkinis and Others, and the Gauteng High Court judgment of De
Bruyn v Steinhoff International Holdings N.V. and Others. In both cases, the question was whether section 218(2) of the Companies Act 2008, which states that ‘any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention’, provided shareholders with a statutory right of action and changed the common law prohibition against a reflective loss claim. The courts said the company’s existence as a separate legal person, and the fact that it is the company that has a right to recover damages for the loss, deprives a shareholder of any such claim. The person who can sue in terms of section 218(2) to recover the loss is the one to whom harm was caused. In both cases, the loss was occasioned to the company and that is the entity with the right to claim. Shareholders may pursue a derivative action under section 165 of the Companies Act if the company refuses to act to protect its rights. Compensation, which is then due to the companies, would benefit the shareholders. The law remains that directors owe a fiduciary duty to the company and not its shareholders, and that those shareholders cannot claim from directors for any reflective loss suffered. The common law in that regard is not altered. This will have a limiting effect on potential claims under Directors & Officers insurance policies.
