Frequently Asked Questions · Frequently Asked Questions What you need to know about Effective...

Frequently Asked Questions What you need to know about Effective Annual Cost

Contents What does EAC stand for? .............................................................................................................................................. 2

What is EAC? ................................................................................................................................................................ 2

Why has the EAC been introduced? ................................................................................................................................. 2

Which companies and products have to use the EAC? ....................................................................................................... 2

By when does the EAC have to be implemented? .............................................................................................................. 2

Can the EAC be requested on existing products? .............................................................................................................. 3

Can you give me an example? ......................................................................................................................................... 3

What does each row of the EAC comprise of? ................................................................................................................... 3

Why are the values shown at different times? .................................................................................................................... 3

I see the last column is the EAC at maturity. What happens to investments which have no maturity?...................................... 4

How is EAC calculated .................................................................................................................................................... 4

Evolve ........................................................................................................................................................................... 4

Can you give me an example for a single premium Evolve?................................................................................................ 4

Why does the EAC still reflect upfront advice fees after year 1? .......................................................................................... 5

Why does the EAC in years 3 onwards still reflect growth sharing in the Evolve? .................................................................. 5

What Growth Sharing number is being used for the Evolve products? ................................................................................. 6

Does the EAC structure allow for different return scenarios for Evolve? ............................................................................... 6

Can you show me how Growth Sharing and Growth Sharing Deduction is taken into account in the table for Evolve, net of the

allocation enhancement .................................................................................................................................................. 6

What happens with guaranteed products .......................................................................................................................... 6

Agile ............................................................................................................................................................................. 6

What does the EAC for the Exact Income Fund look like? .................................................................................................. 6

What does Agile look like without EIF, in other words, only regular portfolios? ...................................................................... 7

Can you give another example of Agile, with 50% going into EIF? ....................................................................................... 7

Can you give an example of Agile, with a recurring contribution? ........................................................................................ 8

Why is does the EAC seem like it doubles if I choose a IAF on a recurring premium? ........................................................... 8

Other examples: ............................................................................................................................................................. 9

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Effective Annual Cost - FAQ

Q What does EAC stand for?

A Effective Annual Cost

Q What is EAC?

A A standardized disclosure methodology that can be used by consumers and advisers to compare charges on most retail investment products, and their impact on investment returns, across the various legal wrapper so that consumers are placed in a position to make better informed decisions around retail savings and investment product choices. The EAC is a measure of the effect of charges (depicted as a percentage) that an investor will likely incur in purchasing and holding a financial product, and does not attempt to measure the features of a financial product.

Q Why has the EAC been introduced?

A The EAC implementation forms part of TCF (Treat the Customers Fairly) as an initiative to promote transparent, accurate and fully disclosed cost reporting. In the past different methodologies were adopted in various parts of the investment industry, notably RIY in Long-Term Insurance business and TER in Asset Management business. The EAC allows a standardised calculation methodology where these two older disclosure metrics can be combined so that all products are compared in a standardised way.

Q Which companies and products have to use the EAC?

A This Standard applies to all members of ASISA, including asset managers, LISPs and Life Companies. The products covered are retail investment products:

participatory interests in collective investment schemes (including foreign collective investment schemes duly approved for marketing in South Africa),

contracts under a linked investment services provider license,

all insurance contracts (other than pure risk-based insurance contracts and compulsory and voluntary purchase guaranteed non-profit Life Annuities) and products wrapped in a life wrapper, and

memberships of retirement annuity funds and preservation funds. . The only retail investment products that are excluded are compulsory and voluntary purchase guaranteed non-profit Life Annuities

Q By when does the EAC have to be implemented?

A On new business products, Effective 1 October 2016

EAC on the quotes for Agile, Gateway, Flexible Investment Plan, Evolve Investment Range has already been implemented.

EAC on Bold quotes will be implemented on 28 November,2016

EAC on other Liberty Investment products will be implemented on 15 December 2016 On changes to existing products, the effective date is set as:

1 October 2017 for products sold after 1 June 2010,

1 October 2018 for products sold between 1 June 2000 and 31 May 2010; and

on products sold before 1 June 2000, the effective date is 1 October 2019

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Q Can the EAC be requested on existing products?

A Currently they are not available on request – this is for implementation in the next phase

Q Can you give me an example?

A The disclosure is pretty standard and looks as follows: The Effective Annual Cost (EAC) is a measure which has been introduced to allow you to compare the charges you incur and their impact on investment returns when you invest in different Financial Products. It is expressed as an annualised percentage. The EAC is made up of four components, which are added together, as shown in the table below. The effect of some of the charges may vary, depending on your investment period. The EAC calculation assumes that an investor terminates his or her investment in the Financial Product at the end of the relevant periods shown in the table.

Impact of charges 1 Year 3 Years 5 Years Term to

maturity

Investment management 1.1% 1.1% 1.1% 1.1%

Advice 0.5% 0.5% 0.5% 0.5%

Administration 0.9% 0.9% 0.9% 0.9%

Other 0.3% 0.3% 0.3% 0.0%

Effective Annual Cost 2.8% 2.8% 2.8% 2.5%

The Standard allows for free-test notes at the bottom of the table to explain the contents of the table

Q What does each row of the EAC comprise of?

A Investment Management All costs and charges incurred by the investor for all underlying investments such as weighted TER plus Transaction Costs; Advice All costs and charges the investor incurs for financial planning by the adviser both upfront and ongoing; Administration All costs and charges that the investor occurs relating to the administration of the product, such as platform or management fees; Other All termination charges, penalties, loyalty bonus payments, smoothing or risk benefits, guarantee charges, the cost of limiting investment returns, wrap fund charges and the cost of any risk benefits such as waiver of premium or death benefits that are reasonably foreseen if the investor terminates his or her contract and withdraws all of the funds at the end of the disclosure period being calculated. It is like a catch-all: any charge that is not captured by the first three categories

Q Why are the values shown at different times?

A Some charges change over time, e.g. termination charges, or tiered fee scales. The values in the table show the effect of costs if the investment is terminated at those different times. In other words, if there is a termination charge if you terminate at the end of year 1, it is shown in that column of the EAC table. If you look at the year 3 value, it will not show the year 1 termination cost, but rather the year 3 termination cost. The periods 1, 3, 5 and 10 years are shown to indicate the benefit of staying in the investment up to

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maturity

Q I see the last column is the EAC at maturity. What happens to investments which have no maturity?

A 10 years is used as the “maturity”, unless a maturity date exists. For retirement annuities, age 55 is assumed to be the maturity date, if no specific maturity date exists

Q How is EAC calculated

A Simplified method for single premiums (just annualised costs added together) RIY method for recurring premiums and charges that can’t be annualised easily (e.g. tiered fee scales)

6% growth assumed.

The reduction in return for each cost component is what makes up the value in the table.

Evolve

Q Can you give me an example for a single premium Evolve?

A R1m single premium

3.42% IAF, 0.57% OAF

60% allocation to Higher Target Return Capped Tracker, with a return of contributions guarantee

40% allocation to ABSA Large Cap Fund.

To reconcile the above values, let’s look at each in turn.

A Summary of Your Costs

Effective Annual Cost: Evolve Investment Plan

1 Year 3 Years 5 Years

Term to

Maturity 10

Years

1.2% 1.2% 1.2% 1.2%

4.0% 1.7% 1.3% 0.9%

0.3% 0.3% 0.3% 0.3%

3.2% 2.3% 2.1% 1.9%

8.7% 5.5% 4.8% 4.4%

Notes:

•

•

•

Note3: The values include the effect of Growth Sharing, expressed as an annualised cost (see below for a more detailed explanation).Note4: The values also include the upfront enhancements (as negative charges) which have been allocated to the investment amount.

The Effective Annual Cost (EAC) is a measure which has been introduced to allow you to compare the cost you incur when you invest in different financial products. It is

expressed as a percentage of your investment amount. The EAC is made up of four charges, which are added together, as shown in the table below. Some of the charges may

vary, depending on your investment period. The EAC calculation assumes that an investor terminates his or her investment in the financial product at the end of the relevant

periods shown in the table.

RIY after 5 years

Other2,3,4

Investment Management1

Advice

Administration

Impact of Charges

Note1: These charges depend on the portfolio chosen.Note2

: The values shown include guarantee charges.

In the table above, Growth Sharing is taken into account as follows:

The value at the end of year 1 includes the growth which we expect you to have shared with Liberty by that time based on current market conditions (i.e. not

at the 6% p.a. return on which the above table is based).

The value at the end of year 1 also includes the growth which we still expect you to share with Liberty, based on current market conditions. If you had to exit

the product at the end of year 1, this is deducted as a Growth Sharing Deduction.

The value at the end of year 3 includes the total growth which we expect you to have shared with Liberty by that time. At the end of year 3 there is no more

growth sharing and therefore no Growth Sharing Deduction applies anymore if you decide to exit the product.

All calculations include value-added tax (VAT) at the prevailing rate, where applicable.

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Investment Management Charges: This depends on the portfolio chosen. The TER+TC (total investment costs) for the two chosen portfolios add up to 1.2% p.a.

Portfolio Name Portfolio

Split

Total Investment Costs (TER +

TC)

Evolve Investment Plan

ABSA Large Cap Fund 40.00% 2.72%

Liberty Capped Tracker (C) 60.00% 0.20%

Total 100.00% 1.21%

Advice Charges: 3.42% IAF in year one, plus 0.57% OAF= 3.99%, or 4.0% as rounded in the table In year three, we take 3.42%/3=1.14%, plus 0.57% OAF=1.71%, or 1.7% as rounded in the table Etc.

Administration charges: This is simple: 0.3% platform charge applies

Other charges: This is more complicated.

Here we have 3% p.a. guarantee charge on 60% of the portfolio (1.8% p.a.).

Growth Sharing (including the Growth Sharing Deduction) is estimated at 6%.

The enhancement is 4.42%

This means that in year one, the “other” component is roughly 6%+1.8%-4.42%=3.38%

The actual value in the table is 3.2%. The difference is due to the use of the RIY method, i.e. compound interest effects are included.

The same calculation is done at the end of 3 years, where each figures is annualised, e.g. Growth Sharing=6%/3, the enhancement=4.42%/3 and the guarantee charge is still 1.8% p.a.

Adding these gives you 2.3%

Q Why does the EAC still reflect upfront advice fees after year 1?

A The effect of the initial charge is seen overall (i.e. spread over full term). For example, if I invest R100 now and pay R10 initially, over 1 year that cost is R10, over 2 years that cost is R5p.a., over 3 years that cost is R3.33 etc. The only difference is that we look at reduction in yield (not Rands) in the EAC table, so a 3% upfront cost in year 1 is a 1.5% p.a. cost when assessed over 3 years etc. So the EAC component is IAF/n (annualised figure to be included in the EAC figure at all durations) + the ongoing OAF p.a. So a 3% IAF in year 1 will show as 3% in the year 1 column (shown as 3%/1 = 3%). In the year 3 column it will show as 3%/3=1%. This does not mean that it is charged again. It means that at the end of 3 years, the cost you paid upfront (3%) is equivalent to 1% p.a.

Q Why does the EAC in years 3 onwards still reflect growth sharing in the Evolve?

A Again the effect of the initial charge is seen overall (spread over the term). If I pay a cost for Growth Sharing during the first 3 years, but want to see what the effect was when I leave now at the end of

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year 5, I still need to include the cost of growth sharing that I paid in the first three years. For example, I ended up paying R2p.a. in each of the first three years in Growth Sharing. The 5 year figure (summary) of the cost is R6/5=R1.2 per annum, when looking over the 5 years.

Q What Growth Sharing number is being used for the Evolve products?

A The current best-estimate assumption for Growth Sharing for the next 3 years depends on the market conditions. This value, should it be estimated from the outset, is given in the Growth Sharing Deduction table (value of Growth Sharing Deduction, being the Growth Yet to be Shared, at outset) The value of Growth Sharing is therefore not determined at the 6% calculation rate, but rather as a best estimate based on future return scenarios.

Q Does the EAC structure allow for different return scenarios for Evolve?

A No, the EAC works on a best estimate of future Growth Sharing. (only pertains to Evolve and Bold). In determining this best estimate, Liberty does consider a large number of scenarios and effective determines the best estimate from the results of all of those.

Q Can you show me how Growth Sharing and Growth Sharing Deduction is taken into account in the table for Evolve, net of the allocation enhancement

A Let’s say the enhancement is 1.71%, and the Growth Sharing Deduction at the outset is 6.5% (this is the estimate of all future Growth Sharing)

t term = t 0 1 3 5

A A=growth sharing deduction if exit = expected future growth sharing (non-annualised)

6.50% 4.50% 0% 0%

B B=growth sharing incurred to term t (non-annualised) 0.00% 2.00% 6.50% 6.50%

A+B Total effect of GS (non-annualised)

6.50% 6.50% 6.50%

(A+B)/t Annualised GS

6.50% 2.17% 1.30%

Enhancement (annualised)

1.71% 0.57% 0.34%

EAC (other)=

Annualised GS - Enhancement (annualised)

4.79% 1.60% 0.96%

Q What happens with guaranteed products

A For products with implicit or embedded charges, some of the EAC components may not apply, e.g. administration fees on a GCB. Those rows then do not have to be shown. Where there is an advice cost, on GCB’s for example, the advice cost is the drop in the guaranteed return when the advice is added to a similar investment without advice. The Exact Income Fund is also such a guaranteed fund, as is Guaranteed Income Annuities (with a fixed term).

Agile

Q What does the EAC for the Exact Income Fund look like?

A Assume 100% invested in the Exact income Fund:

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Investment Management = 0%

Advice = 0.57% IAF and 0.57% OAF (included)

Admin = 0%

Other = 0%

Q What does Agile look like without EIF, in other words, only regular portfolios? A For a R1m case into Agile,

with 1.14% IAF and 0.57% OAF, and

100% invested in the STANLIB Balanced Fund (with an investment management charge of 1.4%)

Platform charge=0.3% p.a.

Q Can you give another example of Agile, with 50% going into EIF? A R1m invested

1.14% IAF

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0.57% OAF

50% EIF and 50% in CPI Plus

Term to retirement = 19.5 years

You can see that the EIF and Other Investment Portfolios are treated separately. A table giving a combined figure (weighted 50:50 between the two separate tables) is given below.

Impact of Charges (Exact Income Fund) 1 Year 3 Year 5 Year

Term to Retirement

Advice² 1.8% 1.0% 0.9% 0.7%


Impact of Charges (Other Investment Portfolios) 1 Year 3 Year 5 Year

Term to Retirement

Investment management1 1.0% 1.0% 1.0% 1.0%

Advice 1.8% 1.0% 0.8% 0.7%


Other⁵ 0.0% 0.0% 0.0% 0.0%


Total Estimated weighted costs (incl. EIF) 2.6% 1.8% 1.6% 1.4%

Q Can you give an example of Agile, with a recurring contribution? A Assume R1 000 invested p.m., no escalation

3.42% upfront advice fee (from each premium), 0.57% ongoing advice fee 100% invested in the Medium Equity Tracker You can see that the advice fee of 3.42% seems to “double” and shows as 7.1% (incl the OAF of 0.57% as well) - SEE BELOW FOR EXPLANATION

Impact of Charges 1 Year 3 Year 5 Year

Term to Retirement

Investment management1 0.2% 0.2% 0.2% 0.2%

Advice 7.1% 2.9% 2.0% 0.9%


Other⁵ 0.0% 0.0% 0.0% 0.0%

Effective Annual Cost 7.6% 3.4% 2.5% 1.4% note1

: These charges depend on the portfolios chosen.

note5: There are no early termination charges.

Q Why is does the EAC seem like it doubles if I choose a IAF on a recurring premium?

A For single premiums, an initial charge of 1% is included as 1% in the EAC table (since we can use a simplified method). For recurring premiums, an initial charge of 1% of premium can't be taken into account in this way as the RIY calculation method has to be used. Since it is taken off before the premium is invested, the premium grows less during the period, so the reduction in return is greater than the simplified cost. An initial charge of 1% looks almost double during year one, even though this reduces by year three to "look" more like the simplified method. The reason for this calculation difference is because monthly recurring premiums would only have been invested for approx. half the term (on average), so the RIY cost appears larger.

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Other examples:

R1m investment; 0.57% IAF, 0.57% OAF; 100% Stanlib Balanced

FIP

Gateway

Agile RA (no EIF)

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