HOT TOPICS SEMINAR - Alexander Forbes€¦ · 2014-03-20 · *WEF Global Competitiveness Report...
Transcript of HOT TOPICS SEMINAR - Alexander Forbes€¦ · 2014-03-20 · *WEF Global Competitiveness Report...
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HOT TOPICS SEMINAR
LEADING OPINION | Investing to secure your members’ retirement
SECTION 1
ECONOMIC LANDSCAPE
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What were the main themes of 2013, in the context of:
a) Our economic environment (what drove beta); and
b) Asset manager strategies (what drove alpha)?
Question 1
Economic Environment
2013 – another
year of:
risk ON
risk OFF
Could we expect
the same for
2014?
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Does this look familiar?
Despite initial expectations ALSI in 2012 = 26.7%
Strong
2nd half
Source: Bloomberg
2013 ended with new highs
Many thought 2013 would disappoint, but ALSI = 21.4%
Source: Bloomberg
Another strong 2nd half
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2013 ended with new highs
MSCI World Index = 27.4% (in $), 20% stronger than EM
Source: Bloomberg
Good year for global equities
Asset class performance...
... in Rands over periods to 31 December 2013
Asset
Classes
Index 1 Year 3 Years 5 Years
Local Equities FTSE/JSE All Share
Index 21.43% 16.42% 19.93%
Local Bonds BESA All Bond Index 0.64% 8.29% 7.65%
Local Cash SteFi Index 5.18% 5.48% 6.49%
Global Equities MSCI World Index 57.23% 30.69% 18.60%
Global Bonds Citi WGBI 18.51% 18.00% 4.87%
Global Cash US 3month TBill 23.51% 16.63% 2.63%
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Weak Rand
Depreciated by
26%
Euro crisis
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Tapering QE
18 December 2013 | Bernanke announces $10bn cut in January 2014 to monthly purchases
Interest rates have no where to go...
Source: I-Net Bridge, Investec Asset Management
Short term interest rates in the UK, US & EU
...but UP
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... as seen with the ‘Fragile Five’
Source: Bloomberg, Investec Asset Management
Turkey announces a 5.5% increase to rates (28 Jan 2014)…
…hours later (29 Jan 2014) the SARB announces an “unexpected”
increase of 0.5%
Manager Watch™ Survey
https://www.alexanderforbes.co.za/busines
s/Asset%20Consulting%20Surveys/Annual
%20Retirement%20Fund%20Survey%2020
13.pdf
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Strategies | Balanced funds
Primary drivers of performance are typically:
Asset allocation Global vs. Local
Asset classes within global & local
Asset strategy Value/momentum, market cap, low volatility
etc. for equities
Duration, credit, market timing & trading etc.
for fixed income
Sector allocation in each asset class
Security selection
Global allocations
Source: Investment Solutions
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Global equities allocations
Source: Investment Solutions
Global equities was the place to be
Source: Investment Solutions
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Key point for long term investors
Regardless of managers’ views,
all of the global balanced managers
(as per AF Manager Surveys)
managed to deliver CPI + 5% performance
over the 1, 3, 5 & 10 year periods on a
per annum basis
Strategies | Equity funds
Main sources of performance are:
Manager style/strategy
Sector allocation
Market risk
Security selection
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Large performance range of shares
Source: Investment Solutions
Asset manager strategies
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
6/1
/2003
9/1
/2003
12/1
/2003
3/1
/2004
6/1
/2004
9/1
/2004
12/1
/2004
3/1
/2005
6/1
/2005
9/1
/2005
12/1
/2005
3/1
/2006
6/1
/2006
9/1
/2006
12/1
/2006
3/1
/2007
6/1
/2007
9/1
/2007
12/1
/2007
3/1
/2008
6/1
/2008
9/1
/2008
12/1
/2008
3/1
/2009
6/1
/2009
9/1
/2009
12/1
/2009
3/1
/2010
6/1
/2010
9/1
/2010
12/1
/2010
3/1
/2011
6/1
/2011
9/1
/2011
12/1
/2011
3/1
/2012
6/1
/2012
9/1
/2012
12/1
/2012
3/1
/2013
6/1
/2013
9/1
/2013
12/1
/2013
Rolling 1 Year Average Active returns - SWIX
Rolling 1 year Average Active returns
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Strategies | Bond funds
Main sources of performance are:
Portfolio positioning
Credit yield pick-up
Managing the portfolio term (duration)
Trading
Other sources: convexity optimisation,
carry trades, convertible bonds.
Bonds, a tough place to be
Source: Bloomberg
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Tapering of quantitative easing is one of the main
economic events to play out in 2014 – what are
the possible effects?
Question 2
Scale of QE is unprecedented
Fed expanded its balance sheet from ~$800 billion to ~$4 trillion!
$ ,0.00
$ ,500.00
$ 1,000.00
$ 1,500.00
$ 2,000.00
$ 2,500.00
$ 3,000.00
$ 3,500.00
$ 4,000.00
$ 4,500.00
Bil
lio
ns
Total Assets of the Federal Reserve
Source: Federal Reserve
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Tapering has started
Going from $85 billion
to $65 billion per
month!
How will pension funds be affected
Christine Romans, Chief Business Correspondent for CNN,
described ‘tapering’ as the most important driver of US defined
contribution (‘DC’) pension plans!
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Anticipate volatility & uncertainty
Negative views
Large decline in equity
markets
Large losses on bond
portfolios
Large losses in EM (e.g. SA)
If this happens:
Fed has already exhausted
all policy measures
Compound with global
economic risks
Positive views
QE has stabilized the US
economy, managed
unemployment & galvanized
economic growth
Tapering already priced in –
equity markets to deliver
moderate but positive
growth while bond prices
remain stable
Reality is likely to lie somewhere between these two extremes!
Prepare fund & members for this
Trustees to
consider
Review, decide & stick to strategy
Communicate to members
Alert employer
Volatility, but don’t panic
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Retain a well diversified strategy
Trustees should not try to time tapering
through asset allocation / manager
selection
Specialist approach
Balanced approach
Offshore allocations: QE – ‘search for yield’
Yields in developed nations normalising
Developing & EM – may suffer outflows
Understand the asset allocation
Stochastic asset liability modeling – can
help to derive a long term strategic asset
allocation to provide growth within acceptable risk
levels & protect principle objectives
Cash over long term - imprudent
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Keep a eye on your asset manager
Regulation 28 dictates that boards of
trustees should: “understand the changing
risk profile of assets of the fund over time,
taking into account comprehensive risk
analysis”
Trustees remain responsible for
compliance even when asset
management, for example, is outsourced
Interest rate risks & value of advice
Volatile rates implies volatile annuity prices
Focus on income affordability rather than
accumulated capital
When to annuitize?
DC FUNDS
Fund liabilities increased significantly as interest rates
fell on the back of QE
Liability driven investments (‘LDI’) helped
DB FUNDS
“In a perfect world we could separate the effects of the economy and QE, but this
simply is not feasible. Still, we think that QE at a minimum has accelerated the
demise of some pensions...Unfortunately, things got so bad for some pension
funds that they never had a chance to stick around to see the “long run”.” UBS
strategist Boris Rjavinski
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In conclusion
“Given the unprecedented scale of the Fed’s QE
program it is impossible to reliably predict
exactly how markets will react to tapering”
No free “free lunches” – will be some risk for investors
Diversified portfolios designed to target suitable
liability related objectives, e.g. RR in DC funds
Engage with asset managers – how have they
positioned their portfolios for tapering?
Encourage members to seek advice
AF’s views
The history of asset managers
Question 3
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How does SA fare globally?
0.7% of world GDP
Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
How does SA fare globally?
Less than 2% of global AUM
Source: World Bank (2012), Investment Solutions
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How does SA fare globally?
53rd out of 148 countries in global competitiveness
Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
How does SA fare globally?
Financial services industry ranks 3rd
Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
SA ranks 1 out
of 144 for
Regulation of
Securities Exchanges
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How does SA fare globally?
2012 - Towers Watson Top 500 list of global managers
6 25 6 10
1965 - the first unit
trusts in SA, by
2012 - R1 trillion in
assets
2012 - Pension assets as a percentage of GDP
101%
14%
110%
108%
64%
Size of industry
SA Equity Market – capitalisation over time
JSE listed in 2006
17th biggest exchange
by market cap (2012)
and most liquid
emerging market**
SA ranks 2nd out of 144
for availability of
financial services &
financing through local
equity markets*
*WEF Global Competitiveness Report 2013/14
** World Federation of Exchanges
Source: JSE, Investment Solutions
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Concentration of the industry
Market share of 5 biggest asset managers in each country
61%
30%
43%
25%
Source: World Bank, Black Rock, Investment Solutions
Highly
concentrated
AUM by SA
2000 – just under R1.1 trillion
2012 – more than R3.8 trillion
Size of the industry
Life insurance companies losing market share
67%
42%
33%
58%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Dec 2002
Dec 2012
Life-company owned The rest
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Dominant players
Largest managers overtime
Source: Investment Solutions, Alexander Forbes
Rank 2000 2005 2010 2012
1 OMIGSA OMIGSA OMIGSA OMIGSA
2 SIM SIM SIM Investec
3 LIBAM STANLIB STANLIB SIM
4 RMBAM RMBAM Allan Gray Coronation
5 Investec Investec Investec Allan Gray
6 Coronation Allan Gray Coronation STANLIB
7 Fedsure Investment Solutions Investment Solutions Investment Solutions
8 SCMB Coronation RMBAM Momentum
9 Investment Solutions Metropolitan ABSA Prescient
10 Metropolitan ABSA Prudential Futuregrowth
Dominant players
Top 10 asset managers & growth rates over the past 10 years
Foreign firms have found it difficult to break into SA market
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Dominant players
Market share of black-owned & managed firms over time: Showing growth of AUM
Slower growth of market share
Source: Investment Solutions
Challenges
Firms Increasing cost of regulatory compliance
NT’s call for lower fees
Market volatility & shrinking of funds
Longevity of firms relies on skill, luck (timing of
entering the industry) & patient investors
Investors Refine rigorous & robust manager selection
process
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SECTION 2
INVESTMENT STRATEGIES
Have life stage strategies delivered appropriate
results in view of their intended objectives?
Question 4
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Rationale & history of life stage
DB to DC conversions – passed risks from
employer to individual members:
Investment risk
Longevity risk
Planning & modeling risk
Life stage was largely a response to:
Detrimental member behaviour
Lack of financial awareness
Market volatility
Rationale & history of life stage
Text 1
Text 2
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
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-04
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-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Equities
Bonds
Cash
Inflation
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jan
-94
Ju
l-95
Jan
-97
Ju
l-98
Jan
-00
Ju
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-03
Ju
l-04
Jan
-06
Ju
l-07
Jan
-09
Ju
l-10
Jan
-12
Ju
l-13
Equities
Notional Investment
Manage growth
Manage volatility
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Life stage strategy
3 distinct phases
Life stage strategy
Example of asset class exposure in the
accumulation and pre-retirement phases
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Primary objectives of life stage
Achieving investment returns in line with stated
objectives (e.g. RR)
Exposure to growth assets – for long enough
Diversification of returns
Limited volatility (preservation of capital) close to
retirement
Limited (negative) impact of member behaviour –
offering an embedded advice model
Simple for members to understand
Cost-effective to administer
To answer the question...
Impossible to categorically determine whether life
stage strategies have indeed ‘delivered appropriate
results in terms of all their objectives’
However, what we can say is that in a risk cognisant
world, developing our investment strategy such that at
inception its optimised to deliver our key objective
(RR) with a high probability & then refining this to
improve techniques – is intuitively correct. This does
not guarantee that in hindsight, a slightly different
structure could not have delivered a marginally better
result. It is all about maximising the probability of
success.
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Accumulation portfolio | provided real growth
Commencement
date
Accumulation
portfolio performance
since commencement Inflation
Real return since
commencement
Fund A Mar-06 13.3% 6.5% 6.8%
Fund B Oct-06 12.9% 6.5% 6.3%
Fund C Jul-07 11.1% 6.4% 4.7%
Fund D Dec-00 15.3% 5.8% 9.5%
Most IPS targets met
De-risking portfolios | capital & volatility protection
Ran
ds
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In conclusion
Continually evolving
Different life stage strategies & long timeframe
Life stage seems to have delivered on its’
measurable objectives
Believe life stage is appropriate
What are the criticisms of life stage investing and
how might life stage models evolve?
Question 5
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Criticisms of life stage strategies
Too conservative
at retirement
Does not allow
for a smooth
transition into
retirement
Not focused on preservation of income
Most members access savings in cash
Criticisms of life stage strategies
“One size fits all” approach
Pre-retirement portfolio – fairly volatile (capital preservation vs. Income preservation)
Comparison of
performance
against...
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Evolution of DC & life stage
Source: Principle Global Investors / CREATE-Research Survey 2013
Evolution of DC & life stage
Smooth transition from fund credit to
retirement income by better protecting level of
income
MIC – refined solutions which aim to further
align pre-retirement to cost of securing income
(e.g. LDI)
Alignment to default annuities
Optimising timing & implementation of de-
risking phase
Return maximisation in accumulation stage
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What’s an appropriate investment strategy for
post-retirement and how should this be linked to
pre-retirement strategies?
Question 6
Change in projected incomes
Replacement ratio index of members born in different years
Declining pension outcomes over the long term, but
improved over the last three quarters of 2013
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What we don’t want
What we do want
Stability of income
Income for life
Maintain standard of living
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Inflation-linked annuity
Guarantees monthly income for life
Level of income increases with inflation
Monthly Income
(net of income taxes)
Capital Needed
R5 000 R1 360 000
R15 000 R4 505 000
R25 000 R8 300 000
With-profit annuity
Guaranteed for life
Will not decrease in nominal terms
Increases depend on investment
performance of the bonus portfolio
Monthly Income
(net of income taxes)
Capital Needed
R5 000 R1 005 000
R15 000 R3 310 000
R25 000 R6 110 000
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Fixed annuities
Monthly Income
(net of income
taxes)
Capital Needed for
Level Annuity
Capital Needed for 5%
Escalating Annuity
R5 000 R630 000 R1 000 000
R15 000 R2 100 000 R3 310 000
R25 000 R3 850 000 R6 100 000
Guaranteed for life
Will not decrease in nominal terms
2 types: Fixed Level Annuity & Fixed
Escalating Annuity
Living annuity
Living annuity holder takes all the risk
No guarantees – longevity & investment
risk
What’s a feasible income level to draw?
Capital Inflation-linked annuity
per month
3.5% With-profit annuity
per month
R1 million R3 674 R4 990
R5 million R14 784 R21 164
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Investment strategy
0
25
50
75
100
125
150
175
200
225
VA
LU
E/C
OS
T
DATE
VALUE OF INFLATION-LINKED BONDS VS COST OF THE INFLATION-LINKED ANNUITY
Value of Inflation-linked Bonds
Cost of an Inflation-linked Annuity
Purchasing power portfolios
Improve retirement income
Reduce chance of ‘undesirable outcomes’
R-
R500,000
R1000,000
R1500,000
R2000,000
R2500,000
RE
QU
IRE
D C
AP
ITA
L
DATE
REQUIRED CAPITAL TO PURCHASE REAL INCOME
Cost of an Annuity
Purchasing Power Moderator
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Example | Annuity costs increase
Investment strategy needs to be cognisant of liabilities
June 2013 Annual
ALSI -5.7% 21.0%
ALBI -1.5% 6.2%
SAPY 4.4% 24.0%
STEFI 0.4% 4.7%
Purchasing Power Moderator -3.91% 14.36%
Monthly
Income needed
Capital needed
for income
Investment
Value
Affordability
Level
1 June 2013 R5 500 1 864 818 1 500 000 80.44%
1 July 2013 R5 500 1 659 085 1 441 393 86.88%
Improvement 12.04% -3.91% 6.44%
Example | Affordability level
R ,0
R 1,000
R 2,000
R 3,000
R 4,000
R 5,000
R 6,000
R 7,000
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Mo
nth
ly I
nco
me D
raw
n
Aff
ord
ab
ilit
y L
evel
AFFORDABILITY LEVEL OVER TIME
Affordability Level
Income Drawn
Inflation-linked drawdown
88%
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Linking pre & post retirement
Post-retirement vehicle Asset backing this
vehicle
Retirement matching
strategy
Inflation-linked annuity Inflation-linked bonds Inflation-linked bonds
With-profit annuity Multi-asset class investment
strategy
Multi-asset class investment
strategy
Living annuity
Whatever was the chosen
investment strategy, but to
target inflationary increases a
significant portion of ILB’s
needs to be purchased
Purchasing power strategy
Retirement recipe
Receive education from the
beginning
Ensure that members understand what is
required to ensure a comfortable retirement.
Embrace sacrifice (PFA’s) and save Save more, lower consumption, prolong
income
Take on advice Advice does indeed add value.
Initiate an aggressive Capital Build-
up High allocation to growth asset classes.
Retirement matching strategy Obtain advice on what post-retirement
vehicle you can utilise and match to this
vehicle.
Effective post-retirement vehicle Aim for inflation linked annuity.
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How can trustees practically implement a strategy
which incorporates a sustainable returns
approach?
Question 7
Shift in mindset...
...away from chasing short-term
gains to focusing on achieving
benchmark-beating returns over
time!
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The RI & Ownership Guide
Industry led
initiative
Incorporates ESG
factors
Toolkit to assist
trustees & PO’s
Practical guidance
Step by step
strategy
RI policy
Interpretation of RI & how it’s aligned with
philosophy & objectives
Implementation & monitoring – assign responsible
person
Scope of application
Key ESG issues
Voting & engagement
Conflicts of interest
Investment approach
Reporting of ESG activities
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Implementation
Starting point – focus on listed equities
Understand how investment managers
apply RI principles
Scrutinise policies, voting activity &
investment approach
Clear policy on fund’s goals, objectives &
commitments regarding active ownership
Disclosure & reporting
CRISA practice
note
Fully & publically
disclose General description
Period
Extent of engaged
stakeholders
Measures adopted
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Recommended timeline
Source: Responsible Investment and Ownership: A Guide for Pension Funds in South Africa
Can a fair price be determined for active asset
(investment) management fees?
Question 8
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Asset management fees
Reviewing the fee conundrum through
alternate lenses, from the perspective of the
consumer & value being purchased
Risk-return
Call & put derivative
options
“Naïve” framework
Using option mathematics to put forward a pricing
Framework:
Beta & Outperformance
Beta
Fee to access an
asset class / strategy
Outperformance
(“Alpha”)
Fee payable for
expectation that the
manager will
outperform the
benchmark
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1 | Don’t pay more than what you get
Investors should not pay more than the value
derived
The relationship of risk & return
Higher absolute risk – rewarded with greater return
Active risk = relative risk = prospective tracking error
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2 | Don’t be fooled by randomness
Luck vs. Skill – should not pay extra for random outcomes
Probability of randomly achieving positive outperformance
outcomes with zero-skill:
Potential outperformance outcomes
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
15.87% 19.08% 22.66% 26.60% 30.85% 35.38% 40.13% 45.03% 50.00%
50% probability of achieving a positive outcome on a random
basis over 1 year. ~ 1 in 5 managers will randomly deliver a
return in excess of 3.5%!
Option theory
CALL option PUT option
Legal right to purchase investment
instrument at specific time at a
predefined price
Legal right to sell investment
instrument at specific time at a
predetermined price
Investors’ view: underlying asset
will increase in value (don’t want
exposure where asset loses value)
Investors’ view: seeking protection
from adverse movements in asset
value
Idealistic concept: access
additional performance being sold
by manager without incurring
downside risk
Idealistic concept: investment
manager wants to insure himself
from underperformance and passes
this to investor
Idealistic application: investor
pays premium to manager
Idealistic application: manager
pays insurance premium to investor
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3 | You need to eat off the same plate
Percentage value earned by manager on a 1% fee
Potential manager outcomes
0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%
Active fee 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
% to manager - 400% 200% 133% 100% 80% 67% 57% 50%
Not just about sharing value – commitment
Conversation should not only be about performance
Holistic relationship
Performance fees
A mechanism to align objectives?
The concept is sound – implementation is
flawed
Operational management of performance
fees needs review
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What should I pay a skilful manager
Active Management Fee = Sharing Factor *
Skill Outcome – 20% * Call Option Price on Skill +
Passive Fee
Factor in formula Description
Sharing Factor The level of sharing (recommended: 50%)
Skill Outcome Expected long-term mean outperformance of
manager
Call Option Price Risk-neutral naïve price of a call option on the
manager skill outcome at a given level of risk
Passive Fee The passive fee to access the asset
Option theory | Recap
CALL option PUT option
Legal right to purchase investment
instrument at specific time at a
predefined price
Legal right to sell investment
instrument at specific time at a
predetermined price
Investors view: underlying asset will
increase in value (don’t want
exposure where asset loses value)
Investors view: seeking protection
from adverse movements in asset
value
Idealistic concept: access additional
performance being sold by manager
without incurring downside risk
Idealistic concept: investment
manager wants to insure himself
from underperformance and passes
this to investor
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What should I pay a skilful manager
Skill (expected non-random outcome)
0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%
Call option price 1.60% 1.72% 1.85% 1.99% 2.14% 2.28% 2.44% 2.60% 2.76%
Put option price 1.60% 1.47% 1.36% 1.24% 1.14% 1.04% 0.95% 0.86% 0.78%
Max Active fee 0.00% 0.25% 0.50% 0.75% 1.00% 1.24% 1.49% 1.74% 1.98%
Fairness adj. 0.00% 0.13% 0.25% 0.37% 0.50% 0.62% 0.74% 0.87% 0.99%
Perf. premium 0.32% 0.34% 0.37% 0.40% 0.43% 0.46% 0.49% 0.52% 0.55%
Passive fee 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total base fee -0.17% -0.07% 0.03% 0.13% 0.22% 0.31% 0.41% 0.50% 0.59%
Understanding your manager
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In conclusion
Clear investment strategy
Return expectations: Understood relative to objectives
Consistent with risk
Fair investment management fees
3 key principles: Don’t pay for more than the value received
Don’t pay for randomness
The manager & investor need to have commonly
aligned objectives
Appropriate benchmarks & performance
targets
Methodology for performance fees
SECTION 3
REFORM
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The 2014 National Budget Speech – what should
trustees consider?
Question 9
Aims for financial security
90% of adult SA’s to have access to financial
services by 2030
Reduce debt burden of households & root out
reckless lenders & unscrupulous debt collectors
Ensure pensioners have a secure income in
retirement
Retirement fund reform: Lowering costs in the retirement fund system
Regulations to reduce product charges
Compulsory employer-sponsored retirement plans
Accrual of retirement fund benefits “calculation date”
Cross-border retirement savings
Alignment between the Unemployment Insurance Act
and the Unemployment Insurance Contributions Act
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Retirement fund tax
With effect from 1 March 2014, the taxable income
brackets on withdrawal lump sums will be increased
by 10% and for retirement lump sums the increase is
almost 50%.
Retirement lump sums, the tax free limit increased
from R315 000 to R500 000 over the life time of the
taxpayer.
Withdrawal lump sums, the tax free limit increased
from R22 500 to R25 000 of the benefit due.
The aggregation principle still applies at exit date,
where the taxpayer has previously withdrawn from the
Fund.
Retirement fund tax
Pre-retirement lump-sum taxation (“Withdrawals”) - effective date
1 March 2014
Taxable income (R)
2013/14
Rates of tax
Taxable income (R)
2014/15
Rates of tax
R0 – R22 500
R22 501 – R600 000
R600 001 – R900 000
R900 001 +
0% of taxable income
18% of taxable income
above R22 500
R103 950 + 27% of
taxable income above
R600 000
R184 950 + 36% of
taxable income above
R900 000
R0 – R25 000
R25 001 – R660 000
R660 001 – R990 000
R990 001 +
0% of taxable income
18% of taxable income
above R25 000
R114 300 + 27% of
taxable income above
R660 000
R203 400 + 36% of
taxable income above
R990 000
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Retirement fund tax
Retirement lump-sum taxation (Also applicable to “qualifying
retrenchments”) - effective date 1 March 2014
Taxable income (R)
2013/14
Rates of tax
Taxable income (R)
2014/15
Rates of tax
R0 – R315 000
R315 001 – R630 000
R630 001 – R945 000
R945 001 +
0% of taxable income
18% of taxable income
above R315 000
R56 700 + 27% of
taxable income above
R630 000
R141 750 + 36% of
taxable income above
R945 000
R0 – R500 000
R500 001 – R700 000
R700 001 – R1 050 000
R1 050 001 +
0% of taxable income
18% of taxable
income above
R500 000
R36 000 + 27% of
taxable income above
R700 000
R130 500 + 36% of
taxable income above
R1 050 000
Retirement vs. Withdrawal
2013/2014 Tax tables 2014/2015 Tax tables
Retirement Tax on R945 000 =
R141 750
Tax on R1 050 000 =
R130 500
Effective rate 15% 12.42%
Withdrawal Tax on R945 000 =
R184 950 + (R45 000 x
36%) = R201 150
Tax on R1 050 000 =
R203 000 + (R60 000 x
36%) = R225 000
Effective rate 21.29% 21.42%
Difference R59 400 R94 500
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The Dennis Davis Commission
Three further investigations have commenced
Value-added tax considering: does the present system achieve a justifiable balance
between direct & indirect taxes?
what are its retrogressive effects, is the system efficient &
what challenges are posed by e-commerce?
Review of the current system of mining taxes
Role of wealth taxes: estate duty
broader role of wealth taxes in a system aiming to balance
efficiency and equity
Tax incentivised product in 2015
Tax preferred savings vehicles - units trust &
interest bearing investments
Earnings and capital growth - exempted from
income tax
Contributions will be made from after-tax income,
but capped
Annual limit will be R30 000 and a lifetime limit of
R500 000 per individual
Annual limits will be adjusted over time to take
account of inflation
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Policies
Change to rate in Individual policyholders
fund – 30%
Disability policies
Section 11(w)
Foreign policies which are reinsured
Long term risk policies
Taxation Laws Amend... Act
Promulgated on 12 December 2013
Effective 1 March 2015
Alignment of tax treatment of contributions across all types
of funds
27.5% of taxable income / remuneration, subject to
R350 000 cap
Provident funds limited to 1/3 in
cash at retirement
Disability income policies –
premiums will be taxable,
benefit will be tax free
Pension to provident fund
transfers will no longer be
taxable
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Financial Services Laws... Act
Promulgated on 14 January 2014
Effective: 28 February, 30 May & 29 August 2014
Heightened governance: Composition of trustee board:
Comply with Rules
Vacancy to be filled within ‘period as prescribed’
Trustees must obtain prescribed skills & training within 6 months
(and maintain throughout term of office)
Requirement to act independently
Extending fiduciary duties
Enabling provision –
communication to members
Personal liability for non-
payment of contributions
Whistle blowing obligations &
protection
Reforms may be viewed in 3 parts
Imminent Changes (TLAA 1 March 2015, FSLGAA 2014)
• Contribution tax regime – TLA Act
• Provident Funds retirement benefits – TLA Act
• Some governance changes – FSLGA Act
• Disability Income policy tax changes
Possible but not yet legislated
• Some governance changes – Retirement Reform papers
• Annuity framework – could become a default
Still requires legislative enablement
• Pre-retirement preservation (P-day?) – retirement reform proposals
• Non-retirement savings product – National Budget Speech 2014
• New “PF130” as directive
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Expected changes in the industry
Consolidation of funds
Review of contribution rates
Disability income policies – likely to remain
unchanged
Consideration of default annuities
Engage with your consultant to fully understand
how reform affects your fund’s specific
circumstances
THANK YOU