GCI EMPLOYEE BENEFITS

RETIREMENT REFORM 2015 DRAFT LEGISLATION INDUSTRY COMMENTS & POTENTIAL EFFECTS ON INTERMEDIARIES

• Stacey Leigh Whitwam• (e) Stacey@gci.co.za

• (c) 082 556 7240www.gci.co.za

Mission

Increasing the Global Savings Rate through building and

preserving our clients’ wealth ensuring a Safe and Secure

Retirement

Treat our clients like

family

Constant drive to innovate and

develop

Practice what we preach

Independence and

Entrepreneurial

Take ownership of our

responsibilities

Sense of urgency in all we do

Do or do not, there is no try

SECTIONS COVERED

1. Key point to note in the Taxation Laws Amendment Bill

2. Draft amendments to the regulations issued in terms of S36 of

the Pension Funds Act.

1. ISSUES BROUGHT TO LIGHT

2. DEFAULT INVESTMENTS PORTFOLIOS

3. DEFAULT PRESERVATION FUNDS AND PORTABILITY

4. DEFAULT ANNUITIES

3. Current debates creating uncertainty

4. The effects these changes will have on intermediaries and the

new opportunities identified.

5. Questions?

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Section 01KEY POINTS TO TAKE NOTE OF IN THE TAXATION LAWS

AMENDMENT BILL

KEY POINTS TO TAKE NOTE OF IN THE TAXATION LAWS AMENDMENT BILL

The amendments which were initially published in 2013, will finally

come into force as of 1st March 2016. (Speculation that this date

will be pushed to March 2017 but not likely).

Pension fund, Provident Fund & Retirement Annuity Contributions

will now all enjoy the same tax benefits.

Provident funds will no longer be any different to Pension funds

when it comes to annuitisation. (1/3, 2/3 Rule)

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KEY POINTS TO TAKE NOTE OF IN THE TAXATION LAWS AMENDMENT BILL

Provident fund contributions already vested on 1st March 2016 will remain

governed by the current legislation, allowing 100% to be taken in cash by

the member on retirement.

Any contributions made to a provident fund after this date will be subject to

the 1/3 cash withdrawal limitation on retirement.

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Section 02____________________________________

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN

TERMS OF S36 OF THE PENSION FUNDS ACT

2.1 IMPORTANT CONCERNS WHICH NEEDED TO BE ADDRESSED

2.2 DEFAULT INVESTMENT PORTFOLIOS

2.3 DEFAULT PRESERVATION FUNDS AND PORTABILITY

2.4 DEFAULT ANNUITIES

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

Members exiting Employer schemes are not provided with advice or

guidance leaving them to make complex investment decisions on

their own.

Investment fund selection,

Whether to preserve funds or withdraw them without knowing the tax

implications thereof.

No post retirement planning provided unless they can afford private

financial advice

Poor performance of default portfolios

Trustees of the funds and Intermediaries have conflicting interests,

Default investment portfolio fees are too high and complex.

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PART 1: IMPORTANT CONCERNS WHICH NEED TO BE ADDRESSED

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

Poor Mobility of Funds.

Products aimed at middle to high income earners. High

administration charges counter and tax benefits causing Retirement

Funding vehicles not to benefit low income earners.

It has been proposed that a government managed fund should be

implemented with mandatory contributions to be made by employers

employing any person who earns below a legislated threshold.

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DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

Current retirement system is characterised by COMPLEX and OPAQUE

products with HIGH FEES and COMISSIONS.

Funds are being withdrawn before retirement, negating the intention of

retirement funding vehicles.

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DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF

S36 OF THE PENSION FUNDS ACT

All members who are AUTOMATICALLY ENROLLED into an Employee Benefits

Scheme must be enrolled into the selected default fund unless the employer gives

the member advise in writing otherwise.

The Trustees must choose a Portfolio which is most suited to all members. Factors

they are obliged to consider are, high level objective, underlying asset allocation,

charging structure, risks and returns, average term, sophistication of members and

the ability of members to access independent financial advice.

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PART 2: DEFAULT INVESTMENT PORTFOLIOS

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF

S36 OF THE PENSION FUNDS ACT

Trustees must do ongoing reviews- look at past performance, charges related to

market, number of members utilizing default.

Members must not be locked into the default Portfolio they must be able to change

their fund selection, at no charge, within 3 months.

Default Portfolios Fees MUST BE reasonable & competitive, disclosed accurately &

regularly and may not include any performance fees or bonuses

Passive funds have been suggested.

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DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

No current provisions for when members leave the employer. Most

employers automatically pay out the amount in cash to the employee.

Negative tax consequences, negates purpose of retirement

New procedure is that the member will be made “paid-up” by the

scheme and the funds accumulated will be invested in the default

scheme investment portfolio until withdrawn/ transferred. No new

contributions allowed. Same charges as current members.

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PART 3- DEFAULT PRESERVATION FUNDS & PORTABILITY

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

All funds must accept amounts from previous employer schemes and no

charges allowed on initial amounts. Due to tax amendments provident funds can

be moved to pension funds.

Members will be issued with “paid-up certificate”. Load these onto central

registry Fees- Reasonable & competitive, disclosed accurately & regularly, no

performance fee, no bonuses, suggesting the use of passive funds.

No Risk benefits may be continued or transferred.

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DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

Can be an in fund policy, either kept within so long as there is sufficient solvency and

no risk to active members/ separate pot started so that the retirees carry the market

risk entirely-must be informed of this.

Maximum Drawdown table applied <55=7%, <60=8% <65=9%........

Investment portfolio must be Regulation 28 compliant

Living/Life annuities can be chosen.

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PART 4: DEFAULT ANNUITIES

DRAFT AMENDMENTS TO THE REGULATIONS ISSUED IN TERMS OF S36 OF THE PENSION FUNDS ACT

Members must have access to a retirement planning specialist- this may not be

at any direct/ indirect cost to the member. No commission may be paid for these

services.

Monitor the default and members in it.

Life Annuity- must do a due diligence on the long term insurance provider to

ensure, solvency and liquidity to ensure the safety of retirees.

All costs must be disclosed simply

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Section 03CURRENT DEBATES CREATING UNCERTAINTY

CURRENT DEBATES CREATING UNCERTAINTY

Although much cheaper are passive funds really in the best interest of

the members?

Huge burden being placed on Trustees regarding default fund selection,

default can never be the best choice for all members?

No performance fees may make managers push up the overall fees to

compensate, prejudicing all members.

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Section 04The potential effects these changes will have on intermediaries and the new opportunities identified

The potential effects these changes will have on intermediaries and the new opportunities identified

POSSIBLE NEGATIVE EFFECTS

– Intermediary advice at member level becomes less necessary

– Retirement planners negate the need for intermediaries.

– Defaults will be used and members will not think to seek independent financial advice.

– Fees/ commissions which we are allowed to charge could be reduced.

– Overly restricted by legislation.

– Limitation of advice due to prohibition of performance/bonus fees (limited funds)

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The potential effects these changes will have on intermediaries and the new opportunities identified

POSSIBLE OPPORTUNITIES

– Play a more active role at scheme level assisting with best investment choices. Build

relationship with boards/Trustees, gain trust of members.

– Defaults are never going to be best for all members……identify clients nearing

retirement/member exits and provide individualized retirement planning.

– There has been a lot of publicity and awareness brought about by this for retirement

planning, members are now more aware of the importance of correct advice.

– Increased prescribed cost and benefit reporting to members creates more opportunities for

contact with scheme members.

– Monitoring of preservations

– Opportunity to gain member trust by adding value superseding basic requirements

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Section 05

Questions?

Thank you