Press Release

Press Release News

News

PF 130: Providing trustees with a moral compass

+ 31.08.2016

By Carmen Schubert, legislative advisor at FedGroup There are various pieces of legislation and good governance procedures that shape the retirement fund industry in South Africa. These pieces would include the Pension Funds Act, the PF130 circular drawn up by the Financial Services Board (FSB) which outlines principles of good governance and the guidelines set out by the Adjudicator, which she refers to as a “basket of factors”. However, these various documents are often utilised in isolation – to the detriment of the funds and their governing trustees. This is especially evident when it comes to making decisions regarding death benefit distributions in terms of Section 37C of the Pension Funds Act.

In South Africa, the general rule of law dictates that each person has complete freedom of testation and can bequeath their estate to whomever they please. However, this freedom does not extend to the distribution of approved death benefits payable from a fund registered under the Pension Funds Act. Thus, if a member of a retirement fund dies before he has exited the fund, his benefits are not paid in terms of a nomination form or in terms of his will. The fund’s board of trustees have a fiduciary duty to determine how the death benefits should be allocated among the member’s beneficiaries, dependants and nominees,; using the member’s nomination of beneficiary form and will as a guideline or investigative tool.

According to Section 37C of the Pension Funds Act, it is clear that there is a duty on the board of trustees to determine the dependency of each beneficiary and to make a fair and equitable distribution among the member’s beneficiaries and, under certain circumstances and conditions, the member’s nominees, using the member’s beneficiary nomination form as a guide but not an absolute instruction. The trustees’ decision becomes onerous as they have to make every reasonable effort and take all the necessary steps to identify and make contact with all the member’s dependants and nominees without prior knowledge of the deceased’s household circumstances, to ensure that an informed decision regarding payment of benefits can be made.

However, there are no express instructions, procedures or formulae to outline what steps could be regarded as reasonable and that reasonability would depend solely on the particular circumstances of the member’s household at the time of the Section 37C investigation. For example, it would not be reasonable for the trustees to track down a person living in a remote area of the country who might have been semi-dependent on the member, if the benefit available for distribution would almost wholly be utilised to track down that potential beneficiary. This would be especially pertinent if there are confirmed dependents who were totally supported by the deceased. However, where there is evidence that a minor dependant’s benefit may be squandered by the guardian, it would be reasonable for the trustees to conduct further investigation into the finances of that guardian and possibly pay any apportionment into a beneficiary fund for the benefit of the minor. In fact, failing to do so may, in certain instances, constitute a breach of fiduciary duty and be considered unreasonable, as the rights of the minor have not been protected.

While arriving at a decision on how to distribute a death benefit requires a multi-faceted approach to the board of trustee’s deliberation process, the actual apportionment is also based on how the trustees interpret the information. Thus, different trustee boards may make different allocations, although all the allocations could be seen as equitable and fair. While the unique circumstances of each distribution and the manner in which the trustees come to a distribution resolution makes it very difficult to criticise that decision, the trustees will fail to fulfil their fiduciary duty in apportioning death benefits if they do not act in good faith, apply their minds to the problem, or fail to exercise discretion after taking account of all the various known facts.

Thus, the fiduciary duties placed on trustees by the Pension Funds Act, the somewhat vague guidelines on how they should apportion benefits in the best interests of the beneficiaries, the need to be apply their minds, be reasonable, fair and equitable, all combine to force trustees to make decisions by relying on industry best practices and previous value judgements.

However, the trustees often overlook the fact that they can also use the guidelines put forth in the PF130 circular released by the FSB, which provides some form of guidance in the field of good governance, when conducting such investigations. This document attempts to promote legislative compliance and good governance with regard to the trustees’ duties and responsibilities in all decision-making processes. And, while this document does not deal specifically with the distribution of death benefits, it serves as both a guide and a reference on recommended best practices by promoting the drawing up and implementation of policies and mandates that govern various decision-making processes. These policies would include provisions to outline the trustees’ code of conduct, declarations of interest, communication policies and sub-committee mandates. While none of these items would provide the trustees with a rule of thumb when making decisions regarding death benefit distributions, they will provide the trustees with principles and guidance in the due diligence aspects of the Section 37C process.

To expand, familiarising themselves with the code of conduct policy would ensure that the trustees are made aware of their fiduciary duties and what is expected of them, and a declarations of interest policy would ensure that no trustee is promoting an allocation to a specific beneficiary because of a vested interest.

A communication policy would help to educate members on how death benefit distributions are made and how members can help the process by providing full and correct information. And, finally, the wording of the mandate which appoints a sub-committee to investigate and propose a death benefit distribution will ensure that the members of that subcommittee are fully aware of the scope and power of their duties.

To quote the circular, good governance “includes values and ethical principles which require a certain standard of behaviour of the board”. Therefore, the various principles and policies espoused in circular PF 130 will ensure that the good governance and due diligence structures are in place as a support for the trustees when making a difficult decision such as a Section 37C distribution.

Settlement Trust eases burden

+ 05.08.2016

Personal injury lawyers are in a unique position to understand the emotional turmoil that afflicts a family following the injury or death of a loved one, and often find themselves fulfilling a counselling role for those affected by the event, in addition to performing onerous administrative tasks. To ease the burden on both the families and the lawyer, FedGroup has launched the innovative Settlement Trust solution.

The significant shock that a family suffers in the event of the injury or death of a loved one is often compounded by the lengthy delays between the life-changing event and the final court order to receive payment from the Road Accident Fund (RAF), or from a medical malpractice suit. Even after a favourable judgment, more delays follow from the date of the court order to the actual date of payment.

These delays are often difficult for family members to understand, especially those who have not gone through this experience before. This is particularly true of the often lengthy lag time between the court order and the payment from the RAF. This prompts them to be in constant communication with their legal representative, who often cannot provide any certainty beyond advising them to be patient and wait for the payout. In the meantime, the family often faces financial hardship in the absence of a breadwinner. FedGroup therefore identified the need for a solution that could ease the burden on both the family and the lawyer during this time.

The proprietary Settlement Trust account structure was therefore created to ensure that money is made available to meet the basic everyday needs of a beneficiary soon after the court order is granted and the Settlement Trust is registered, but before the lump sum payment from the RAF is made.

To make use of this offering, those affected by road accidents or medical malpractice can sign up for the Settlement Trust product with FedGroup, even before a court order is made. Then, upon the issuing of the court order, and immediately upon a Settlement Trust being registered, an amount up to R30 000 is paid over to the trustees to cover the waiting period until the court-ordered payment is made into the trust.

“Beneficiaries often wait up to ten months from the date of the court order before they receive any financial support or benefit,” explains Grant Field, CEO at FedGroup. “This can materially impact the quality of life of a beneficiary as it denies them access to these vital financial resources, which may be needed for continued medical treatment, or to improve the quality of life for those who have been left with diminished capacity or permanent impairments.”

The money may also be needed immediately to cover loss of income or provide ongoing financial support to dependents, should a primary breadwinner be injured or pass away.

“Because of FedGroup’s passionate commitment to Beneficiary Care, we have sought additional ways to support and care for the vulnerable and potentially destitute following the often devastating effects of road accidents or medical malpractice and negligence,” says Field.

In addition to providing instant financial relief to beneficiaries, FedGroup is also able to assist attorneys and advocates in managing the process of Settlement Trust registration, and to ensure that the ongoing process of trust administration and asset management are made as simple as possible.

“Our end-to-end administrative services ensure that the assets in a Settlement Trust are accessible within 48 hours of being released by the RAF – a record in the industry,” says Field. “This ensures that we can further reduce the administrative burden on attorneys and advocates because lump sum payments can immediately be paid into the Settlement Trust once received by the attorneys. This negates the need to hold assets in an attorney’s trust or investment account, which reduces the costs associated with multiple transfers. It also allows attorneys to move on and help new clients rather than spending additional unnecessary time on administration.”

In addition, FedGroup’s centralised management, enabled through a bespoke IT system designed and built to manage this specific need, ensures that the company becomes the central point of contact for all stakeholders during every stage of the process, with automated regular updates that keep attorneys and Beneficiaries informed of progress.

Once the Settlement Trust is registered, and the lump sum payment has been made into it, FedGroup will continue to provide administrative services as part of this seamless offering.

“This includes maintaining the delicate duty of caring for Beneficiaries entrusted to us by advocates and attorneys, and the management and preservation of the assets needed to provide them with meaningful financial support,” concludes Field

Navigating the maze: EB for a diversified market

+ 30.07.2016

When structuring employee benefits for the small-to-medium enterprise (SME), there are certain principles that should be applied regardless of the size of company or the socioeconomic circumstances of staff members.

Foremost among these is the selection of an employee benefits provider and the cost implications thereof.

Advisers need to understand that, from a risk-rating perspective, group cover will be cheaper than individual policies due to cross subsidisation; males cross subsidise females, and the youth cross subsidise the mortality risk of older individuals.

The cost factor
As such, underwriting is only required above a certain limit for some employees, whereas individual policies require underwriting from the first rand insured.

The cost of these benefits will then come off contributions to an umbrella fund, along with the provider’s administration costs. This is priced into the offering and included in the total contribution rate.

Providers that levy additional admin fees against retirement savings erode value and nullify the cost benefits of umbrella funds. Therefore, advisers need to be aware of cost structures before advising their clients on potential offerings.=

They should also be wary of providers that undercut the price for group cover initially to secure business only to implement double-digit escalations in subsequent years to cover the shortfall. Always remember, if it sounds too good to be true, it usually is.

Focus on metrics
With these principles in place, the information then needs to be extracted from employees for the insurer to determine adequate cross subsidisation ratios and price the group benefits. These include gender, date of birth, occupation and income of employees.

While occupation determines risk, income ultimately determines employee group benefits as a person’s basic financial requirements generally do not vary based on industry verticals.

Take for example a small manufacturing business with 20 employees; most of whom are semi-skilled or unskilled. They work with machinery and income levels are usually low. They generally support an extended family.

In this instance, an adviser should look at the basics, bearing in mind the cost of benefits because the higher the sum insured the more expensive the premium. The cost of the group cover is proportional to salary. The basic requirement would include life cover which should not exceed three times the annual salary for management and no more than once the annual salary for factory workers to remain affordable.

Funeral cover of at least R15 000 should be included as it’s a relatively cheap benefit comparatively and meets an important need for these socio-economic groups, because the benefit extends to the entire family. To cover the potential risks of working on the factory floor, capital disability should be included. A lump sum benefit is preferable as it’s more cost effective than income protection.

The other side of the coin
Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the adviser should consider to categorise levels of cover between high and low earners.

Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the adviser should consider to categorise levels of cover between high and low earners.

As a starting point, the higher earners can consider life cover that equates to five times their annual salary to take advantage of the cheaper cover through the group scheme. The lower income earners can consider life cover of three times their annual package to keep it more affordable.

In this instance, income disability cover is more important than capital disability for higher earners to maintain their standard of living. They can also afford the premium. The lower earners should consider lump sum disability of three times their annual salary. Due to the low cost and the minimal impact it has on premiums, funeral cover is worth including for both groups as it pays out within 48 hours.

Additional cover for higher earners should include critical illness and education trust cover, which continues to pay for the education of their children should they pass away as they can afford both benefits.

Encourage following the standard
The industry standard for retirement savings is 10% of pre-tax income. Higher earners could go higher to take advantage of new tax structures. However, it’s wise to keep the all-inclusive premium – risk benefits and retirement – to no more than 15% of pre-tax earnings for lower income earners.

Finally, advisers need to understand that they should never negate their requirement for consultation, regardless of the degree of cover offered. While individual consultations may be the norm with high income earners, there is a need to meet with everyone before structuring employee benefits because all employees have a right to consultation regardless of the fees that will be charged. This can of course take the form of a group consultation for lower income earners.

The adviser should also be involved in regular client engagements. This is an opportunity to provide updated info to employees and foster stronger relationships. This could lead to opportunities to up-sell to clients or find other opportunities to sell financial products to make the whole transaction more viable rather than relying solely on once off upfront commissions that do not benefit anyone in the value chain in the long term.

Applying even-handedness to beneficiary fund administration

+ 15.07.2016

Highlighting the need for trustee impartiality in selecting a beneficiary fund provider The issue of the impartiality of trustees when deliberating on the placement of pension funds following the death of a fund member was recently highlighted by the Pensions Fund Adjudicator.

In this regard, the Pensions Fund Adjudicator’s deliberation on the matter clearly outlined her concern with the fact that when a fund member passes away and a beneficiary fund is selected as the ideal mode of payment, that trustees often place funds with the pension fund administrator if they have a suitable beneficiary fund offering.

It is an important statement for trustees to understand, mainly because a fund administrator who offers this service as part of a broader end-to-end offering may not always be the best choice when it comes to meeting the unique needs of beneficiaries.

It is a common practice that trustees should reconsider and, in so doing, aim to act with greater impartiality for the best interests of beneficiaries. This is because trustees are ultimately responsible for the continued care of beneficiaries, with the placement of these funds the primary enabler thereof as they provide ongoing financial support to those left destitute following the loss of a primary breadwinner.

It is therefore the responsibility of trustees to ensure that the beneficiary is catered for according to their specific needs, which is why this important decision should not be based on convenience, shareholder requirements or even nepotism. Accordingly, when deliberating on which beneficiary fund provider to entrust with this role, trustees need to base their decision on objective criteria, setting aside subjective biases and preferences.

This approach is also required of trustees to fulfil their mandate and meet their fiduciary duties as outlined in the Pensions Fund Act, which dictate that beneficiaries should receive the same level of care and support that was provided by their parents. Therefore, there should be no discrimination in the process of selecting a beneficiary fund provider and distinctions of an adverse nature should not be applied.

The Act also requires that trustees act independently and without conflict of interest, which is why all reasonable steps need to be taken to ensure they act with due diligence and consider their responsibilities carefully.

Further informing a trustee’s approach in this critical decision-making process and guiding them in terms of governance requirements, Circular PF 130 issued by the Financial Services Board recommends industry best practices in the rendering of services to a board of trustees. The document clearly defines the need for independence in the execution of tasks by members of the retirement industry through the application of transparency, ethics, equity and the absence of self-interest or a conflict of interest, and always in the best interest of fund members – in this instance, beneficiaries.

To this end, trustees should consider how often they review all suitable beneficiary fund providers in the industry, how much they apply themselves to making an unbiased evaluation of these providers and not simply stick with the status quo, and just how much credence they give to the administrator’s ability to perform the beneficiary care role in the same manner that they fulfilled their pension fund management duties.

Further to this, trustees should also consider if a single beneficiary fund provider would be sufficient or even capable of meeting the specific needs of a beneficiary, or if two or maybe three might be better able to according to their unique capabilities, on a case-by-case basis. While there may be cost implications, there is not always a one-size-fits-all approach to the provisioning of optimal care to beneficiaries. When all of these requirements are considered in totality, simply taking the easiest route when selecting a beneficiary care provider is definitely not an option.

In a similar vein, a trustee does not relinquish their responsibility to the beneficiary once a beneficiary fund provider has been appointed and the funds transferred. By ending their role prematurely by not ensuring the provider delivers adequate care to maintain the wellbeing and on-going support of the beneficiary following their appointment, a trustee also fails to meet their due diligence requirements.

A pension fund cannot be deemed to be paid to the beneficiary after it is placed in a nominated beneficiary fund. The onus still rests with the trustee to ensure that the provider they selected fulfils their duty with the requisite skill, expertise, ability, administrative capabilities and experience for which they were selected. Only once these services are provisioned and a suitable level of care delivered to the beneficiary can a trustee consider their responsibilities fulfilled.

Ultimately, trustees are handing over the care of a vulnerable human being. It is not simply a financial transaction. A trustee needs to leave a beneficiary under the aegis of a suitable caretaker, and without impartiality during the selection process this predominant duty entrusted to a board of trustees is not always met. It is ultimately up to the trustee to make the right choice in selecting a beneficiary fund provider, not the fund administrator, in the best interests of the beneficiary. While this may not always be an easy choice, it is certainly the most important decision from the perspective of the beneficiary.

Counting the true cost of upfront fees

+ 09.06.2016

When it comes to the ultimate success of retirement savings, every rand invested over time will have a meaningful impact on the final outcome thanks to the power of compound interest.

Excess, often unnecessary fees, particularly upfront fees and percentage-based admin fees, can therefore have a deleterious effect on the ultimate value of an investment and the returns an investor will enjoy on retirement as it reduces the impact of compounding interest.

Unfortunately the modern-day retirement investment industry is characterised by complexity – complicated, tiered products that supposedly offer greater returns that are accompanied by complicated fee structures.

Various funds today also apply differing cost structures, with some charging asset-based management and administration fees that increase in relation to the sum invested, which penalises those who save or invest more. These investment fee structures also tend to look cheap at quotation stage when there is no asset, but become excessively high as the fund accumulates over time.

It is also not uncommon for funds to attract other fees such as portfolio-based multi-manager fees and performance-based fees. In many of these instances it is often only the top-line costs that are disclosed, not the underlying asset manager fees. These so-called hidden fees also erode fund value as they add up over time. And don’t forget that the financial advisor also needs to take his commission, often in the form of an upfront payment.

The lack of transparency with regard to these upfront fees often leaves investors unsure of what they’ll get in return for their lump sum investment or monthly contributions. Therefore, the first step to improving investment returns and the creation of long-term wealth is to understand the impact that differing upfront fees can have on fund value. This would enable investors to select advisors and investments based on performance and the associated costs to determine real returns.

As an example of how high upfront fees can impact investment returns, take two investors who both invest a lump sum of R100,000 at the same rate of return over a period of 10 years. Based on different upfront fee structures they would realise vastly different returns when the investment matures. Assuming an annual growth rate of 7%, the investor who was charged a lower upfront fee of 1% would realise a return of R194,747.98 after 10 years. Investor B, on the other hand, who was charged a 5% upfront fee, would only receive R186,879.38 over the same period.

In this example, investor B would only recoup his initial lump sum investment after 11 months following the upfront fee deductions. This means he spends almost the entire first year effectively paying his returns to the administrator. Conversely, investor A starts making positive returns in the second month having already recouped the fees. In addition, investor A will earn over 9% extra on his original investment because of the small upfront fee that barely affected his initial lump sum investment.

In the case where both investors choose to make a monthly contribution of R1,000 to a fund that delivers a 7% return per annum on investments that mature in 10 years, when investor A, who was charged an annual fee of just 1%, would receive R163,879.35. Investor B, who was charged a 5% annual fee, would get back only R132,719.66, a substantial difference of R31,159.69.

In this example, the higher upfront fees effectively eroded 31 months worth of contributions. In the context of retirement savings, this effectively means that investor B would need to work for almost an additional three years to continue making contributions to achieve the same outcome as investor A, just because he didn’t query or understand the upfront fees. Add additional monthly admin fees and other hidden charges and it’s easy to see how quickly fund value can be eroded further over time.

It therefore pays to take the time to understand and determine the impact that any upfront fees that an advisor, portfolio manager or investment provider may charge to ensure more of your money is invested over the longest possible period to benefit from the power of compound interest. Often, if it is too confusing to understand it probably means hidden fees which usually delivers lower returns over time. It is also worth finding an advisor who charges annuity-based fees for on-going interactions with you to better manage your investments over time.

Investing in your 20’s

+ 01.06.2016

Life in your twenties is generally filled with adventure and a sense of reckless abandon as you’ve been set free from the shackles of school life and are now paying your own way, says Walter van der Merwe, CEO, FedGroup Life.

The freedom that a regular income brings can be intoxicating and many young people choose a life of care-free spending.

Few 20-somethings therefore give a thought to saving even just a small amount each month toward their retirement. It’s understandable given their circumstances, but if more young people adopted a basic approach to saving earlier in life they would set themselves up for a very comfortable future, cautions Van der Merwe.

This is largely due to the power of compound interest, which means a little saved over a long time can deliver big returns. Take, for example, someone who invests R15,000 at the age of 25 in an account paying 5.5% compound interest annually. Twenty five years later that amount would have grown to R57 200.89.

By contrast, if that person invested the same amount at the same interest rate at the age of 35, it would only have grown to R33,487.15 by the time they reached the age of 50.

“Granted, most 20-somethings don’t have a lump sum to invest into a retirement savings plan, but it is a simple example that illustrates that the longer you allow compound interest to work, the more money it will make for you,” he says.

With that in mind, a small monthly contribution of just a few hundred rand invested each month from the day you start earning an income would be the best place to start. Obviously the smaller the amount with which you start, the longer you need to leave it invested to accumulate significant interest, but the basic principle applies.

Low minimum
Choose a savings plan that has a low monthly minimum contribution, but one that stops you from accessing your money immediately. This will ensure you don’t give in to life’s temptations, of which there can be many in your twenties, and withdraw the funds.

Avoid unnecessary risk
While conventional investing advice would advocate investing in higher risk funds and investments when you’re young and therefore have a longer investment horizon, it is always best to avoid unnecessary risk when it comes to investing for retirement.

Start investing in a stable fund that offers solid returns, and when you start earning more money or choose to invest more, start a discretionary investment fund that can be used for riskier options that yield higher returns.

Starting early
Investing in this manner in your twenties will also help develop good savings and retirement planning habits early on, which will prove invaluable as life’s expenses and financial commitments grow in unison with your monthly income the older you get.

In fact, starting early is ideal as you tend to have more expendable income available, before family commitments and mortgage repayments start to bite into your monthly budget. In this instance, saving becomes more about “not spending” than finding the money to actually invest.

Starting early will also ensure that you have more time at your disposal to correct any financial mistakes or shortfalls that occur.

The fact of the matter is that by missing the opportunity to start investing early on in life when you have the means and ability to do so comfortably, you’ll merely be holding back the potential of your retirement investments in the long run.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

A tale of two pension funds

+ 15.05.2016

In the collective context, pension funds consist of two seemingly similar product offerings. However, while the aim of each investment is ultimately the same – to provide fund members or beneficiaries with a form of income – pension funds and beneficiary funds are distinctly different.

The generic pension fund, for instance, is an investment vehicle for those saving for retirement. Whatever the age of the investor, they make contributions to a pension fund to invest money that will deliver a return and provide them with a form of income when they are no longer working.

The beneficiary fund, on the other hand, is a type of pension fund for minors. This fund aims to pay out money to a beneficiary to provide them with a form of income or livelihood to replace what is lost following the loss of a family’s primary breadwinner. This money is provided over a set period of time until the beneficiary reaches the age of majority.

The average term of a beneficiary fund is eight years which means it has a limited investment horizon. Pension funds are invested over a much longer period. In this context, a pension fund targets growth to fight inflation and deliver the desired return at a specified point in the future. Beneficiary funds also need to target growth but need the requisite liquidity required to meet the financial needs and obligations of the beneficiary too.

Accordingly, the investment strategies that need to be employed for each fund should be different. Why then are so many beneficiary funds managed in the same manner as pension funds? Why are so many beneficiary funds tied up in off-shore or long-term growth funds? Why does the legislation governing pension funds not adequately cater for the differences between these two funds? Why are so many beneficiary funds unnecessarily complex?

The fact of the matter is that, in its current state, the special requirements and elements of beneficiary funds are not entirely aligned with the Pension Funds Act. This is a concern that has previously been noted and acknowledged by industry commentators, who have stated that beneficiary funds require their own set of rules. Certainly, housing beneficiary fund regulations outside those of generic pension funds would simplify matters and the industry would be better equipped to meet the financial needs of beneficiaries and their guardians.

However, without these rules many beneficiary funds still adopt complicated policies, investment strategies, and apply terms and conditions that are more suitable to pension funds that cater to retirement.

A beneficiary fund, with its short investment horizon, cannot have these layers of complexity if it is to fulfil its primary social mandate – to ensure that minors or the aged do not become dependent on the state or destitute – because a balance between liquidity and adequate returns is required. Beneficiary fund management therefore needs to be simplified to remove the cost and complexity inherent in the industry, for the benefit of those who ultimately need it most, the beneficiaries.

Those entrusted with managing these funds in the best interests of the beneficiary – the trustees – need to understand that even though it looks and feels right because it is the industry norm, the prevailing approach to targeting investment growth is misplaced and needs to change.

Without change, beneficiaries and guardians who try to access money will continue to wait longer than is acceptable to receive funds, and will continue to pay the high costs and fees associated with investing and disinvesting from long-term asset classes. There are also additional admin requirements and the associated costs that accompany these complex processes.

Unfortunately, changes to legislation that govern how beneficiary funds are regulated within the ambit of the Pension Funds Act are some way off. However, there are ways in which fund providers and administrators can help to mitigate some of complexity now, to ultimately deliver greater value to the beneficiary.

The most important approach in this regard is to simplify the process of beneficiary fund management as far as possible. For example, simplifying the administrative requirements by using technology to automate processes and basic admin tasks can help keep the expensive human resource requirements to a minimum.

The same logic can be applied to the investment strategies adopted, especially when considered in the context of the target audience. When a beneficiary fund is chosen for a minor the customer is ultimately the board of trustees – they decide on which fund provider to appoint. However, the consumer – the beneficiary – is left out of the selection process.

Conversely, with regard to a pension fund, the customer and the consumer are the same. These individuals are able to choose their preferred fund allocation to chase a specified return or, for greater simplicity and cost savings, they can invest in a default portfolio that still meets their primary needs and requirements. Trustees are therefore tasked with thinking along the same lines when making decisions on behalf of the beneficiary.

While both types of funds are regulated in the same manner, they both need to deliver different outcomes and therefore cannot be approached in the same way. It is also easy for trustees to fall into the trap of chasing the highest possible returns in a genuine, albeit misguided attempt to deliver the most value to beneficiaries. However, in this instance the end does not justify the means and this approach tends to overcomplicate the process.

By carefully considering the beneficiary fund provider selected, their approach and efficiency with regard to beneficiary management, and their fees, trustees can reduce complexity-driven costs and ensure the beneficiary ultimately benefits.

The common characteristics of pension funds – targeting higher returns – comes with greater costs and administrative requirements, and a lack of liquidity, which does not adequately cater to the requirements of a beneficiary fund, which, ultimately, is to meet the basic financial needs of the beneficiary.

A separate, simpler approach is definitely needed, whether it is mandated through regulatory guidelines or merely adopted as best practice by an industry that should always have the best interests of the beneficiary at heart.

file_download Netcare Case Study (529.18 KB)

Constructing employee benefits for the SME

+ 01.05.2016

When structuring employee benefits for the small-to-medium enterprise (SME), there are certain principles that should be applied regardless of the size of company or the income of the staff and their socioeconomic circumstances. Foremost among these is the selection of an employee benefits provider and the cost implications thereof.

Advisors need to understand that, from a risk-rating perspective, group cover will be cheaper than individual policies due to cross subsidisation – males cross subsidise females, and the youth cross subsidise the mortality risk of older individuals. As such, underwriting is only required above a certain limit for some employees, whereas individual policies require underwriting from the first rand insured.

The cost of these benefits will then come off contributions to an umbrella fund, along with the provider’s administration costs. This is priced into the offering and included in the total contribution rate. Providers that levy additional admin fees against retirement savings erode value and nullify the cost benefits of umbrella funds. Therefore advisors need to be aware of cost structures before advising their clients on potential offerings.

They should also be weary of providers that undercut the price for group cover initially to secure business, only to implement double-digit escalations in subsequent years to cover the shortfall. Always remember, if it sounds too good to be true, it usually is.

With these principles in place, the information that then needs to be extracted from employees for the insurer to determine adequate cross subsidisation ratios and price the group benefits offered includes the gender, date of birth, occupation and income of employees.

While the occupation determines risk, income ultimately determines employee group benefits as a person’s basic financial requirements generally do not vary based on industry verticals.

Take, for example, a small manufacturing business with 20 employees, most of whom are semi-skilled or unskilled. They work with machinery and income levels are usually low. They generally support an extended family.

In this instance, an advisor should look at the basics, bearing in mind the cost of benefits because the higher the sum insured the more expensive the premium – the cost of the group cover is proportional to salary. The basic requirement would include life cover which should not exceed three times annual salary for management and no more than once annual salary for factory workers to remain affordable.

Funeral cover of at least R15,000 should be included as it’s a relatively cheap benefit in comparison to the rest and meets an important need for these socio-economic groups because the benefit extends to the entire family. To cover the potential risks of working on the factory floor, capital disability should be included. A lump sum benefit is preferable as it’s more cost effective than income protection.

Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the advisor should consider to categorise levels of cover between high and low earners.

As a starting point, the higher earners can consider life cover that equates to five times their annual salary to take advantage of the cheaper cover through the group scheme. The lower income earners can consider life cover of three times their annual package to keep it more affordable.

In this instance, income disability cover is more important than capital disability for higher earners to maintain their standard of living, and they can afford the premium. The lower earners should consider lump sum disability of three times their annual salary. Due to the low cost and the minimal impact it has on premiums, funeral cover is worth including for both groups as it pays out within 48 hours.

Additional cover for higher earners should include critical illness and education trust cover, which continues to pay for the education of their children should they pass away, as they can afford both benefits.

The industry standard for retirement savings is 10% of pre-tax income. Higher earners could go higher to take advantage of new tax structures. However, it’s wise to keep the all-inclusive premium – risk benefits and retirement – to no more than 15% of pre-tax earnings for lower income earners.

Finally, advisors need to understand that they should never negate their requirement for consultation, regardless of the degree of cover offered. While individual consultations may be the norm with high income earners, there is a need to meet with everyone before structuring employee benefits because all employees have a right to consultation regardless of the fees that will be charged. This can, of course, take the form of a group consultation for lower income earners.

The advisor should also engage in regular client engagements. This is an opportunity to provide updated info to employees and foster a stronger relationship. This could lead to opportunities to up-sell their clients or find other opportunities to sell financial products to make the whole transaction more viable, rather than relying solely on once off upfront commissions that don’t benefit anyone in the value chain in the long term.

Promotions