David Gluckman Default Regulations and Living Annuities issues to 8 - - PowerPoint PPT Presentation

Default Regulations and Living Annuities – issues to consider when retirement funds implement annuity strategies and the experience and learnings to date

David Gluckman

8 August 2017

it’s all about retirement outcomes …

Despite the high membership rates for retirement funds and significant accumulated savings, only about 10%

• f South Africans are able to maintain the same level
• f consumption they had before they stopped working.

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Strengthening Retirement Savings Media Release May 2012

’

the paradigm shift …

‘

These are structural changes and a paradigm shift. At the end of the day government has one interest and that is to ensure that the beneficiaries of the retirement process benefit from their own savings. Strengthening Retirement Savings Media Release May 2012

Finance Minister: Pravin Gordhan

Associations: unprompted

RETIREMENT FUND

TOP OF MIND ASSOCIATION TO ‘RETIREMENT FUNDS’

This is what retirement is sold as by financial

• institutions. They build the expectation of a

beach life, travelling and carefree attitude. However, participants have learnt that it could end up far from that. They have heard & witnessed examples where retired people have truly suffered.

2015 Draft Default Regulations

“Currently workers benefit from a strong support structure provided by the retirement system while they are employed, which is effectively withdrawn for the vast majority of these workers after they retire. At retirement the workers are then left to the retail market, where they must bear the risks of retirement on their own, including the risks of poor financial advice, poor decisions, and high charges.“

2015 Draft Default Regulations

“In order to increase the competitiveness of the market for retirement income products, to provide a greater degree of assistance to members of retirement funds who retire, and to require funds to use their considerable purchasing power and skill to provide their members with cost-effective annuitisation options, Regulation 39 requires all funds to adopt a default annuity strategy, and lays out the requirements that fund boards implementing such a strategy must comply with. “

2016 Revised Draft Default Regulations

“National Treasury re-emphasises, through these default regulations, that fund boards have the responsibility to protect the interests and investments of pension fund members during and post accumulation stages.” Media Release - December 2016

2016 Principles for Annuity Strategies

• 1. Appropriate and suitable for members
• 2. Objectives clearly communicated to members
• 3. Reasonable and competitive fees and charges
• 4. Disclosure of impact of fees and charges
• 5. Members given access to retirement benefits counselling
• 6. Trustees must review annually
• 7. Maximum of 4 investment portfolios for living annuities
• 8. Drawdown levels are compliant with industry standards
• 9. Trustees must monitor sustainability & alert members

Has your Fund implemented an appropriate default annuity strategy for your members?

Imagine you are reaching retirement age right now. Which of the following options would you choose?

the member is the customer …

• Treating Customers Fairly (TCF)
• PF Circular 2 of 2016
• member communication and payment of benefits
• default regulations

Institutional v retail

… worlds are colliding

Evolution of Umbrella Funds

1986 Old Mutual 1992 Liberty 2002 SANLAM 1995 MMI 1997 Alexander Forbes

Infant 1986-2008 Teenager 2009-2014

2009

Adult 2015 -

2015

the best of both worlds!

… institutional partnering with retail

Sanlam Umbrella Fund EB platform LISP platform

in fund annuities in fund preservation ex fund annuities ex fund preservation

• rdinary members
• economies of scale
• default strategies
• virtual tax haven
• solidarity

affluent members

• > 1000 collective investment schemes
• stockbroking services
• virtual tax haven

South African apartheid referendum 17 March 1992

Do you support continuation of the reform process which the State President began

• n 2 February 1990 and which is aimed at a new Constitution through negotiation?

Yes or no Votes Percentage Yes 1,924,186

68.73%

No 875,619

31.27%

Valid votes 2,799,805

99.82%

Invalid or blank votes 5,142

0.18%

Total votes 2,804,947 100.00% Voter turnout Electorate Results

85.08%

3,296,800

Sanlam Umbrella Fund trustee referendum 16 February 2015

Do you support continuation of the reform process which your leader began on 19 April 1988 and which is aimed at a better deal for members??

Economics 101 for financial advisers …

viable

based on Sanlam Umbrella Fund exits 2016

Fund Credit # Retirements Retirement Amounts

> 1m 312 R804m 500k-1m 157 R106m 150k - 500k 371 R103m 25k - 150k 380 R28m 0-25k 175 R2m Total 1,395 R1,042m > R500k 33.6% 87.4%

UWRF Default Annuity Experience

⧁ The University of the Witwatersrand Retirement Fund offered all retiring members a default annuity from the mid-to-late 1990s to its discontinuance in 2003. Here the default annuity was a Guaranteed Annuity in the name of the Fund attractively priced and on a commission free basis. ⧁ The actual experience was that no retiring member elected the default annuity option upon retirement, and all chose to invest their retirement proceeds elsewhere. It might be that the Fund’s default annuity option did serve a useful purpose as a reference point for retirees to benchmark other

• ptions against, but from a commercial / take-up perspective, it was a

dismal failure.

ASISA LIFE INSURANCE STATISTICS For the period to 31 December 2016

ASISA LIFE INSURANCE STATISTICS For the period to 31 December 2016

# Policies Single Premiums Average Single Premium Living Annuities 55,086 R 56,810,000,000 R 1,031,297 Compulsory Annuities 13,950 R 5,286,000,000 R 378,925

What type of annuity (pension) did you choose when you went on retirement?

Andrew Davison presentation to FPI

ASISA Living Annuity Statistics 2015

Age band Average drawdown % - By # Policies Average drawdown % - By Asset Size < 55 9.4% 7.0% 55-59 8.5% 6.9% 60-64 8.5% 6.6% 65-69 8.4% 6.4% 70-74 8.9% 6.6% ≥75 9.5% 6.9% Overall 8.7% 6.6%

 Make access simple & unpressurised  Same member experience pre- and post-retirement



Contributions cease and pensions begin  Seamless



Align with pre-retirement investment strategy



No time out of the market



No up front costs



Avoid discontinuities  Not irreversible



Can switch to ILLA or guaranteed annuity at any point



Optionality is very valuable for retirees with >20 years life expectancy  Accommodate financial advisers

Inertia is the most powerful force in the universe!

Features of a good default strategy

⧁ Sanlam Lifestage ⧁ Volatility Protection Strategy ⧁ Passive Lifestage Strategy ⧁ Sanlam Blue Lifestage Strategy ⧁ SIM Balanced Fund ⧁ SIM Inflation Plus Fund ⧁ Sanlam Cash Fund ⧁ SMM 70 Portfolio ⧁ SMM 50 Portfolio ⧁ SMM 30 Portfolio ⧁ SMM Absolute Return CPI + 5% Portfolio ⧁ Sanlam NUR Balanced Portfolio ⧁ Allan Gray Global Balanced Portfolio ⧁ Coronation Houseview Portfolio ⧁ Investec Balanced Fund ⧁ Sanlam Foord Balanced Fund ⧁ Sanlam Prudential Balanced Fund ⧁ Sanlam Monthly Bonus Fund ⧁ Sanlam Stable Bonus Portfolio ⧁ SATRIX (SWIX) Balanced Tracker Fund

Sanlam Umbrella Fund

In Fund Living Annuitant investment options

Assumptions In-fund Out-of-fund Initial fund value R1 000 000 R1 000 000 Initial drawdown 7% 7% Drawdown increase rate 50% of CPI pa 50% of CPI pa Initial fee Nil Nil Ongoing administration fee R150 pm increasing with CPI Nil Ongoing advice fee 0.5% of assets 0.75% of assets Investment management fee 1% of assets 1.50% of assets Gross investment return CPI + 3.5% CPI + 3.5%

The Power of Scale

The Power of Scale

The challenge going forward will be to get somewhere in between, i.e. you cannot deliver a retail service and product at wholesale costs and vice versa ….the pricing gap is big, but some of it is for a reason … Institutional businesses are not geared for retail Dawie de Villiers

Chief Executive

Employee Benefits

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Key Differences (besides costs)

In Fund Living Annuities Ex Fund Living Annuities (via insurers)

Governed by Pension Funds Act Governed by Long Term Insurance Act Governance overseen by Board of Trustees Individual insurance contract 37C of Pension Funds Act applies on death Beneficiary nomination prevails on death Regulation 28 of Pension Funds Act applies No Regulation 28 constraints

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Smoothed bonus products can mitigate investment risks! Real pension & 5% drawdown

• 10,000

20,000 30,000 40,000 50,000 60,000 5 10 15 20 25 30 35 Conservative; 50% Max 25% SB; 50% Aggressive; 50% Conservative; 5% Max 25% SB; 5% Aggressive; 5%

Conservative; 50% Max 25% SB; 50% Aggressive; 50% Conservative; 5% Max 25% SB; 5% Aggressive; 5% Percentile 50% 50% 50% 5% 5% 5% Sustainable Years 23.0 31.1 31.4 14.6 14.8 12.8

Sanlam Employee Benefits In Fund Living Annuitants 1 July 2017

Total # Active Retirement Funds 95 Total # Active Retirement Funds offering In Fund Living Annuities 9 Proportion Retirement Funds offering In Fund Living Annuities 9.5% Total # Active Contributing Members 617,165 Total # In Fund Living Annuitants 557 In Fund Living Annuitants / # Active Contributing Members 0.1% Total Assets in In Fund Living Annuities R 1,609,576,979 Average Assets per In Fund Living Annuitant R 2,889,725

Interesting retirement fund statistics comprising 430 In Fund Living Annuitants …

Fund A Fund B Fund C Fund D Fund E Sanlam Umbrella Fund Drawdown Mean % (not asset weighted) 6.5% 4.3% 7.1% 4.6% 6.7% 6.1% Drawdown Median % (not asset weighted) 6.0% 4.3% 7.0% 4.4% 6.0% 6.0% Fund facilitates payment of advice fee? Yes No No Yes No Yes Oldest annuitant 66 63 71 66 84 75

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⧁ Investment choices ⧁ Drawdown rates ⧁ Administration complexity ⧁ Reporting requirements ⧁ Advice ⧁ Trustee involvement ⧁ Economies of scale ⧁ Competition ⧁ Synergies

Factors that impact pricing philosophy

Sanlam Umbrella Fund

Current Pricing Basis for In Fund Living Annuitants

Administration Fees

⧁ No initial administration fees ⧁ Administration fee of 10 bps excluding VAT on the first R1.5m AUM

⧁

zero fees thereafter, minimum fee R25 per month excluding Vat

Advice Fees

⧁ No initial advice fees ⧁ Ongoing advice fees negotiable up to 50 bps excluding VAT ⧁ Institutionally priced investment management fees ⧁ Standard Contingency Reserve Account Levy, currently R3.80 pm to cover fund

governance costs such as FSB levies, audit costs, actuarial services, independent trustees and Fund officers, fidelity insurance, communication, investment consulting, etc.

the importance of advice

Should Sanlam Umbrella Fund raise the 50bps per annum + VAT cap on advice fees?

Wouter Fourie presentation to FPI

Living annuities are complex when compared to conventional life annuities Owners of living annuities make / review several choices annually. These decisions could have serious consequences that only become apparent years later. Buyers of living annuities must:

• Choose an investment mix from extensive options
• Choose a drawdown rate (between 2.5% and 17.5%)
• Select a provider or change their existing provider

Decisions are dependent on a range of factors that vary from individual to individual, including:

• The level of support they can expect from family
• Access to post-retirement medical aid cover
• Risk aversion
• Bequest motives
• Life expectancy

SAIFAA Member feedback

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⧁ Make provision for advisers’ fees (I was against it initially) but cap it!! Most of the advice work is done by the Trustees (with age banded caps aiming to ensure sustainability and the investment menu is vetted). ⧁ Don’t underestimate the power of the adviser (I made that mistake) their relationship and influence over the retiring member is such that they will talk the members out of it. ⧁ I will see the Board as seriously failing their fiduciary duties, being complicit to or facilitating the fleecing of members and to quote John Vorster “too ghastly to contemplate”.

EB Consultant Feedback

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⧁ In Fund Living Annuities are a viable / compelling option for many retirees ⧁ Savvy affluent retirees are the initial base of investors ⧁ Pricing differences between institutional and retail likely to narrow over time ⧁ Good advisers should be putting these options on the table ⧁ Retirement funds must consider solutions holistically e.g. how to assist all members on a national basis ⧁ Important to guide members on switching to other annuity products over time e.g. guaranteed or hybrid annuities to protect longevity risk. ⧁ Product in infancy and retirees relatively young – longer term risks might not yet be apparent

Final Thoughts

thank you