Download Hot Topics presentation March 2014

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Document related concepts

Greeks (finance) wikipedia, lookup

Beta (finance) wikipedia, lookup

Index fund wikipedia, lookup

Private equity secondary market wikipedia, lookup

Business valuation wikipedia, lookup

International investment agreement wikipedia, lookup

Pensions crisis wikipedia, lookup

Financial economics wikipedia, lookup

Land banking wikipedia, lookup

Stock selection criterion wikipedia, lookup

The Millionaire Next Door wikipedia, lookup

Negative gearing wikipedia, lookup

Investment fund wikipedia, lookup

Investment management wikipedia, lookup

Transcript
HOT TOPICS SEMINAR
LEADING OPINION | Investing to secure your members’ retirement
SECTION 1
ECONOMIC LANDSCAPE
Question 1
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)?
Economic Environment
2013 – another
year of:
risk ON
risk OFF
Could we expect
the same for
2014?
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%
Another strong 2nd half
Source: Bloomberg
2013 ended with new highs
MSCI World Index = 27.4% (in $), 20% stronger than EM
Good year for global equities
Source: Bloomberg
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%
Weak Rand
Depreciated by
26%
Euro crisis
Tapering QE
18 December 2013 | Bernanke announces $10bn cut in January 2014 to monthly purchases
Interest rates have no where to go...
Short term interest rates in the UK, US & EU
...but UP
Source: I-Net Bridge, Investec Asset Management
... as seen with the ‘Fragile Five’
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%
Source: Bloomberg, Investec Asset Management
Manager Watch™ Survey
https://www.alexanderforbes.co.za/busines
s/Asset%20Consulting%20Surveys/Annual
%20Retirement%20Fund%20Survey%2020
13.pdf
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
Global equities allocations
Source: Investment Solutions
Global equities was the place to be
Source: Investment Solutions
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
Large performance range of shares
Source: Investment Solutions
Asset manager strategies
Rolling 1 Year Average Active returns - SWIX
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
12/1/2013
9/1/2013
6/1/2013
3/1/2013
12/1/2012
9/1/2012
6/1/2012
3/1/2012
12/1/2011
9/1/2011
6/1/2011
3/1/2011
12/1/2010
9/1/2010
6/1/2010
3/1/2010
12/1/2009
9/1/2009
6/1/2009
3/1/2009
12/1/2008
9/1/2008
6/1/2008
3/1/2008
12/1/2007
9/1/2007
6/1/2007
3/1/2007
12/1/2006
9/1/2006
6/1/2006
3/1/2006
12/1/2005
9/1/2005
6/1/2005
3/1/2005
12/1/2004
9/1/2004
6/1/2004
3/1/2004
12/1/2003
9/1/2003
6/1/2003
Rolling 1 year Average Active returns
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
Question 2
Tapering of quantitative easing is one of the main
economic events to play out in 2014 – what are
the possible effects?
Scale of QE is unprecedented
Fed expanded its balance sheet from ~$800 billion to ~$4 trillion!
Total Assets of the Federal Reserve
$ 4,500.00
$ 4,000.00
$ 3,500.00
Billions
$ 3,000.00
$ 2,500.00
$ 2,000.00
$ 1,500.00
$ 1,000.00
$ ,500.00
$ ,0.00
Source: Federal Reserve
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!
Anticipate volatility & uncertainty
Negative views
Positive views
 Large decline in equity
markets
 Large losses on bond
portfolios
 Large losses in EM (e.g. SA)
 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
If this happens:
 Fed has already exhausted
all policy measures
 Compound with global
economic risks
Reality is likely to lie somewhere between these two extremes!
Prepare fund & members for this
Review,
decide &
stick to
strategy
Volatility, but
don’t panic
Trustees
to
consider
Alert
employer
Communicate
to members
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
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
DC FUNDS
 Volatile rates implies volatile annuity prices
 Focus on income affordability rather than
accumulated capital
 When to annuitize?
DB FUNDS
 Fund liabilities increased significantly as interest rates
fell on the back of QE
 Liability driven investments (‘LDI’) helped
“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
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”
AF’s views
 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
Question 3
The history of asset managers
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
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
SA ranks 1 out
of 144 for
Regulation of
Securities
Exchanges
Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
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
Concentration of the industry
Market share of 5 biggest asset managers in each country
25%
30%
AUM by SA
2000 – just under R1.1 trillion
2012 – more than R3.8 trillion
Source: World Bank, Black Rock, Investment Solutions
43%
61%
Highly
concentrated
Size of the industry
Life insurance companies losing market share
42%
Dec 2012
58%
67%
Dec 2002
0%
10%
20%
30%
33%
40%
50%
Life-company owned
60%
The rest
70%
80%
90%
100%
Dominant players
Largest managers overtime
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
Source: Investment Solutions, Alexander Forbes
Dominant players
Top 10 asset managers & growth rates over the past 10 years
Foreign firms have found it difficult to break into SA market
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
SECTION 2
INVESTMENT STRATEGIES
Question 4
Have life stage strategies delivered appropriate
results in view of their intended objectives?
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
2000
1800
1600
1400
 Text 1
 Text 2
Manage growth
1200
Equities
1000
Bonds
800
Cash
600
Inflation
400
2000
0
1800
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
200
1600
1400
1200
Equities
1000
800
Notional
Investment
600
400
200
0
Jan-94
Jul-95
Jan-97
Jul-98
Jan-00
Jul-01
Jan-03
Jul-04
Jan-06
Jul-07
Jan-09
Jul-10
Jan-12
Jul-13
Manage volatility
Life stage strategy
3 distinct phases
Life stage strategy
Example of asset class exposure in the
accumulation and pre-retirement phases
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.
Accumulation portfolio |
provided real growth
Commencement
date
Accumulation
portfolio performance
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
Real return since
Inflation commencement
Rands
De-risking portfolios |
capital & volatility protection
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
Question 5
What are the criticisms of life stage investing and
how might life stage models evolve?
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...
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 derisking phase
 Return maximisation in accumulation stage
Question 6
What’s an appropriate investment strategy for
post-retirement and how should this be linked to
pre-retirement strategies?
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
What we don’t want
What we do want
 Stability of income
 Income for life
 Maintain standard of living
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
Fixed annuities
 Guaranteed for life
 Will not decrease in nominal terms
 2 types: Fixed Level Annuity & Fixed
Escalating Annuity
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
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
Investment strategy
225
VALUE OF INFLATION-LINKED BONDS VS COST OF THE
INFLATION-LINKED ANNUITY
200
175
VALUE/COST
150
125
100
75
50
Value of Inflation-linked Bonds
25
Cost of an Inflation-linked Annuity
0
DATE
Purchasing power portfolios
 Improve retirement income
 Reduce chance of ‘undesirable outcomes’
REQUIRED CAPITAL TO PURCHASE REAL INCOME
R2500,000
REQUIRED CAPITAL
R2000,000
R1500,000
R1000,000
R500,000
Cost of an Annuity
Purchasing Power Moderator
R-
DATE
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%
-3.91%
14.36%
Purchasing Power Moderator
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%
12.04%
-3.91%
6.44%
Improvement
Example | Affordability level
AFFORDABILITY LEVEL OVER TIME
100%
R 7,000
Inflation-linked drawdown
95%
R 6,000
R 5,000
85%
80%
R 4,000
75%
R 3,000
70%
65%
R 2,000
60%
55%
50%
Affordability Level
Income Drawn
R 1,000
R ,0
Monthly Income Drawn
Affordability Level
90%
88%
Linking pre & post retirement
Post-retirement vehicle
Inflation-linked annuity
Asset backing this
vehicle
Retirement matching
strategy
Inflation-linked bonds
Inflation-linked bonds
With-profit annuity
Multi-asset class investment Multi-asset class investment
strategy
strategy
Living annuity
Whatever was the chosen
investment strategy, but to
target inflationary increases a Purchasing power strategy
significant portion of ILB’s
needs to be purchased
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-
High allocation to growth asset classes.
up
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.
Question 7
How can trustees practically implement a strategy
which incorporates a sustainable returns
approach?
Shift in mindset...
...away from chasing short-term
gains to focusing on achieving
benchmark-beating returns over
time!
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
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
Recommended timeline
Source: Responsible Investment and Ownership: A Guide for Pension Funds in South Africa
Question 8
Can a fair price be determined for active asset
(investment) management fees?
Asset management fees
Reviewing the fee conundrum through
alternate lenses, from the perspective of the
consumer & value being purchased
Using option mathematics to put forward a pricing
Framework:



Risk-return
Call & put derivative
options
“Naïve” framework
Beta & Outperformance
Beta
Fee to access an
asset class / strategy
Outperformance
(“Alpha”)
Fee payable for
expectation that the
manager will
outperform the
benchmark
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
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
3 | You need to eat off the same plate
 Not just about sharing value – commitment
 Conversation should not only be about performance
 Holistic relationship
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%
Performance fees
 A mechanism to align objectives?
 The concept is sound – implementation is
flawed
 Operational management of performance
fees needs review
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
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
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
Question 9
The 2014 National Budget Speech – what should
trustees consider?
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
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
0% of taxable income
R0 – R25 000
0% of taxable income
R22 501 – R600 000
18% of taxable income
above R22 500
R25 001 – R660 000
18% of taxable income
above R25 000
R600 001 – R900 000
R103 950 + 27% of
taxable income above
R600 000
R660 001 – R990 000
R114 300 + 27% of
taxable income above
R660 000
R900 001 +
R184 950 + 36% of
taxable income above
R900 000
R990 001 +
R203 400 + 36% of
taxable income above
R990 000
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
0% of taxable income
R0 – R500 000
0% of taxable income
R315 001 – R630 000
18% of taxable income
above R315 000
R500 001 – R700 000
18% of taxable
income above
R500 000
R630 001 – R945 000
R56 700 + 27% of
taxable income above
R630 000
R700 001 – R1 050 000
R36 000 + 27% of
taxable income above
R700 000
R945 001 +
R141 750 + 36% of
taxable income above
R945 000
R1 050 001 +
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
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
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
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 nonpayment 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
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