IRF DAILY
Friday, 29 July 2011
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IN THE NEWS TODAY
LOCAL NEWS
Unit trust investors pull funds due to tax plans
South African unit trusts had the lowest inflows in three years in the second quarter because of a
proposed change in the way dividend-income funds were taxed, the Association for Savings and
Investment SA said yesterday.
Unit trusts attracted net inflows of R4 billion in the three months to June, the least since the first quarter
of 2008, the industry organisation said. Most of this was income that had been reinvested.
Without the reinvested income, there would have been a net outflow of R5bn in the quarter, it said.
“The recently released 2011 Draft Taxation Laws Amendment Bill indicated that the tax loophole would
soon close for dividend income funds, causing investors to exit these funds,” association chief executive
Leon Campher said.
The Reserve Bank has maintained its key lending rate at 5.5 percent, the lowest in 30 years, since
November to spur growth in the economy. A debt crisis in Europe and in the US is fuelling recession
concern and has increased market volatility, with the JSE’s volatility index rising for two consecutive
quarters.
Money market funds posted net outflows of R9.9bn for the quarter, the biggest among all funds, as
corporate investors withdrew cash. “This is not necessarily a bad thing since these corporates may well
have ring-fenced this money for development projects or other investment opportunities.”
Business Report
29 July 2001
By Stephen Gunnion
Less is more when it comes to living annuity draw downs
I’ve covered the ‘save for retirement’ topic on a number of occasions. The experts say you will retire
comfortably provided you tuck away 15% of your gross salary over a period of 30-years, earn marketrelated returns on your retirement savings, and always preserve! Although this three-point retirement
‘recipe’ is often dismissed as too simplistic it serves as a great ‘rule of thumb’ for anyone looking to retire
with a replacement ratio of around 75%. (The replacement ratio is your retirement income expressed as a
percentage of your final gross income pre-retirement).
The topic less frequently covered by the media is how to manage your retirement nest egg upon
retirement. At retirement the law allows you to draw down (subject to the taxation regime of the time)
one third of the accumulated capital in your pension fund or retirement annuity (or 100% of the amount
in your provident fund). The remaining two thirds must be used to purchase an annuity, a financial
instrument designed to provide income through your retirement years. The country’s major life insurers
and fund managers offer a range of annuity products, including traditional annuities, guaranteed annuities
and living annuities. In today’s newsletter we’ll take a closer look at the living annuity as discussed in an
article by Lourens Coetzee, an investment professional at Marriott Asset Management.
The capital preservation versus income dilemma
If you purchase a living annuity you have to draw a regular income of between 2.5% and 17.5% of your
annual investment value, reviewed each year. Unlike ordinary annuities, where the balance at death
passes to the insurer, any final value on the living annuity is paid to your beneficiaries. But there are risks
associated with this type of annuity. Because living annuities rely on investment return to provide income
in retirement, life insurers suggest you only select the product if you have other sources of retirement
funding.
It is also critical that you make use of a professional financial adviser to assist you with the asset allocation
and draw down choices associated with the product!
“Retired investors commonly face the dilemma of either maintaining a certain lifestyle or lowering it in
order to preserve their capital for longer,” writes Coetzee. One of the most critical choices at retirement is
how much income you draw from your living annuity. The more you draw the less capital is available to
create future income! “If you opt for too much income now, you risk eroding your capital over time and
possibly even wiping it out,” he says. A sensible choice is to draw down as little as possible of your capital
each year to preserve your investment value for as long as possible.
“Capital preservation is dependent on two variables: the performance of the underlying assets (capital
and income returns), and the extent to which income is drawn from the annuity,” says Coetzee. The
retiree, with assistance from a financial planner, has some control over these variables. You can influence
performance by making sure the underlying assets in your living annuity are appropriately weighted
(according to your life stage / risk profile) to equities, bonds and listed property. And choosing the lowest
possible draw down takes care of the latter.
Does your living annuity make the grade?
How do you maximise your investment return through retirement? According to Marriott Asset
Management the average annual real return on asset classes, going back four decades, is 10.71% for
equities, 2.45% for bonds and 2.24% for cash. And the average balanced fund is invested approximately
60% in equities, 30% in bonds and 10% in cash. To investigate the effect of different capital draw downs
on living annuities Marriott considered 30-year rolling period performances for an average balanced fund
going back to 1900. This gives them 81 periods to assess. Their other assumptions include an all-in fee of
2.3% per annum (the current approximate market fee for living annuities) and using the previous year’s
inflation rate to determine annual income escalations.
The findings will probably shock a number of retirees who believe they are drawing down an acceptable
capital amount from their living annuities. Marriott’s calculations show that only five in every 100 retirees
drawing down 7% of their living annuity capital would have been able to sustain their income through
retirement. And only 15% of these individuals would still have capital at death. The picture is only
slightly healthier if a draw down of 5% is selected.
In this scenario 38% of retirees would be able to sustain their income through retirement, with capital
lasting in around half of all case. The best outcome was achieved with a draw down of only 3%! This
prudent approach would see 91% of retirees retaining income, with capital ‘outlasting’ the retiree 99% of
the time. “The results since 1960 (during which there are 18 rolling 30-year periods) were similar,” says
Coetzee, although slightly better real returns from equities over these periods led to improved result for
persons drawing 5% of their capital each year.
You may have to restrict your annuity income
Financial planning through retirement is complicated by uncertain life expectancies. At age 65 it is
impossible to know for how long your retirement capital needs to provide an income. “We urge retirees to
examine their situation carefully when contemplating using their capital to supplement income – and
suggest they preserve capital until they reach a stage in their retirement years when it may become safe to
reduce it,” writes Coetzee.
To this end annuity providers offer differently structured products. Marriott offers an investment-linked
living annuity (the Perpetual Annuity) that invests in three underlying Marriott funds of funds and is
structured to enable investors to draw the level of income that their underlying funds produce, thus
ensuring that their capital is preserved. Retirees, with assistance from their financial planners, can use the
company’s online Living Annuity Tool to set an annuity at a level which ensures that it matches the
income from the underlying investments!
“While investors may find it challenging to restrict their annuity income to the income produced by their
investment choice, it is preferable to finding that one’s capital has been completely (or even partially)
eroded,” concludes Coetzee. “Rather be conservative now, than risk having to find another source of
income or having to reduce one’s standard of living at some point in the future.”
FA News
25 July 2011
By Gareth Stokes
Retirement planning under the spotlight at October Expo
South Africa’s first-ever expo aimed at enhancing peoples’ lifestyles after retirement will be held at
Johannesburg’s Coca-Cola dome from 28 to 30 October 2011.
Owned by the Thebe Exhibitions and Projects Group (TEPG) and presented by Century Property
Developments, the Retirement Expo will showcase leading financial, property and lifestyle brands.
TEPG Managing Director Carol Weaving says the expo will be established as an important annual platform
where South Africans can obtain information, services and products that will suit their retirement lifestyle
needs. “We will literally present every relevant option for a mature lifestyle under one roof.”
Research by Statistics South Africa shows that almost 9,75 million South Africans will retire within the
next 25 years. Most of these are so called ‘baby boomers’ – people born between 1946 and 1964 – who
tend to be optimistic, competitive and focus on personal accomplishment.
According to Weaving exhibitors at the Retirement Expo will include financial and investment planners,
retirement villages and lifestyle resorts, local and international travel planners, taxation advisors,
property investors, legal and insurance advisors and health and nutrition experts.
Leading brands that will participate in the expo include Liberty, Starlight Cruises, Old Mutual, Marriott,
Helderberg Village, Mediclinic, Reader’s Digest, The Protea Group, Glacier by Sanlam, the Refirement
Network, Alexander Forbes and Northern Area Retirement Villages.
“Today’s retirees are generally more active and have great expectations of their golden years,” says
Weaving. “The expo will help them to pursue their dreams. It will offer visitors a number of interactive
workshops where they can obtain personal advice on planning their retirement, related to aspects such as
real estate options, investments and drawing up a ‘bucket list’.”
Well-known retirement coach Lynda Smith of the Refirement Network will explain how retirement can
open up a new world. “We say ‘don’t retire – refire!’, she says. “Retired people definitely have a
constructive role to play in society and in business.”
Other workshops include ‘Your retirement: in control, or in crisis?’ presented by Old Mutual and ‘An estate
plan: the centrepiece of your retirement puzzle’ presented by Glacier by Sanlam.
The Retirement Expo will follow on the United Nations International Day of Older Persons on 1 October
and South African Grandparents Day on 2 October.
FA News
29 July 2011
ASISA: Lower flows for SA unit trust industry as investors reposition
The anticipated change in the tax treatment of Dividend Income Funds and corporate investors
repositioning their cash holdings resulted in a difficult second quarter for the local Collective Investment
Schemes (CIS) industry.
Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), says while the
industry attracted net inflows of R4-billion in the second quarter of this year, the bulk of these flows
consisted of income reinvested. Without this money, the industry would have seen a net outflow of R5billion. The second quarter net inflows are the lowest since the end of March 2008 when net inflows were
also at the R4-billion level.
However, says Campher, the R4-billion must be seen against the total net inflow for the 12 months to the
end of June 2011, which shows net inflows of R66-billion.
Campher says the recently released 2011 Draft Taxation Laws Amendment Bills indicated that the tax
loophole would soon close for Dividend Income Funds, causing investors to exit these funds. As a result
the Domestic Fixed Interest Varied Specialist fund category, which houses these funds, suffered net
outflows of R1.3-billion in the second quarter of this year.
In addition, domestic Money Market funds posted the biggest net outflows for the quarter of R9.9-billion.
However, Campher is not too concerned. “A closer look at industry statistics has shown that the
withdrawals were made by a few corporate investors, mainly from Corporate Money Market Funds. This
is not necessarily a bad thing since these corporates may well have ring fenced this money for
development projects or other investment opportunities.”
At the end of June 2011, the industry’s total assets under management stood at R956-billion, compared to
the R949-billion at the end of March this year. Following a decline in the number of funds on offer to 934
in the first quarter of this year, a number of new fund registrations brought the number back up to 943 by
the end of June.
Winning categories
Most popular with investors were three of the Domestic Asset Allocation fund categories (Prudential
Variable, Flexible, and Targeted Absolute and Real Return), as well as the Domestic Fixed Interest Income
fund category. Together these four categories attracted net inflows of R9.6-billion.
Domestic asset allocation funds invest across the equity, bond, money and property markets, with the
asset manager deciding how much money to invest in each asset class. Campher says these funds are
growing in popularity with investors and advisers alike since they provide diversification across asset
classes within one fund, with an expert fund manager deciding on the appropriate mix. Funds ranging
from low equity to high equity exposure are available within the asset allocation category.
At the end of the second quarter, the domestic asset allocation category held 28% of industry assets.
Campher says for investors who cannot stomach the volatility of the equity market, but who want to
achieve inflation-beating returns over the long-term, asset allocation funds are a good option to consider.
“The ongoing debt crisis in Europe and in the US is fuelling renewed fears of another recession and
increased market volatility. This causes investors to panic and switch to money market funds, sacrificing
the capital growth that can only be achieved by investing in equities over the long-term.”
Instead of opting out of equity exposure completely, Campher urges investors to consult their financial
advisers and to consider asset allocation funds as an alternative.
Campher says despite markets having been plagued by some of the worst volatility in living history in
recent years, equities have continued to deliver. The table below shows that even for the five years ended
June 2011, equities delivered a double-digit return. This period reflects the market crash of 2008 as well
as a period of high interest rates.
FA News
28 July 2011
INTERNATIONAL NEWS
US trustee: Almost half of Madoff losses recovered
HAS SECURED MORE THAN A BILLION DOLLARS THROUGH SETTLEMENTS.
A trustee recovering money for investors who lost billions of dollars through Wall Street swindler
Bernard Madoff's dealings says he's secured more than a billion dollars through settlements with
associates of the second largest feeder fund group to invest with Madoff.
Trustee Irving Picard announced Thursday the settlement will boost recoveries of money available to
jilted investors to more than $8.6 billion. He says that's nearly half the approximately $17.3 billion in
principal lost by Madoff, who pleaded guilty to federal fraud charges and is serving a 150-year prison
sentence in Butner, North Carolina.
The deal was reached with more than a dozen domestic and foreign investment funds, their affiliates and a
former chief executive associated with Tremont Group Holdings Inc., a multibillion-dollar money
management company based in Rye, New York.
Moneyweb
29 July 2011
Hedge funds not systemically risky, but UK regulator issues caveats
UK - Britain’s financial regulator says the low footprint hedge funds have in most capital markets means
overall they pose a low systemic risk, but it has warned of a greater influence by the industry in areas such
as convertible bonds and commodity and rates derivatives.
The Financial Services Authority paints a generally improved picture for hedge funds two years since the
crisis ended, after surveying about 50 regulated managers with $390bn assets in March.
In its report published yesterday, the watchdog found the average fund returned 7% over six months to
31 March, far above the 2% during the corresponding period before its September 2010 survey.
At most, 5% of net industry assets are still below their previous high value - called the high water mark.
After this has been reached, managers can recommence collecting performance fees on further gains. In
October 2009, 43% were below previous highs.
The UK watchdog said: "Funds' footprint remains modest within most markets, so that current risks to
financial stability through the market channel seem limited at the time of the latest surveys."
Hedge funds do not represent more than 2% in any of 11 asset classes the FSA categorised.
But it found larger proportional ownership in convertibles and rate and commodity derivatives - between
7% and 4% - and did not rule out funds being largest aggregate players there.
The findings are mixed news for the industry, and for its trade body the Alternative Investment
Management Association, which earlier this month called for no hedge fund to be dubbed 'systemically
important'.
Among other findings, the FSA said about 60% of hedge fund portfolios could now be liquidated in a
working week, covering over fivefold investor and financing liabilities falling due over the same period.
Global Pensions
28 July 2011
By David Walker
Softer Approach on Pension Problems
Head of Rhode Island's Fund Aims to Win Workers' Support
Standing before hundreds of state employees at a union meeting in late May, Gina Raimondo warned that
Rhode Island's pension system could run out of money unless big cutbacks are made.
Then something unusual happened. The workers loudly applauded the 40-year-old Ms. Raimondo, who
was elected in November to oversee Rhode Island's $6.4 billion pension fund. "This system as designed
today is fundamentally unsustainable, and it is in your best interest to fix it," she said.
Across the nation, state officials wrestling with budget woes are pushing through cuts in public-sector
pensions, saying there is no alternative to immediate financial pain. Ms. Raimondo, a Democrat, is taking a
softer approach.
Instead of breaking ranks with labor allies to win a round of pension cuts now, as elected officials in New
Jersey did recently, Ms. Raimondo has been trying for months to persuade workers, unions and taxpayers
to support a top-to-bottom overhaul of Rhode Island's pension system that she says will fix the plan for
decades to come.
If she succeeds, the tiny state will plug one of the most gigantic pension holes in the U.S. If she fails, the
financial hole could get even deeper.
Rhode Island pensions are so generous that thousands of retirees now collect more than they ever
received while working. The system's current assets cover just 48% of future obligations to workers, one
of the nation's lowest funding levels.
Another nightmare: There are fewer current state workers paying into the Rhode Island pension system
than retired workers collecting money from it. In comparison, the average pension system has 1.9 current
workers per retiree, according to the National Association of State Retirement Administrators, a trade
group for directors of statewide retirement systems.
Those numbers wouldn't necessarily be a problem if Rhode Island had socked away enough money to
meet future pension obligations. For 50 years, though, state officials didn't follow actuarial standards on
how much money should be set aside.
To keep the pension plan afloat, Ms. Raimondo, a former Rhodes Scholar, says Rhode Island might need to
go even further than other states have in making pension changes. She has floated the idea of converting a
portion of guaranteed pension payments into 401(k)-style accounts or suspending cost-of-living
adjustments to retirees.
"In the private-equity world, everyone thinks: Get rid of pensions," she says. "I think there is a way to
provide a defined-benefit plan that ultimately provides retirement security, but you are never going to get
there if all you have is a polarized political debate. The very word 'pension' gets people excited, but this is
math."
Rhode Island's smallest city, Central Falls, is expected to run out of money to make pension payments by
October. More than 100 Central Falls workers are being asked to give back as much as half of their
pensions or risk losing more if the city goes bankrupt. The Central Falls fund isn't part of the statewide
fund overseen by Ms. Raimondo.
The Wall Street Journal
25 July 2011
By MICHAEL CORKERY
Japanese pensions have twice as much in pooled accounts than with
asset managers
JAPAN - Japan’s corporate pension funds have twice as much money entrusted to pooled accounts run by
life companies and trust banks as they have under mandates awarded to asset managers, research shows.
The Japan Pensions Industry Database (JPID) said as of 31 March 2011 corporate retirement schemes had
assets with a book value of ¥45.65trn ($551.48bn) at life companies and trust banks. Meanwhile, data
compiled by the Japan Securities Investment Advisors' Association (JSIAA) shows schemes had ¥23.64trn
invested with fund managers.
JPID said the numbers show while the business of managing pension assets has come a long way since it
was first deregulated in 1995, it still had far to go.
"If managers are to win more business and pensions portfolios are to be more closely aligned with the
investment horizons, the two sides will need far more effective communications channels and sponsors
will need to let retirement-benefits staff build up their skills," the report said.
It argued a regulatory review of the role of sokanji - the trust banks and insurers who traditionally control
a pension plan sponsor's investment - with a view to unbundling and deregulating it, would also be
helpful, but the chances of that happening were "slim to nil".
JPID added: "And time is now short. The labour force is set to contract annually for the foreseeable future
and by deregulating so late Japan lost years of investment management returns on contributions made
when workers were young and plentiful. The nation remains very much a defined-benefit market."
The report said this situation had come about because until deregulation in 1995, retirement scheme
investment and administration were the responsibility of trust banks and life companies. In a country
where lifetime employment is the norm and pay has depended on length of service, companies have not
use benefits packages to recruit or retain staff and human resources departments have tended to be small.
"The early-1960s laws which ushered in Japan's corporate pensions catered to this by providing that
sponsors appoint a trust bank or life company as sokanji to set up and run their schemes," it added. Full
Report:
http://www.globalpensions.com/global-pensions/news/2097616/japan-pensions-twice-
pooled-accounts-asset-managers
Global Pensions
28 July 2011
By Chris Panteli
INTEREST NEWS
Jobless rate hits 25,7% as ‘labour recession’ grips SA
Influx of job seekers into the labour market surpasses job creation, double-digit pay hike demands in
current wave of strikes does not bode well for job creation.
SA’s unemployment rate climbed to 25,7% in the second quarter — its highest in seven years — as an
influx of job seekers into the labour market surpassed job creation.
Analysts were shocked at the news from Statistics SA yesterday, which showed the jobless rate leaping
sharply from 25% in the first quarter.
Overall, the number of employed people rose by 7000 in the second quarter — a far cry from the number
needed to reach the government’s goal of creating 5-million new jobs by 2020.
"We are still in a labour recession," T-Sec economist Mike Schussler said yesterday. "The economy might
be growing but it’s not creating jobs."
According to the expanded definition of unemployment, which includes people who have stopped looking
for work, SA’s jobless rate rose to 36,9% from 36,5% in the first quarter. The figures show that only four
in 10 working-age South Africans are employed. The number of people classified as unemployed rose to
4,54 -million in the second quarter, from 4,36 -million in the first, Statistics SA’s Labour Force Survey
showed.
Compared with the same period last year, a net 64000 jobs were created — mainly in the formal sector.
But in the second quarter itself jobs were shed in manufacturing, mining, trade and agriculture, which
account for a third of the economy. Jobs were created in the informal, nonfarm sector.
"SA’s labour market performance remains deeply disappointing," Stanlib economist Kevin Lings said. "The
unemployment rate remains far too high by historical and international standards and contributes to
much of the social tension and anguish experienced in SA."
SA’s jobless rate has hovered between 24% and 26% in the past decade, despite the economy growing
every year apart from 2009. It has expanded for seven quarters in a row since the recession. "Any
improvement in the economy is unsustainable with labour statistics as weak as they are," Brait economist
Colen Garrow said yesterday.
Stats SA officials said the main reason for the rise in unemployment in the second quarter was an increase
in the number of people actively looking for jobs.
Those classified as "not economically active" fell by 60000 to 14,77- million in the first quarter, while the
number of discouraged work seekers dipped by 16000 to 2,2- million.
But compared with the second quarter of last year, the number of discouraged work seekers jumped 14%
or 269000.
Analysts say the current wave of strikes, marked by double-digit pay hikes, does not bode well for job
creation.
"Investment decisions will favour capital intensity rather than labour intensity," labour economist
Andrew Levy said yesterday. "There will be retrenchments and maybe closures … it’s a tough and difficult
environment out there."
The Congress of South African Trade Unions was "appalled" at the figures.
Employment figures rarely affect financial markets. But after the data yesterday the rand weakened
slightly, while local money markets priced in the view that interest rates will remain steady this year,
despite rising inflation.
Business Day
29 July 2011
Mariam Isa
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Compiled By
Ruwaida Kassim
Institute of Retirement Funds, SA
Tel: 011 781 4320
WEB: www.irf.org.za
We would love to hear your suggestions on the type of news you would like more on. Send your
suggestions to: Ruwaida@irf.org.za
Disclaimer:
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Our mission is to scan the most
important daily news and distribute them to our members for concise reading.
The information contained in this newsletter does not constitute an offer or solicitation to sell any
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The information contained herein has been gathered by the Institute of Retirement Funds SA from sources
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