IRF DAILY
29 April 2011
________________________________________________________________________
IN THE NEWS TODAY
LOCAL NEWS
PFA rules fund credit at time of withdrawal notice must be paid
A pension fund has been rapped on the knuckles by the Pension Funds Adjudicator for not paying out a
withdrawal benefit as it stood when notice of withdrawal was given instead of the fund credit at the actual
time of disinvestment.
GG Umbrella Pension Fund (first respondent) has been ordered by Dr Elmarie de la Rey, the acting
Pension Funds Adjudicator, to pay the complainant the difference between the withdrawal benefit already
paid and the withdrawal benefit as it stood at the time of withdrawal notification.
Mrs FJ Fuller of Parklands, Cape Town became entitled to her withdrawal benefit when she exited
employment from Pharma Natura (Pty) Ltd and from the first respondent on 4 September 2007 which
was the accrual date of her benefit.
She was not happy with the quantum of the withdrawal benefit that she was paid and complained to the
Office of the Pension Funds Adjudicator. She said during March 2008 she contacted Liberty to assist her
with the transfer of her benefit from the then administrator of the first respondent, Hollard
Administration Services (Pty) Ltd to Liberty.
During April 2008 she completed a withdrawal notification form. On numerous occasions she was
informed that the payment would not be effected as the first respondent was undergoing an audit process
and that they were awaiting tax approval from the South African Revenue Services for her withdrawal
benefit.
She was also informed that only 75% of the withdrawal benefit will be transferred to Liberty and the
balance will be paid once the audit process was completed. She was eventually paid a withdrawal benefit
of R269 070.77. An amount of R30 000 was commuted to cash and the balance of R239 070.77 (R156
159.52 and R82 911.25 respectively) was paid to Liberty Group Limited (Liberty) to purchase a living
annuity on her behalf.
The delay in the payment of her withdrawal benefit resulted in a loss of approximately R69000.
Mrs Fuller requested that her withdrawal benefit be calculated as at her date of submission of a
withdrawal notification form (April 2008) when her fund credit was R310 856.54 based on a valuation as
at 30 September 2007.
From 30 September 2007 until 1 April 2008 her fund credit should have increased by at least the current
rate of investment return. In its response, Garrun Group Employee Benefits (Pty) Ltd, as the consultant to
the first respondent, said subsequent to the complainant’s termination of employment, her fund credit
was R310 856.54 as at 30 September 2007.
In April 2008 the complainant submitted a claim for the payment of her withdrawal benefit. In January
2009 the complainant’s fund credit was R248 000.00. On 27 May 2009 she was paid a withdrawal benefit
in the amount of R269 070.77.
Garrun submitted that the first respondent had had an “unfortunate history” with respect to the
administration and disposition of benefits. From inception it was administered by Integrated Futures, a
company which was later sold to Dynam-ique SA Consultants and Actuaries (Pty) Ltd. The trustees
terminated its contract and Maxim Administration Services (Pty) Ltd was appointed as the new
administrator with effect from 1 October 2007.
Dynam-ique failed to transfer the data to Maxim and the matter was reported to the Financial Services
Board. While the efforts to obtain data continued, Dynam-ique sold its business to another administrator.
This complicated communication and further delayed the final take-on of data.
The integrity of data, when finally obtained, was in doubt and the trustees had to send in a task team to
clean up the member records and to arrive at an asset-liability match acceptable to the trustees and
Maxim.
This asset-liability match was for the fund as a whole and the values per member had to be reconciled as
well. That process was only finalised on 20 May 2009. During the course of this process the respondents
communicated extensively with the participating employers and the members to keep them apprised of
this unfortunate set of circumstances.
While the trustees cannot dispute the delays, they are firmly of the view that the delays were entirely
necessary to protect the first respondent as a whole and ensure that members’ interests were
appropriately protected.
FA News
28 April 2011
Why retirement annuities still make sense?
South Africa’s retirement landscape is slowly evolving. One of the main trends in recent years has been the
consolidation of the traditional employer-sponsored retirement fund space, which according to the
Financial Services Board (FSB) has shrunk from 13,000-plus funds to around 3,500 funds today.
Unfortunately for savers it appears the “save costs by consolidating” motivation has morphed into one of
“consolidating to avoid rising costs”! Increasing compliance requirements, most notably those introduced
by the 1 July 2011 changes to Regulation 28, make it more necessary than ever for pension funds to
appoint professional trustees and advisers to make fund administration and investment decisions.
“The rule of thumb for retiring independently is that you will need a capital sum of 15 to 20 times your
final annual pre-tax income,” says Jeanette Marais, director of distribution and client services at Allan
Gray. “This will give you an income equal to about 70% of your income at a retirement age of 65 –
assuming you buy a conventional annuity with 5% escalation at retirement.” Pension funds are supposed
to provide adequate capital upon retirement for the retiree to “buy” a sustainable inflation-tracking
income through retirement.
But many pension fund members discover too late that their employer-backed pension funds provide too
little capital to achieve this goal. And thousands of formally and informally employed South Africans who
don’t belong to formal retirement funds have to find other ways to prepare for retirement. One of these
“methods” is the ever popular retirement annuity.
Additional retirement saving a must for most South Africans
Marais says investors can consider supplementing their company pension or provident fund with a
retirement annuity (RA), particularly one that offers exposure to outperforming unit trusts. “Investors
who do not contribute to a pension fund can invest 15% of their taxable income into an RA tax free – and
those who currently contribute to a pension fund can contribute 15% of any income that is not taken into
account when calculating their pension contribution, also tax free,” she says Additional payments (over
and above the 15% limit) may be carried forward and offset against future taxable income. Andrew
Davison, acsis Head of Institutional Asset Consulting agrees. “RAs are still popular tools to bolster
retirement capital, especially for self employed, commission earners and those who earn large bonuses,”
he says.
An RA can be viewed as a portable personal pension vehicle. “RAs linked to investment funds such as
balanced unit trust funds have solved most of the structural problems historically associated with RAs,
providing a flexible, easy to understand, reasonably priced and transparent way to access the tax deferral
benefits of a pension savings vehicle,” says Pieter Koekemoer, head of Personal Investments, Coronation
Fund Managers There are numerous other benefits to using RAs as retirement savings vehicles.
One of these is “choice”. Investors can choose the underlying funds they want to invest in, and can switch
between funds at no extra cost! A second is that contributions are excluded from personal taxable income
and any interest and growth (including interest and dividends) is tax free! In addition, at retirement the
tax exemptions and subsequent tax rates are favourable.
Savers should certainly consult with their financial advisers to make sure they maximise the tax benefits
of RAs before the end of February each year. “If you have done an assessment and believe you owe tax,
contributing to an RA can reduce the amount of tax you owe, while building up your retirement
investment,” says Marais.
The impact of changes to dividend tax
It was recently brought to our attention that the replacement of secondary tax on companies (STC) with a
new dividend withholding tax (DWT) would create yet another “advantage” for RA holders. “DWT will be
positive for RAs,” says Koekemoer. “A retirement fund incurs no tax for investment income or capital gains
– and they will also be exempt from the DWT!” Marais explains: DWT shifts the liability for the dividend
tax liability from the company paying the dividend to the shareholder. But while the tax cost will be that of
the shareholder, the company declaring the dividend will have an obligation to withhold the tax on behalf
of the shareholder and pay it over to SARS. The tax is set at 10% of the final dividend paid. “There are
various exemptions from dividend tax, the most common being where the shareholder is another South
African-resident company or a tax-exempt institution, such as a public benefit organisation or a
retirement fund!” she says.
Still not sold on RAs?
Investors who aren’t keen to go the RA route – or those who wish to save additional funds outside the RA
space – can consider a variety of other investments. A popular technique is to build up a discretionary
portfolio of unit trusts. This method will prove even more popular after Regulation 28 takes effect. “All
retirement fund accounts must be compliant with Regulation 28 at individual level,” says Marais. “Having
a discretionary non-retirement portfolio enables an investor to be more aggressive, by taking larger
equity or offshore exposures than will be possible within retirement funds.”
“The most accessible non-retirement fund growth assets are listed shares and property, often accessed
through multi-asset unit trusts,” says Koekemoer. But investors who wish to use their primary residence
as part of their retirement funding plan should weigh up the pros and cons very carefully. “Most people
who use their home to supplement retirement capital end up violating the objective of maintaining their
lifestyle in retirement!” he says. “Remember, lock-up and go units in retirement villages can trade at
significant premiums to large free-standing houses in the suburbs, making the ‘equity release’ available
from trading down uncertain.
FA News
28 April 2011
By Gareth Stokes
INTERNATIONAL NEWS
Bad recession: State pension funds lose 24% of value
In a different measure of just how bad the recession has been, a new census report says state retirement
systems lost a quarter of the value of their investments between 2008 and 2009 — and Utah’s system had
typical losses.
“Retirement systems have substantial investments in financial markets and consequently, earnings are
dependent on changes in market performance,” the Census Bureau wrote about what happened in 2009.
Its data often is delayed by a couple years, and the economy has improved since 2009.
Nationally, the value of assets in state worker pension plans dropped 24 percent between 2008 and 2009,
losing $641.3 billion of value, dropping from $2.67 trillion to $2.03 trillion.
In Utah, the report said the value of the state retirement system’s assets dropped by 23.6 percent, from
$22.98 billion to $17.57 billion.
Such losses led the Utah Legislature last year to redesign its retirement system. It shifted away from a
guaranteed benefit pension plan to a 401(k)-style system for new workers. The Wall Street Journal has
praised that shift, and said it likely is a harbinger of things to come in other states because it could help
close long-term funding gaps for their pension funds.
The Journal said state governments are “one of the last bastions of guaranteed pensions,” but said more
states are considering following the example of Utah and Michigan and moving to 401(k)-style plans
where each employee decides where to invest funds and at retirement will have a sum that reflects how
much was contributed and how the investments fared.
In a traditional pension plan, administrators choose where to put the money, and employees receive a set
payout at retirement regardless of how well or poorly the funds were invested. A report from the Pew
Center on the States earlier this week said that while state retirement systems nationally can pay for
pensions to current retirees, they are short more than $600 billion for future payments.
As an example of problems, on Wednesday two of the three major rating agencies raised flags about the
fiscal condition of New Jersey, citing that state’s $31 billion pension shortfall.
The Salt Lake Tribune
28 April 2011
By LEE DAVIDSON
Pension funds could shift power away from chaebol chairman to
shareholders
The mood is good for the funds’ exercising their vote, but it depends on government’s will
Kwak Seung-joon, head of the Presidential Council for Future and Vision, said, “Pension funds should
actively use their shareholders rights in large companies.” In response, Samsung Electronics Chairman Lee
Kun-hee openly said Sunday that he welcomed such a move. Hana Financial Group Chairman Kim Seungyu also said at a morning press conference that as shareholders, pension funds’ rights should be
respected.
The mood is more accepting of pension funds’ exercising their vote. It appears repercussions will continue
as the interests of chaebol, major family-run conglomerates, whose corporate structure is opaque, and the
pension funds cannot help but clash.
The fact that chaebol company stockholders are not treated like the owners is not a new problem. With
less than 5 percent of the capital, chaebol heads have used their personnel decision-making power to
determine the presidents and executives of subsidiaries before general stockholder meetings are held.
They do not attend the stockholder meetings.
It is also the same case with the executives. They have regarded the will of the chairman as more
important than that of the stockholders. This is because it is the chairman who really controls the
company due to knotty and complex capital relationships, such as circular finance. Coming primarily from
civic organizations, calls for strengthening the voice of stockholders have been ongoing. A typical example
is groups like Solidarity for Economic Reform (SER) getting minority shareholders together to attend
general stockholder meetings.
An official in the business sector said, “While such moves have yet to change results, the law and structure
is changing to strengthen the voice of minority shareholders, such as allowing class action suits and
imposing fines.”
The minority stockholder movement, however, has been unable to escape a certain limit due to their
limited capital. This is because pension funds, which have as much capital as the head of the company,
have not moved. If the pension funds move, the situation will definitively change. The National Pension
Service (NPS) has drawn great interest this year by opposing the re-electing of Hyundai Motor Chairman
Chung Mong-koo and SK Chairman Choi Tae-won to their companies’ boards of directors at general
stockholders meetings, claiming the men had hurt the value of their companies through unfairly
supporting subsidiaries and keeping two sets of books. Moreover, with pension funds increasing the ratio
of their holdings over time, their voice is expected to increase gradually.
The Lee Myung-bak administration has created an economic climate favorable to the chaebol through low
interest rates and high exchange rates. Despite this, the administration has reportedly expressed
disappointed not only by the chaebols having shown no intention to pursue shared growth with small and
medium enterprises (SMEs), but also by criticism from Lee Kun-hee, who said the government’s economic
policies have just avoided a failing grade. It is for this reason that Kwak’s comments are of such
significance. Commission on Shared Growth for Large and Small Companies Chairman Chung Un-chan’s
push for a system that would take a certain portion of the profits of major corporations and use it for
shared growth is along the same lines.
The key is whether the Lee administration has any level of intention to actively exercise the voting rights
of pension fund holders. If this was just a short-term exercise in bringing companies to heel, than this is
likely to be an isolated event. If Lee administration possesses a concrete intent, however, the situation is
likely to change. The administration can restrain the companies to some extent while avoiding criticism
that they are twisting the companies’ arms.
Lee Kun-hee said, “I am not especially concerned, and in fact I welcome the open exercise of stockholders’
rights.”
This development, however, are likely not good news for the chaebol heads. Economic groups like the
Federation of Korean Industries (FKI) have expressed their vehement opposition, even using the term
“pension socialism.” However, if the NPS and other pension funds actively use their voting rights, there is
nothing anyone can do to stop them. Ultimately, it all depends on the will of the government.
The Hankyoreh
29 April 2011
By Kim Jae-seob
Peru proposal will allow pension funds to invest more abroad
PERU - A Peruvian congressional committee approved a government proposal to increase the limit on
private pension fund managers’ investments overseas.
The measure calls for raising the limit gradually to 50% of the funds' assets from 30% now, and seeks to
ease the pressure on the Peruvian economy caused by speculative capital inflows, the committee said in
an e-mailed statement today. The increase will allow funds to diversify their risk, the committee said.
Peru's central bank increased the limit on pension investments abroad four times last year, to 30% from
22%, to help cool demand for the sol. Congressional approval is required to raise the legal limit beyond
30%.
"The strength of demand for instruments in the local market and scarcity of investment alternatives leads
to the concentration of investments in a few issuers," Lorena Masias, the banking regulator's assistant
superintendent of pension funds, told the committee. "That's why it's a good idea to raise the limit."
Peru's four private pension fund managers had 29% of their assets invested overseas last month,
according to the regulator. The measure will now go to the full congress for a vote.
Global Pensions
28 April 2011
US state pension fund assets down $643.1 bln in 2009
The value of assets in U.S. state retirement systems fell by $641.3 billion to $2 trillion in 2009, the U.S.
Census Bureau said in a report on Thursday that showed the deep damage done to pension funds by the
financial crisis.
The 24 percent drop followed a loss of $152.2 billion the previous year.
The declines came from a $485 billion decrease in earnings on investments in 2009, after a nearly $440
billion loss in 2008, according to the U.S. Census.
Public pension funds are backed by contributions from employees and employers and by earnings from
investments, which provide more than half of revenue. This makes retirement systems, especially ones as
large as California's, a force in the markets.
The value of the all state funds' assets peaked at $3.2 trillion in 2007 then fell by more than a quarter to
$2.8 trillion in 2008, when the financial crisis took hold, according to the Federal Reserve.
Last week, two public pension fund associations said the assets held by retirement systems rose to $2.93
trillion in 2010, indicating the worst of the crisis may be over. While retirement systems can pay for
pensions to current retirees, they are short more than $600 billion for future benefit payments, a report
from the Pew Center on the States said earlier this week.
Those in the $2.9 trillion U.S. municipal bond market are worried that the large obligations could affect the
credit-worthiness of many states. On Wednesday, two of the three major rating agencies raised flags about
the fiscal condition of New Jersey, citing the state's $31 billion public pension shortfall.
Reuters
28 April 2011
OUT OF INTEREST NEWS
Standard & Poor’s warns ‘monetary inflexibility’ may force rate hike
Contradicts recent IMF assessment that economic growth in SA is still too fragile
SA HAS little "monetary policy flexibility" because of its dependence on volatile portfolio inflows and low
savings rate, global ratings agency Standard & Poor’s said yesterday. The remarks can be seen as a hint
that SA may have to raise interest rates later this year, as local markets predict, in the face of rising
inflation.
This is contrary to the view of the International Monetary Fund, which said a few weeks ago that SA does
not need to raise interest rates in the coming months as its economy is too weak. S&P was referring to the
fact that foreign buying of local shares and bonds were what covered the country’s deficit on the current
account, its broadest measure of trade in goods and services.
In a report on Sub-Saharan Africa, S&P said SA’s "fiscal flexibility" was also constrained by public sector
debt. "Although we expect the government to remain committed to reducing the general government
deficit, the increasing ... debt burden and funding needs of nonfinancial public enterprises continue to
constrain the rating," S&P said.
The agency has given SA a BBB+ sovereign credit rating, the highest in the region after Botswana, which
has an A- rating. Last year it revised the outlook on SA’s rating to "stable" from "negative". S&P said it
expected SA’s economy to expand by between 3% and 4% over the coming three years, in line with
consensus. It said the country’s policies "continue to support stability" and foreign financing.
But it added: "We expect the wider public-sector debt to increase to almost 60% of gross domestic
product over the next three years, which in our view reduces SA’s fiscal flexibility." In its February
budget, the Treasury revised its deficit forecasts for the next three years slightly higher, to maintain
spending in the face of slower growth.
S&P’s view on SA was broadly in line with its assessment for Sub- Saharan Africa. Stronger growth and
better fiscal management should limit negative pressures on ratings in the region, but there was "limited
potential" for upward movement, it said.
Thirteen of the 15 countries S&P rates in the region have "stable" outlooks, while two — Cape Verde and
Senegal — have a negative outlook. Although the fiscal performance of most of those countries should
improve this year, their balances would continue to "underperform" what they were before the global
crisis, S&P said. In some, this reflected scaled up government spending.
Business Day
29 April 2011
By Mariam Isa
Compiled By
Ruwaida Kassim
Institute of Retirement Funds, SA
Tel: 011 781 4320
WEB: www.irf.org.za
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