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%

of South Africans are able to maintain the same level

of consumption they had before they stopped working.

‘’

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’

Size of word = number of mentions

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benefit from a strong support structure provided by the retirement system while they are employed, which is effectively withdrawn for the vast majority of these workers after they retire.At retirement the workers are then left to the retail market, where they must bear the risks of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 members2. Objectives clearly communicated to members3. Reasonable and competitive fees and charges4. Disclosure of impact of fees and charges5. Members given access to retirement benefits counselling6. Trustees must review annually7. Maximum of 4 investment portfolios for living annuities8. Drawdown levels are compliant with industry standards9. 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

2009Adult

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

ordinary 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

on 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

options 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

Annuities13,950 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 FundIn 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 VilliersChief Executive

Employee Benefits

‘’

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

32

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

-

10,000

20,000

30,000

40,000

50,000

60,000

0 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 ESanlam 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

35

⧁ Investment choices

⧁ Drawdown rates

⧁ Administration complexity

⧁ Reporting requirements

⧁ Advice

⧁ Trustee involvement

⧁ Economies of scale

⧁ Competition

⧁ Synergies

Factors that impact pricing philosophy

Sanlam Umbrella FundCurrent 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

‘

’

⧁ 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

‘

’

⧁ 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