What you need to know about pensions offered by retirement funds

The Default Regulations, which become effective for all retirement funds from March next year, require every retirement fund to develop a trustee-endorsed annuity strategy.

By using their scale and bargaining power, bigger retirement funds can potentially offer more cost-effective annuity solutions to retiring members than currently available retail annuity products, although the differences are expected to narrow as providers adapt to the changing retirement landscape.

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Poor governance behind most complaints to pension funds adjudicator

It is a criminal offence for employers to withhold contributions they are obliged to pay, however successful prosecutions are rare

Poor governance within funds and administrators is the reason behind most complaints to the pension funds adjudicator, it has emerged.

Adjudicator Muvhango Lukhaimane said, after releasing her office’s 2017-2018 annual report, that fund members have been forced to complain after things that should have been dealt with are left hanging, resulting in thousands of complaints and stretched resources at her office.

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SA’s twisted history of pension fund plunder

South Africa has a grimy history of companies raiding their pension funds, and the fear is that two recent court cases, which found in favour of the pension fund trustees, will do little to curb the practice.

The first case, involving two pensioners against the Tongaat Hulett Pension Fund, wound its way through the lower courts to the Supreme Court of Appeal (SCA), only to be defeated on what the vanquished pensioners regard as a poor understanding of the law by the judges. They were denied an opportunity for review at Constitutional Court (ConCourt).

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The second case involved Rosemary Hunter, former deputy pension fund registrar at the Financial Services Board (now called the Financial Services Conduct Authority), against the FSB over its attempts to deregister funds that still had assets owing to former employees. She too lost her case in the ConCourt, principally on the basis that the court assumed the FSB had competent and responsible people running it, and had investigated a few funds (less than 20%) that had been deregistered as part of the FSB’s cancellations project.

Both cases ended up in defeat at the ConCourt, with no further avenues of legal redress available to the applicants. But the findings of the judges in favour of the pension fund trustees and regulator should be a cause for concern for employees, past and current, with claims to a share of actuarial surpluses or other assets sitting in pension funds of which they are members.

The Tongaat Hulett pensioners, in a recent missive to the 54 fellow pensioners that supported their legal fight, spell out several false or erroneous findings they believe were made by the judges who heard their case.

They claimed in their court papers that the trustees were able to deceive the courts by mislabelling R1.43 billion in contingency reserves as “excess assets”, a term not found in the Pension Funds Act. “Assets in contingency reserve accounts” – a term that is defined in the act – should be shared among the members when they are no longer needed to provide for contingent liabilities. It is at this point they become an actuarial surplus. The pensioners argued that by renaming these assets as something else, the trustees, who by law must balance the interests of employees and the company, were able to divert funds away from the members to the company.

The “excess assets” in the Tongaat case referred to the actuarial surplus plus reserves. The SCA was satisfied this was clear enough and “in order to ensure the continuing solvency of the fund, the employer had to carry the balance of the cost”. The decision to apportion these assets as it did was therefore reasonable, found the court. It was legal, said the court.

Letter of the law

But was it moral? Bruce Moor, one of the applicants in the case against the Tongaat Hulett Pension Fund, outlines what the loss of the case means in financial terms: of the R800 million “future actuarial surplus” in the fund at 2012 valuations, R107 million will go to the members and R693 million to the company. The pensioners had argued that a proper application of the intent of the law would probably have given them a 50:50 split, or R400 million. The actual fund rules allow for 80% of actuarial surpluses to go to members and 20% to the company, but by applying this to “excess assets”, the employer managed to grab three quarters of the actuarial surplus, says Moor.

The losers in this case must also pay legal costs of some R680 000 to the winners. The costs would have been about R500 000 higher had the pensioners’ lawyers not taken the last leg of the case on risk. In Rosemary Hunter’s case, she at least got off with no costs awarded against her, largely because she waged her fight in the public interest. However, she had to carry her own litigation costs, even though she did not stand to benefit financially from the court’s decision.

The prohibitive cost of fighting these cases against deep-pocketed adversaries will not be lost on others contemplating a similar legal challenge.

Before 2001, there was robust debate as to who owned surpluses accumulated in pension funds – the company or the beneficiaries. Many employers claimed these surpluses as their own, particularly in defined benefit or so-called balance of cost funds, since they could with some moral authority claim that they had carried all the risks. If the market went down, they still had to cover the fund’s liabilities. The law was sufficiently vague to encourage several employers to plunder their pension fund surplus assets without any legal sanction. Several billion rands worth of surpluses were snatched away from pensioners through this self-serving interpretation of the law.


In 2001 the law was changed to curb this looting by companies. The Pension Funds Act was amended to set rules for the allocation of surpluses. Where no fund rules on apportionment existed, it was up to the board to determine the split “taking into account the interests of all stakeholders in the funds”, with neither the employer nor the members having any right of veto on such decisions.

One way to get around this is to load the board with docile members, which is precisely what the Tongaat Hulett pensioners claim happened in their case, though this was refuted by the company (the SCA agreed, and found no proof of bias on the part of the pension fund board).

Another way to get around the law is to transfer members out of the fund at the lowest possible cost and then wind up the fund, grabbing whatever surpluses remain. This is also a way to circumvent the Pension Fund Act’s surplus allocation rules. This is what the Tongaat Hulett pensioners argued in their case. In Hunter’s case, the ‘grabbers’ were the fund administrators, who exploited the fact that the funds did not have trustees. The FSB was willing to give the administrators the power to decide what to do with the remaining assets, even if this was not necessarily in the interests of the members or beneficiaries.

The ConCourt’s decision to dismiss the appeal of the pensioners is disquieting in many respects. Cora Hoexter, a law professor at Wits University, writing in the Constitutional Court Review about Mark Shuttleworth’s attempts to challenge the R250 million in ‘fees’ deducted by the National Revenue Fund for transferring R2.5 billion of his wealth abroad, notes that only the wealthy are likely to lose sleep over the ConCourt’s decision to support this outrageous exit charge.

The Shuttleworth case was about the merits of exchange controls. In Shuttleworth’s case, the ConCourt “tolerated constitutional breaches that it had not hesitated to strike down in other contexts”, writes Hoexter. A billionaire emigrant was not the sort of applicant likely to elicit empathy from the court.

Pensioners and fund beneficiaries in these two cases may feel the same lack of love from the courts.

South Africa’s Ramaphosa orders inquiry at $142 billion state pension fund

JOHANNESBURG, Oct 17 (Reuters) – South Africa’s President Cyril Ramaphosa on Wednesday appointed a judicial inquiry into the 2 trillion rand ($142 billion) state pension fund, a government gazette said, following corruption allegations.

The PIC is Africa’s biggest pension fund and the biggest investor in South Africa’s economy holding a large volume of bonds issued by government and state-owned firms.

The gazette notice said it will investigate “persistent and continued negative reports about alleged improprieties regarding investments” by the Public Investment Corporation (PIC), which manages assets on behalf of the government employees.

Ramaphosa said the inquiry should issue a final report by latest April next year.

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In May, opposition parties called for an investigation into the pension fund’s chief executive Dan Matjila, accusing him of misuse of funds and careless investment decisions.

Matjila has denied the allegations and was also backed by the Treasury, which oversees the PIC. PIC’s spokesman could not immediately comment and referred any questions to the Treasury.

In 2017, Matjila was cleared of any wrongdoing by an internal audit committee that looked into the allegations.

But the collapse of VBS Mutual Bank early this year, where the fund has a 25 percent stake, and the resignations of two PIC employees linked to the fraud have raised new questions. PIC also has stakes in blue-chip companies across various sectors such as miner Anglo American (LON:AAL) Platinum AMSJ.J , lender Barclays Africa (JO:ABGJ) BGAJ.J and retailer Shoprite SHPJ.J .

A compelling argument for using SA’s pension funds to build infrastructure

John Oliphant was the youngest CEO of a JSE-listed company when GAIA Infrastructure Capital appointed him. He is the former Principal Executive Officer of the Government Employees Pension Fund (GEPF).

The GEPF is Africa’s largest pension fund, with assets more than R1.6 trillion.

During his time at the GEPF, the assets under its management doubled in less than five years. Oliphant serves as Chairperson of Third Way Investment Group. He is the Executive Director and Founding Partner of Third Way Investment Partners.

The Money Show’s Bruce Whitfield interviewed Oliphant for his weekly “ShapeShifter” feature.

In the interview, Oliphant made a compelling argument for investing South Africa’s pension funds in other areas of the economy, specifically in infrastructure.

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Alex Forbes snags Sanlam exec as new CEO

Alexander Forbes has appointed Dawie de Villiers as its new CEO, less than a week after announcing the the termination of former CEO Andrew Darfoor’s contract.

He will assume the position of group CEO and as a director of the company from November 1, 2018 as well as director of a number of the company’s subsidiary boards, it said in a Sens announcement.

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Court victory for municipal pension fund a blow for members

The high court in Pretoria has ruled in favour of a retirement fund and its administrator, overturning a determination by the Pension Funds Adjudicator, after a member complained to the adjudicator that he had received less than his expected pension payout because the fund had changed the rules on how the payouts were calculated.The matter, with Akani Retirement Fund Administrators, the Municipal Employees Pension Fund (MEPF) and the Dr JS Moroka Local Municipality as respondents, pertained to a complaint brought by John William Masangu to the adjudicator, Muvhango Lukhaimane.

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How digital tools can help financial advisers thrive

To future-proof their practices, all astute financial advisers need to have advisory processes and tools that are built around a strong digital capability. The speed of technological change, coupled with the imminent implementation of the Retail Distribution Review (RDR), have made digital essential to your success as an adviser.

This is according to Lizl Budhram, Head of Advice at Old Mutual Personal Finance, who believes that the integration of digital innovation is critical to the survival of financial advisers and offering customers a unique, personalised service.

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Combining retirement income options can balance capital preservation, growth

The future of retirement income is not a single product – either guaranteed or living annuities – but a combination, according to Glacier by Sanlam.

Investment-linked living annuities (ILLAs) are the preferred choice of retirees as they can choose their income level, control their exposure to risk and nominate beneficiaries to inherit the proceeds.

But on average, retirees need to draw 1% to 2% more income than the guideline recommendations from their living annuities, putting them at some risk if they live to an old age, which could result in them not having enough to live on and leaving little, nothing – or even debt – to beneficiaries.

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Rocco Carr, business development manager at Glacier by Sanlam, says Glacier believes that “retirement solutions will in future be a combination of products in which short-term capital preservation for inheritance (should both spouses pass away early in retirement) can be balanced with longer-term income protection against longevity, or the risk of outliving one’s money.”

The challenge isn’t the client with enough money, who needs an income of less than 4% of their capital, but the average client who needs to draw more. A solution is to combine living annuities and life annuities.

Carr says many people made the decision to go into living annuities at a time when guaranteed products gave a guaranteed return of around 5%, while living annuities were getting significantly higher returns.

“But things have changed, and we are looking at guarantees from a different perspective. In balanced funds, many living annuity investments are only getting 4% to 6% while guaranteed rates have picked up and are available with an inflation adjustment as well.

“We noticed some years ago that with people living longer, capital preservation is not a given anymore, and we developed a product to try and address this.”

In the past, a lump sum of R5 million, for example, could be split into two products, say R2 million and R3 million, with one of the two (due to legislation) needing to give at least R150 000 income per annum – making it unviable to split the lump sum.

Now, with changes to regulations, a lump sum can be easily split into three or four possible products, ensuring retirees get the best of both worlds.

“Our view was that instead of buying a single living annuity, a client should buy more than one living annuity, and if need be, at some stage in the future, the client can switch one of them to a life annuity. The client should split the R5 million – and, as an example, buy a guaranteed annuity with R2 million and a living annuity with R3 million – to collectively get a better outcome.”

Carr says many people shy away from life annuities because they don’t accommodate inheritances to beneficiaries. “Our opinion is that retirement money is for retirement, not inheritance, which is a bonus.”

Living annuities allow for income fluctuation, and a few years into retirement, clients can buy a guaranteed product at a better rate than they could earlier.

“There is no specific solution for all clients. We use all the possible tools available and build solutions for each client’s individual needs. By combining and splitting we are more able to project the outcome and manage clients’ expectations while protecting them against the continued income requirements associated with living longer.

“Living annuities offer good opportunities, but they are not the only opportunity,” he adds.

Combining products can ensure that retirees’ month-to-month income requirement is catered for, sustainably. According to Glacier by Sanlam, to guarantee as much of the month-to-month income as possible should be the main priority of every investor and financial planner.

Brought to you by Glacier by Sanlam.

Don’t blame the Guptas if your retirement fund has been captured

You shouldn’t blame the ANC, or the Guptas for that matter, if your pension fund has done badly over the last 10 years, no matter what you read in the media, says Steven Nathan, founder and chief executive of 10X Investments.

“We know that South Africa is not currently in a great place, economically or politically. We know there is a recession, a weak currency, emerging market contagion, corporate scandals and state capture. That is nothing new, but it is being amplified in the media,” he said.

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Nathan said the so-called investment experts – fund managers and advisers – are latching on to this bad news to advise that this is a good time to get your money offshore. “They are saying that SA might be a good place to retire, but not to invest in.”

“We have a different view and message,” Nathan said. “Don’t look at these scary headlines and say, ‘Oh this is why my pension fund has not done well in the past, and probably why I won’t do well in the future.’ It is just not true.”

We are hearing a lot of talk about recession, Nathan said. “‘They’ are saying if you are in a recession you are not going to get good returns from your retirement savings investments. We are saying rather look at the facts, not the emotions.”

Citing an example, he said there is no direct link between GDP growth and investment returns. “Over the last 10 years, GDP growth in South Africa has been terrible, a measly 1.8% per year, barely ahead of population growth. So there has been very little real economic growth in South Africa.

“Yet a well-balanced high equity portfolio, as represented by the 10X High Equity fund, has given double digit returns over this period.”

Nathan noted that a South African retirement fund portfolio is a very well globally diversified portfolio. More than 50% is invested in rand-hedge and international stocks that are not exposed to the South African economy.

“Your actual exposure to corporate South Africa is very small, less than 25% of your overall portfolio, Nathan said. Even if you are quite negative about South Africa going forward, your overall exposure is quite limited.

“It is important to know that when you retire in South Africa you are going to be spending rands. The important thing is to ensure that your portfolio beats rand inflation, and over the last 10 years a high equity fund has beaten inflation handsomely,” Nathan said.

The question is: Why have some portfolios not done as well as they should have?
The answer is: Because of the industry, not because of the ANC, or the Guptas.

Nathan pointed to research showing that more than 90% of fund managers have underperformed the index over the last five years. “That is another reason why many investors have fared poorly,” he said.

Research also showed that many investors lose out because they switch portfolios, usually at the worst time, because they are chasing past performance. “They tend to buy things that have done well and sell things that have done badly and by so doing they erode returns further. The combination of high fees, underperforming fund managers and switching can more than halve your retirement capital” said Nathan.

“We don’t know if the JSE will beat the S&P500 over the next 10 years. No one does. Here is what we do know: Over the last 10, 20 years or longer, if you had invested in a well-diversified portfolio, paid low fees, didn’t try to beat the market and stayed invested, you would have done very well invested in a high equity balanced portfolio in SA. You would have handsomely beaten inflation and, together with a good savings programme, should be well on track to a good retirement.

“Investors can still achieve very good retirement capital by investing in a well-diversified portfolio in South Africa. But they must take charge. If people don’t take charge, it doesn’t matter what the economy does, or what the Guptas do, or what happens with state capture. Those who continue to have their retirement funds captured by the industry are going to underperform significantly, in good and bad times.

“There is no need to take all your money offshore, unless you are leaving South Africa, in which case it would not make sense to have your liabilities in a foreign currency, say pounds or Aussie dollars, and your assets in a SA-domiciled portfolio,” said Nathan.