30 November 2014 | R24,00 including VAT | www.moneymarketing.co.za First for the professional personal financial adviser INSIDE your November issue of MoneyMarketing... Binder regulations Increasing competition in the UMA market. Page 8 INVESTING INSIGHTS Interest rates… The combination of stubborn inflation and a sluggish growth outlook continues to pose a difficult dilemma for monetary policy MPC, September 2014 SA interest rates will still have to normalize over time, but clearly the pace of normalization will be relatively gradual and certainly more gradual than many analysts anticipated just a few months ago. Kevin Lings, Stanlib Equity markets Are share prices and underlying company fundamentals still correlated? Page 12 Income protection Four ways to combat rising medical costs Cover for your most valuable asset from day one. Pages 19 - 25 Page 31 Set up a client contract A s a financial adviser you will have contracts with those whose products you are authorised to sell. Your client will have a contract with the financial services institution whose products they buy. This forms the basis of the agreement and any future dealings. But do you have a contract with your client? Changing environments and legislation make contracts essential. Speaking at the August FIA/Altrisk Power Round Table, financial adviser and CFP Anton Swanepoel proposed that advisers have two contracts with clients – a service agreement and an advice agreement. These form the basis of a professional relationship and define the terms and roles of each party, and expectations. Not only do contracts formalize the adviser client relationship - and take it to a more professional level, they also ensure that should a dispute arise there is documented evidence to present. “Have an agreement with your client that defines obligations and responsibilities,” said Gustav Fichardt of Webber Wentzel. “If something goes wrong this is the source document to see if you have breached and are exposed.” Client Contract? Financial adviser Poor record keeping is at the centre of many FAIS Ombud determinations. In an insurance policy – Swanepoel observed that a decision to pay a claim is based on the details of the contract. A contactural relationship exists between the adviser and client – this needs to be documented into a legal agreement. CONTRACTS AND TRUST Contract/ policy Contract/ accreditation Financial services provider Writing in a Harvard Business Review article in 2009, Deepak Molhatra says that contacts are designed to reinforce trust and reduce risk. “Trust requires that parties see each other as ethical and well-intentioned.” Contracts can enhance transparency and ensure that each party knows where they stand and what to expect.” When managing investments, we never lose sight of the fact that it is your money we’re looking after, and we do so with fastidious attention to detail. We even invest in our own funds, so that when we make decisions that affect your money, we’re making decisions that affect our own money too. It’s just one of the ways we ensure we align our long-term interests with yours. Because when you understand how hard someone’s worked for their money, you go to great lengths to take good care of it. For more information ask your financial adviser, call 0800 600 168, email [email protected] or visit psgam.co.za Nick & Barry {00065} Whose money is it anyWay? Collective investment schemes in securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. A feeder fund is a portfolio that, apart from assets in liquid form, consists solely of participatory interests in a single portfolio of a collective investment scheme. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments Limited. Commission and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Different classes of participatory interest can apply to these portfolios and are subject to different fees and charges. PSG Collective Investments Limited is a member of the Association for Savings and Investment South Africa (ASISA) through its holdings company PSG Konsult Limited. PSG Asset Management (Pty) Ltd is an authorised financial services provider. FSP 29524 80x220_PSGAM_Whose000065.indd 1 09/10/2014 09:08 NEWS & OPINION 2 30 November 2014 Use an ILLI for nondiscretionary spend E arlier this year Glacier by Sanlam introduced the ILLI – Investment-Linked Lifetime Income plan. A combination of a guaranteed annuity and a living annuity, the ILLI protects clients from longevity risk and gives them flexibility in managing their funds. Living annuities are popular for their flexibility in investment selection and drawdown rates, and for the legacy aspect with annuitants being able to leave funds to beneficiaries. But, they cannot offer a guarantee that your income will last for as long as you live and there is a risk that you can outlive your money. Patrick Sheehy, head of product management at Glacier says that the idea behind the ILLI was to funds that have built-in unit price guarantees to limit the risk of incomes falling when markets are performing poorly. Why the need to consider longevity protection? Sheehy says we are stuck in the paradigm of a 75 - 80 year life expectancy. Today for a couple aged 65 – there is a 50% chance that one of them will live to 94. While we may all want to be able to leave a financial legacy to our children, for most South Africans it’s really not a viable consideration and trying to do so may seriously compromise our retirement well-being. But if this is a requirement you should consider using the ILLI to provide for non-discretionary expenses and an ILLA for discretionary expenses and to leave a legacy. retain many of the features of the living annuity, while offering longevity protection. The new product from Glacier provides the opportunity to grow income in real terms by giving clients the opportunity to invest in asset classes which are expected to provide investment returns in excess of inflation, while offering longevity guarantees. In the ILLI, an income in the form of a set number of units is guaranteed to be paid for life, with the value of those units growing in line with the investment performance of the underlying investment portfolio. The client and their financial adviser will decide on the composition of the investment portfolio. There is a wide range of unit trust funds to choose from, including Living annuity Complete flexibility Some form of guaranteed income - ILLI Discretionary spend Non-discretionary spend Retirement income SUBSCRIBE TO 30 November First for the 2014 | R24,0 0 includ professional personal fi Binder regulations Increasing compe the UMA marke tition in t. Page 8 Address: INVESTING INSIGHTS Interest rate s… Fax: ber 2014 SA interest rates will still have to normalize over time, but clearly the pace of normalizatio n will relatively gradu be al certainly more and gradu than many analys al anticipated just ts a few months ago. Kevin Lings, Date: ADVERTISING ADVERTISING EXECUTIVE: Lisa Vermaak Cell: 082 330 7701 Email: [email protected] © Copyright Money Marketing 2014 DISTRIBUTION & SUBSCRIPTION Petro Cunning Tel: (011) 217 3222 Email: [email protected] PRINTING Four way to combat risins medical costs g Set up a client contract A Page 31 Not only do formalize the contracts adviser client relationship it to a more and take professional level, they also ensure that should a dispute arise there is documented evidence to present. “Have an agreem ent with your client Poor record defines obliga that at the centre keeping is tions and of Ombud determ many FAIS responsibiliti es,” insurance policyinations. In an said Gustav – Swanepoel observed that Fichardt of pay a claim a decision to Webber Wentz is based on the details of the “If something el. contract. goes A contactural wrong this is the relationship exists betwee source docum n the advise ent and client – r to see if you this have be documented needs to breached and into are a legal agreement. exposed.” Client Contract? Contract/ policy Financial adviser Contract/ accred Whose mo ney is it an yWay? itation Financial servic provider es CONTRACTS AND TRUST Writing in a Harvard Busines Review article s in 2009, Deepak Molhatra says that designed to reinforccontacts are e trust and reduce risk. “Trust require s see each other that parties as well-intentione ethical and d.” Contracts can enhance transparency and ensure that each where they stand party knows and what to expect.” When mana ging invest ments, we attent ion never lose to detail. sight of the We even decisi ons invest fact that it that affect is your mone our own mone in our own funds, so when you y we’re lookin that when under stand y too. It’s g after, and we make just one how inform ation decisi ons we do so with ask your financ hard someone’s worke of the ways we ensure that affect fastid ious d for their ial advise we align our your mone r, call 0800 money, you y, we’re makin long-term 600 168, email go to great interests with g length s to info@psgam yours. Becau take good .co.za or visit se care of it. psgam .co.za For more Collective not a guideinvestment scheme s in securitie schemes, to future performance. s (CIS) are which levy generally CIS are traded participatory their medium - to interests in own charges, which at ruling prices long-term go up or down. a single portfolio and can engage investments. could are included A schedule of of a collectiv result in a higher in borrowin The value of participa fees and charges fee e investme g participatory in the overall costs. tory interests nt scheme structure for these and scrip lending. and maximu (units) may A fund portfolio . Fluctuat South Africa interest can apply Forward pricing go down as is used. Them commissions is availablions or moveme s. A feeder fund of funds is a portfolio (ASISA) through to these well as up portfolio nts in the is a portfolio that e on its holdings portfolios and are that, apart invests in portfolio and past performance subject to s may be capped request from PSG exchange rates may company s of collectiv from at any different fees Collective PSG Konsult e investme is Investments cause the value of assets in liquid form, Limited. PSG and charges time in order for Limited. Commis underlying them to Asset Manage consists solely nt . PSG international sion and incentive ment (Pty) Collective Investme be managed in accorda investments of Ltd is an authorise nts Limited s may be paid to is a membe nce with their mandat hose000065.indd d financia r of the Associat l services provider e. Different and if so, 1 ion for Savings classes . FSP 29524 and Investme of nt 80x220_PSGAM_W 09/10/2014 PUBLISHING TEAM GENERAL MANAGER: Dev Naidoo PUBLISHING MANAGER: Sandra Ladas Email: [email protected] PRODUCTION MANAGER: Angela Silver Email: [email protected] ART DIRECTOR: David Kyslinger Printed and Bound by Paarlmedia Johannesburg Office: 5 Protea Place, Third Floor, Sandton, Johannesburg, 2196 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 217 3210 Fax: +27 (0)11 217 3209 09:08 {00065} EDITORIAL Stanlib Income protection Cover for your most valuable asset from day one. Pages 19 - 25 Nick & Barry Subscriptions Mail: P.O. Box 784698, Sandton, 2146, South Africa Tel: (011) 217-3222, Fax: (011) 217-3209 12 months – R250 (including VAT) EDITOR: Patricia Holburn Tel: (011) 615-7002 Email: [email protected] LAYOUT & DESIGN: Kyle Martin r Are share prices and underlying compa ny fundamentals still correlated? Page 12 s a financia l adviser you will have contra cts with those whose products you are authorised to sell. Your client will have a contra ct with the financial service whose produ s institution cts they buy. This forms the basis of the agreement and dealings. But any future do you have contract with a your Changing enviroclient? nments and legisla tion contracts essentmake ial. Speaking at the Augus FIA/Altrisk t Power Round Table, financia l advise r and CFP Anton proposed that Swanepoel advisers have two contra cts with clients service agreem –a advice agreem ent and an ent. These form professional the basis of a relationship define the terms and and roles of each party, and expect ations. The combinatio n of stubborn infl ation and a sluggish growt h outlook continues to a difficult dilem pose ma monetary policy for MPC, Septem email: Signature: nancial advise INSIDE your November issu e of MoneyMa rketing... Equity mar kets Name: Tel: ing VAT | www. moneymark eting.co.za EDITOR’S NOTE Patricia Holburn A great divide Have you read Piketty? I have not (yet). Thomas Piketty is a French economist – and author most well known this year for his work and ideas on inequality. Here in SA we know about inequality. It goes like this. For those above a mythical line when you have no water you shower at the gym. For those below – you make do with buckets if you are lucky. That’s a bit blasé – but noticeable. Our constitution enshrines basic human rights and those include access to services like water. The “Red Book” financial services roadmap for SA outlines how the financial sector should look – making it safer and more accessible to all. Accessibility to financial services is a South African policy. Gill Marcus said so – at her last MPC media presentation. So while you don’t want to give people loans they cannot afford to pay back, you do need to ensure they have access to financial services – and that includes credit. As we near the end of the year I think the accessibility question we need to ask ourselves is why is credit the most accessible product? Why can you seemingly buy very expensive credit so easily and yet you cannot buy a savings product without ten pages of rules and rigmarole? Why is it – is it? - so difficult to access a financial planner who will guide you in the management of your finances? Why is the building debit side of financial service products not as prevalent as the credit side? South Africa has lots of big questions to deal with – and if you ask the most pressing issues employment and electricity (now water too) will pop up. These accessibility issues are about people accessing dwindling resources – and rebuilding these crumbling services. Financial services are robust and healthy, well regulated and world class. We are innovative. We are competitive. Qualified, experienced. Accessibility is the next big challenge. I wish you a very good month. Patricia @MMMagza [email protected] Published on behalf of Media24 Magazines by New Media Publishing (PTY) Ltd. EXECUTIVE DIRECTORS: John Psillos, Irna van Zyl MANAGING DIRECTOR: Bridget McCarney Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: [email protected] Unless previously agreed in writing, Money Marketing owns all rights to all contributions, whether image or text. SOURCES: Shutterstock, supplied images, editorial staff. While precautions have been taken to ensure the accuracy of its contents and information given to readers, neither the editor, publisher, or its agents can accept responsibility for damages or injury which may arise therefrom. All rights reserved. © Money Marketing. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, photocopying, electronic, mechanical or otherwise without the prior written permission of the copyright owners. © Money Marketing is not a financial adviser. The magazine accepts no responsibility for any decision made by any reader on the basis of information of whatever kind published in the magazine. YOU ONLY KNOW TRUST ONCE YOU EXPERIENCE IT At Auto and General, the opinions and ideas of our brokers have helped to forge a dynamic and solid relationship. Join the Auto and General family as a broker, and be part of a strong and successful partnership. Call us on 0800 100 011 to join us as a broker partner. Auto & General is an authorised financial services provider (FSP licence number: 16354). NEWS & OPINION PROFILE 4 30 November 2014 Your product will differentiate you Ian Middleton is managing director of Masthead, a former legal adviser, a Harley Davidson owner and fan, and passionate about getting advisers to build sustainable businesses I have been with Masthead since inception. In October 2014, Masthead celebrated its 10th birthday. 10 years have passed so quickly that it seems like yesterday when Masthead was launched. Today we work with around 3 000 independent advisers and 1 000 tied agents. In the next 10 years we’d like to increase our base of advisers and ensure good quality advice to consumers If we can help advisers build capital value in their businesses then we have achieved an objective. It is difficult to quantify the impact of TCF. In terms of focus of mind, it has had an effect, and at a corporate level there is more awareness around product pricing and client communications. Advisers feel they have been applying TCF since the introduction of FAIS. In a way TCF was a bit of an indictment on the industry – that doing the right thing had to be legislated. FAIS has made our industry more professional. It introduced standards – competency, ethical and operational. I am positive about FAIS – but again the impact is hard to quantify. The headlines don’t always reflect the positive side and benefits of the industry. The negative headlines need to be seen in context. Consider that the FAIS Ombud has around 20 to 30 determinations per year, while some six million are sold long-term policies a year. Advisers need to demonstrate that they did the right thing. I like to use the analogy of a doctor. Every time you go to a doctor, they make notes about your medical condition. If you see another doctor, they know what was discussed if they have your file. In our world record keeping is critical. You need to keep records, in writing or on a memory stick, of what was discussed and the rationale for the advice given. lot of people skittish, and if there is no certainty it is difficult to plan. Advisers are resilient – they have been through many changes. Certainty will enable them to plan their business models for the long term. With RDR, advisers will need to know their value proposition and what their product offering is. This will differentiate them from online calculators and robo-advisers. You need to take a long term view and know where you want to go if you are starting out in the industry. If you are thinking of making lots of money quickly, don’t start out. There is money to be made but, like professional sports, if you base your expectations on the earnings of say the top ten tennis players, you are deluded. Many younger advisers have a good business mindset when entering the industry and are looking to build a business. They know what value they add and how to price it. Is there a potential customer base? Absolutely! I am part of HOG – the Harley Davidson Owner Group. I bought my first Harley around 12 years ago – I suppose in a way it was a midlife crisis. I like the brand, the freedom of the open road. When I can, I bike to work. I also play golf. I like sports and reading sports biographies. Graham Smith, rugby players, Into Thin Air by Jon Krakauer. Lance Armstrong was my hero till he let me down. But the Tour de France has some fantastic lessons for life and business. For me balance is important – work is not everything. Sometimes it is okay to do nothing. VERY BRIEFLY... Mazars South Africa announced the merger of Mazars Business Rescue Services with insolvency specialists Progressive Administration effective from 1 September 2014. Maarten Boddeüs, a Figlo specialist from the Netherlands has joined the Yellowtail Business Solutions team in South Africa. MMI Holdings Limited announced that the transaction by its Metropolitan International division to acquire a significant majority stake in Kenyan insurer Cannon Assurance Limited has been approved without any conditions. The Actuarial Society has approved the establishment of an unsecured credit sub committee mandated to investigate current credit and provisioning practices in South Africa. Boutique investment management firm, Perpetua Investment Managers, launched its two core unit trust offerings to the investing public on 1 October 2014. Compli-Serve SA announced that its news portal CompliNEWS has been accredited with CPD points. Two of South Africa’s top financial and economic commentators -- Chris Hart and Glenn Silverman from Investment Solutions -- have written and published Half Way There, a book that offers a comprehensive account of the five members of the BRICS and their relationships with one another and with the rest of the world. I am looking forward to RDR because it will give us some certainty. The first time we heard about RDR was November 2011. Questions raised then got a MAKING AN IMPACT Collaborating to make a difference A ccording to recent statistics 33 million primary schoolaged children in Sub-Saharan Africa do not go to school. According to Rob Taylor, director at Columba Leadership Academy, “young people and consequently our society, are at unacceptably high risk due to poor educational standards, high drop-out rates at school, massive youth unemployment, poverty and HIV/AIDS.” The Columba Leadership Academy, started by Taylor, provides valuesbased leadership programmes to empower young people in tough realities to connect with their full potential and create groups to drive sustainable social change. With the help of Aon South Africa, Columba was able to extend the two year leadership course to students at Minerva High School in Alexandra, Johannesburg. The course began with a three month community engagement process, which was followed by a six-day residential academy at a game lodge. The program is concluded with eighteen months of practical leadership projects, evaluation and support. “Besides sponsoring children to go on the leadership training with Columba, Aon also actively recruits young people from the academy for our learnerships,” says Leo Morwe, chief human resources officer Aon. These students went on to create a movement called Marking Incredible Change (MIC) that is aimed at positively impacting their generation. Investec Asset Management announced the appointment of Nick Marsh as associate principal. Nick joins from LGV Capital in London where he was an investment director. Vitality members will be able to claim R750 from their Discovery Health Medical Scheme day-to-day benefits if they have funds available for their Vitalitylinked fitness devices. Vitality currently has partnerships with Fitbug, Fitbit, Jawbone, Garmin, iHealth, and Polar, and members can get up to 25% cash back on a selected range of fitness devices with the HealthyCare benefit NEWS & OPINION 30 November 2014 5 Legacy retirement products offer value P OGILVY CAPE TOWN 72720/E eople who invested in legacy retirement annuity (RA) products – also called old generation RAs –typically received above inflation investment returns at maturity, according to research by Sanlam. The research involved individual analysis of all of Sanlam’s pure savings legacy RA policies that matured in 2013, and was conducted to determine the value of these old generation products to clients, says Anton Gildenhuys, chief executive of Actuarial at Sanlam Personal Finance. The research study found that by far the majority of policies achieved positive real returns (above inflation) after fees and taxes. Moreover, 60% of the policies achieved 2% above inflation. This, says Gildenhuys, is despite the impact of early termination and other alteration charges, and despite the low premiums. The exception is offshore policies, which achieved poor investment returns, and policies where policyholders paid very small premiums for less than a quarter of the policy term. Policyholders who do not terminate their RA policies before maturity receive excellent value from legacy products The policies analysed were divided into ‘clean’ policies (where policyholders paid all their premiums until maturity) and policies with ‘alterations’ (where policyholders made their policies paid up before the maturity date). “It is important to note that 70% of all the legacy policies analysed received monthly premiums of less than R500. Having access to retirement products at such low premiums is extremely limited today, if not impossible to find,” says Gildenhuys. Of the clean policies, all delivered a positive real return – returns in excess of inflation. More than half (57%) achieved a real return of between 2% and 4%, and 39% achieved real returns above 4%. “This is an exceptional result which should exceed client expectations,” he says. The policies with alterations also showed good results. Where premiums were paid for more than 75% of the policy term, 96% achieved a positive real return. With premiums paid for 50% to 75% of the term, all but nine policies achieved a positive real return. Premiums paid for 25% to 50% of the term resulted in all policyholders at least getting their premiums back (with 88% of policyholders achieving a positive real return), despite the changes they made to their contract. Where premiums covered less than 25% of the term, only 4% showed a negative internal THE FURTHER YOU TRAVEL, THE MORE OPPORTUNITIES YOU’LL FIND. With a yearly round trip that stretches over 16 000km, the grey whale has one of the longest migrations of any mammal in the world. The journey is taxing, but they undertake it to find the most favourable conditions for welcoming their progeny into the world. Like us, the grey whale knows that to get the best results, you often have to go a bit further. This is why, together with our global asset management partner Orbis, we give you access to investment opportunities beyond the 1% of the global equity market represented by South Africa. We know that the choices out there can be overwhelming, so we’ve narrowed down the options to what we think are the most favourable offshore investment opportunities, in the Orbis Global Equity Fund. If you share the grey whale’s attitude towards the future, call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za rate of return (with 52% of policyholders achieving a positive real return). This means the policyholder received less than the sum of his or her premiums at maturity. “The main reason for poor returns with some of these policies is due to alterations where premiums were reduced dramatically, or stopped, very early in the term of the policy.” Gildenhuys says the research results confirm that policyholders who do not terminate their RA policies before maturity receive excellent value from legacy products. With limited investment choices, investors generally remain in the asset allocation initially selected for the duration of the policy, with above-average results. “This indicates that sticking to one’s investment choices and not switching regularly between underlying investment funds usually leads to good returns.” “The belief that there is something wrong with these products has led to policyholders taking their accumulated savings, paying an early termination charge, and transferring to new generation products that they believe will offer better value for money.” Note: Legacy products are policies taken out at least 15 years ago and usually invested in a single, balanced fund. They have low monthly premiums – sometimes less than R250 – and are often supplementary to other retirement provisions of policyholders. (iii) (ii) (iv) (v) (i) Artist’s impression. (vi) Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. Commission and incentives may be paid by investors to third-party intermediaries and, if so, would be included in those investors’ overall costs in investing in the Fund. Subscriptions are only valid if made on the basis of the current prospectus, which is available upon request from Allan Gray Unit Trust Management (RF) Proprietary Limited, a member of the Association for Savings & Investment SA (ASISA). A schedule of fees and charges and maximum commissions is also available on request. Allan Gray Proprietary Limited is an authorised financial services provider. 72720-Whale 155x220.indd 1 2014/09/29 4:42 PM 6 NEWS & OPINION 30 November 2014 Fiduciary Matters Brought to you by the Fiduciary Institute of Southern Africa (FISA) Louis van Vuren T he fourth annual FISA Conference was held in Johannesburg on 18 September 2014. Following below are synopses of the ten presentations made at the conference, under the banner of the overall theme: ‘Are you fit for the challenges?’ Anne Klein, head of the Maitland Private Client Team in Johannesburg, spoke about the Foreign Account Tax Compliance Act. This new piece of legislation in the USA will have far reaching implications for any entity managing funds on behalf of anyone with American citizenship or permanent residence. Although the international application and the impact on South Africa is still being negotiated, it could lead to even trustees of South African trusts with American beneficiaries being placed under the obligation to report income and capital distributions to such beneficiaries to American tax authorities. Ronel Williams, a fiduciary specialist at Nedbank Private Wealth in Cape Town, referred to the huge compliance burden already placed on fiduciary practitioners, with reference to deceased estates and trusts. She dealt with some of the provisions of ten pieces of Conference stimulates lively fiduciary discussion legislation placing this burden on practitioners, including the Administration of Estates Act, the Trust Property Control Act, the Attorneys Act, the Promotion of Administrative Justice Act and the Promotion of Access to Information Act. Rowan Stafford, an associate at Eversheds Attorneys in Johannesburg, shared some of his insights on so-called “sham” trusts, alter ego trusts, and generally ‘looking behind’ the trust form. Stafford holds a master’s degree in law (LL M) and wrote his thesis on this topic, which was referred to in a recent Western Cape High Court judgement. He reiterated that for a trust to be declared a sham, none of the trustees nor the founder must have had an honest intention to create a trust. He also proposed that the question should be answered with reference to the essential elements of a trust in South African law. Messrs Anton Maskowitz of Sanlam Private Investments, Harry Joffe of Discovery Life, and Chris Murphy of Legacy Fiduciary Services, took part in a panel discussion on the challenges of dealing with lay persons as co-executors and co-trustees. Technical nature of fiduciary practice a challenge Due to the highly technical nature of fiduciary practice it can be very challenging to deal with persons without any knowledge or experience in these roles. It is also common for such lay persons not to comprehend fully their fiduciary duty and potential liability. All three participants agreed that these persons can play a useful role, but that the fiduciary professional should take control and manage the situation with sensitivity and professionalism. Professor Marius de Waal of the Law Faculty at the University of Stellenbosch spoke about the potential confusion between the legal figures of modus, suspensive condition, and resolutive condition when drafting wills and trust deeds. He pointed out how testators can mean to achieve one goal, but that inaccurate drafting could lead to that goal not being achieved because the wording used created different obligations for heirs and beneficiaries from those intended. James Faber from the Law Faculty at the University of the Free State dealt with the tension between the requirement that a will must be in writing and in hard copy on the one hand, and the technological advances in communication and document management on the other. He referred to developments in countries like Australia, New Zealand, the United States and Canada. In Australia wills created on smartphones and of which only an electronic copy exists, have been accepted by the courts in some of the federal states. He also referred to the need to authorise someone to be able to access one’s electronic accounts, records, and social media profiles after death. Valuable material may be stored in cyberspace, eg photographs, documents relating to patents and other intellectual property. Professor Leon van Vuuren of the Ethics Institute of South Africa posed some challenging questions about ethical behaviour. He suggested a quick ethics test consisting of five questions - Is it legal/procedural? How will it look in a newspaper? Is it consistent with my professional values? Is it fair to all? If I do it, will I feel bad? If one is uncomfortable with the answer to any of these questions, it is a good indication that it is a slippery slope. The Chief Master of the High Court, Adv. Lester Basson, spoke about trends in the number of deceased estates reported and trusts registered per annum. He also reported on progress with the process to move to a paperless regulatory and compliance process in the offices of the Master across the country. Adv. Basson shared his vision of a paperless environment, with the exception of the documents which are by law required to be in hard copy. Copies of the above presentations are available on the FISA website at www.fidsa.org.za This article was written by Louis van Vuren, Acting CEO of FISA, the Fiduciary Institute of Southern Africa. 16347/E WE PREACH CONSISTENCY BECAUSE WE PRACTICE CONSISTENCY. Inflation Plus Fund Top quartile over 3, 5, 7, 10 years Balanced Fund Top quartile over 3, 5, 7, 10 years Equity Fund Top quartile over 3, 5, 7, 10 years Global High Yield Bond Fund of Funds Top quartile over 3, 5, 7, 10 years Enhanced Income Fund Top quartile over 3 and 5 years Source: Morningstar If you’d like to benefit from our long-standing philosophy based on prudence and consistency, speak to your financial adviser or visit www.prudential.co.za/our-funds Consistency is the only currency that matters. Source: Morningstar data for periods ending 31 August 2014. Assets are managed by Prudential Investment Managers (South Africa) (Pty) Ltd, which is an approved discretionary financial services provider #45199. Collective Investment Schemes (unit trusts) are generally medium to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to future performance. Unit trust prices are calculated on a net asset value basis, which is the total book value of all assets in the portfolio divided by the number of units in issue. Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used. All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates. 8 PRACTICE MANAGEMENT 30 November 2014 Increasing UMA competition Yurika Pistorius Compliance Corner H ealthy competition is the underpinning of our society and economy. It ensures providers of service are up-to-date, efficient and productive. Competition provides the consumer with the best possible product. In killing or eliminating the competition, one may win the battle, but one will definitely lose the war. In his book Ishmael Daniel Quinn states: “Any [group] that exempts itself from the rules of competition ends up destroying the community in order to support its own expansion.” The binder regulations, which came into effect on the 1st of January 2012, stipulate that either an Underwriting Manager Agent (UMA) or a Non-Mandated Intermediary (NMI) may be a binder holder. The UMA acts as an agent of the Insurer (ie as if the UMA is the Insurer) and does not act on behalf of a policyholder, potential policyholder or an independent intermediary. The binder regulations allow an insurer to pay a binder holder a fee for the services rendered under the binder agreement. This fee must be reasonably commensurate with the actual costs incurred by the binder holder associated with rendering the services under the binder agreement, with allowance for a reasonable rate of return for the binder holder. The criteria are necessary to deter circumventions of the commission regulations and inappropriate incentives. The regulations do not affect any commission that may be payable to an intermediary for the rendering of services as an intermediary. The UMA does not solicit policies from, or market to, the public or any segments of the public on behalf of the insurer. A UMA performs binder functions and/or other outsourced services on behalf of the insurer and provides specialist technical insurance skills and knowledge in a particular type of business. These binder functions are regulated by the binder regulations, and also by a written agreement between the Insurers and the UMA. The NMI, on the other hand, acts as a representative or an independent intermediary, other than a mandated intermediary or a UMA. An NMI simultaneously acts or may act on behalf of an Insurer and a policyholder. The Insurer ‘outsources’ these binder functions to technical specialists or experts. The UMA predominately underwrites specialised or commoditised insurance. The UMA is prohibited from marketing or selling insurance policies to the policyholder, so these functions are performed by the Insurer and intermediaries. Some reasons why an insurer would ‘outsource’ functions to a UMA include the cost of overheads if the Insurer performs the functions internally, as well as if there is a lack of required expertise internally to provide the service or product offering. The UMA is prohibited from marketing or selling insurance policies to the policyholder, so these functions are performed by the Insurer and intermediaries This is in relation to the policies to which the binder agreement relates, or to an outsourcing fee payable for the outsourced functions performed by the binder holder on behalf of the UMA Underwriting Manager Agent NMI Non-Mandated Intermediary insurer, provided that the commission regulations are complied with. The UMA is remunerated through a binder holder fee, and is not remunerated through commissions. The UMA, unlike an intermediary is solely an agent for the insurer. Competition in the market is increasing due to cut throat margins. UMA’s are only entitled to a binder holder fee for services rendered under the binder agreement; however, they can share in the profits of the insurance business as well. While an NMI can also be paid commission on top of the binder holder fee, subject to that the intermediary may not be remunerated for the same or a similar service twice. The UMA is in competition with not only other UMA’s but other types of binder holders as well. What will differentiate one UMA from another is not necessarily price, but rather good, sound technical underwriting, the selection of risks, claims management, the use of economies of scale, expense management and the use of technology and creating efficiencies. Yurika Pistorius is compliance officer at Compli-Serve SA 0800 50 50 50 One Company | One Focus | One Number DO YOU WANT A PE OF 10+? Warwick is acquiring Independent Investment and Financial Planning Brokerages across South Africa. All existing FSP’s will be considered and many have already been acquired! Contact Wendy on 0800 50 50 50 INVEST COVER TRUST OFFSHORE warwickwealth.com An owner of Authorised Financial Services and Registered Credit Providers in South Africa, Mauritius and Guersney. Money Marketing.indd 1 2014/04/08 11:12 AM PRACTICE MANAGEMENT 30 November 2014 9 The Gallows of Political Wisdom Ian Kilbride The Insider Chronicles S o in a narrow revolt against the William Wallace of the 21st century, Mr Alex Salmod, the Scots have ‘given up their freedom’, or at least continue under Westminster’s rule. Other than a brief moment, when the ‘ruling establishment of Westminster’ panicked following a poll showing the YES tartan hordes ahead, a moment that even saw Mr Dave Cameron call his own party the ‘effing Tories,’ was there ever any real doubt? Yes there was and at times the head of the NO vote Alistair Darling looked seriously like the YES vote’s secret weapon, but even that stiff twit could not get the Scots to jump ship and go all native! Because my friends Independence, be that for any entity, a nation or even an individual, is a hard call to make and take. If you don’t believe me then just ask any parent of a teenager or 20 something, who is trying to get them to leave home and move out, familiarity may breed contempt, but it’s a security blanket and sense of comfort that is hard to walk away from! In this particular case, an age old state of mutual suspicion and yet respect, and after 300 years of Union, Scotland and England are like two mighty trees, but trees from different seeds who have grown side by side together. Their strong limbs are interwoven and have been supporting each other for centuries, they are not so simply separated, they need each other. Yet the debate had me thinking, what about an independent, Gauteng, Western Cape, Kwazulu Natal or, bless them, Eastern Cape? Or what if the English had their own vote on independence, for years the joke in Britain was always that a poll had shown that only 40% of Scots, 30% of the Welsh and 20% of the Northern Irish, but 80% of the English were happy to let them go! This is not that surprising when you learn that in all of the four countries, that make up Great Britain, the Englishman receives the lowest amount of financial support from the tax spending of the treasury. We are better together, or so the politicians in many countries cry. Bigger countries, bigger unions of nations, an expanded US, EU or even AU, but why not a ‘Free State of Cape Town’ or a ‘Principality of Durban’? Were we not once all part of smaller more culturally similar types, is the US not really still a nation of 50 smaller autonomous states and where would ‘you’ choose to live if such a break up occurred here in Southern Africa? Me, well I would live in the more egalitarian and business centred Johannesburg, but I would escape the business buzz for holidays in ‘Europe in Africa’, namely Cape Town. So here we are, with the Scottish seemingly satisfied and the Russian’s drifting slowly out of the Ukraine, and one may think that the message is a cry for unity, but do not be fooled my friend. This is only the beginning, this is the thin edge of a growing human wedge, the need for identity, a trend that has repeated and rolled around like a wheel of ‘consolidation and disintegration’ since the Greeks, Romans, English and others decided in their great wisdom that bigger was better. The super states may have had their day, in this turn of history, the independent individual could be on the march. My one prediction is that Scotland’s referendum only further opens the debate, rather than closes it, who decides our fate and how accountable those politicos are to us the voters will open even more debate. Democracy is not easy, remember the following the next time that a politician pitches to you and thinks himself or herself very clever. “The gallows of the world groan with the weight of politicians who boasted of their foresight, all of history is nothing but a lack of foresight.” Not today or even next year, but one day William Wallace, and many more like him, will have their day in the sun and then they will all have “their freedom”! Ian Kilbride is chairman of Warwick Wealth Limited Financial planning should benefit more A s a profession, financial planning in South Africa has come a long way. But the use of financial planning remains too narrow. Financial planning has benefits for every person who is managing their personal finances. From the basics of managing a day to day budget to detailed estate plans – there are more who could benefit from the services of a professional financial planner than those who use their services. CEO of the Financial Planning Institute of Southern Africa (FPI) , Godfrey Nti, says that their vision is professional financial planning for all. “Financial planning is vital to everybody, especially now with the high level of debt,” Nti comments. He says that there are a good number of South Africans in financial difficulty. “Most South African households need someone to hold their hand and guide them. Many of those earning a salary are not surviving from one paycheck to the next. Financial planning looks at cash flow.” This is one of the real values of a financial planner. Managing your finances is not just about an investment and a policy – it is about how you manage your money. And as Nti notes, for many it needs to be an ongoing process. There is a lot you can do in one meeting – but ongoing coaching and guiding can add a lot more value. This aspect of financial planning is more important right now for most South Africans. But contrast it with the more common practice of selling a product. Do South Africans need a product or a financial plan? An ideal would be for everyone to have access to a financial planner – but you cannot ignore the economics of the situation. Financial planners are highly skilled and experienced and need to be paid appropriately for their services. You can fill some gaps with pro bono work, and the FPI encourages its members to do this – but as Nti says, “pro bono can only go so far.” “We need to come up with a model that rewards people. As an industry we need to find a way to plug this gap.” For example, Nti says we could look at an employer based benefit – here employees would have access to say 20 hours with a financial planner for the year. And why not make this a tax exempt expense? If we do this, Nti says the industry will be much stronger, and the public will have more trust in the profession. 10 PRACTICE MANAGEMENT Focus on the business Writing on www. financialplanet.org, CFP Almo Lubowski says that nobody is under any illusion that a financial planning practice is in the business to be profitable and serve as a source of income for its owners and employees. “However, it is unfortunate that many still overlook the need to engage in implementing some important practice management strategies for their businesses in favour of purely focusing on sales targets and production.” Lubowski says that these practice management strategies are too easily and too often overlooked because “they do not directly relate to generating revenue or acquiring clients, at least not initially.” But as he notes, they are an absolute necessity in “building a foundation for a practice that wants to grow and thrive in the long term. Focusing too much on sales targets is a short term strategy that often takes focus away from long term sustainability of a practice.” Examples of practice management strategies • Creating a compelling vision and strategy for the practice’s future • Defining a unique client value proposition • Embracing and harnessing compliance requirements into useful business processes • Ensuring clients’ take on processes are enhanced rather than shortened in favour of new business quickly • Developing more sustainable charging mechanisms for your practice • Developing and valuing staff 30 November 2014 Prioritise your growth steps By Mimi Pienaar, head of Practice Management, Masthead I n the previous article we unpacked the first step which focused on addressing the current state of your business. We looked at both internal and external data, the state of the industry where you find yourself and a comprehensive analysis of your clients. Once you’ve conducted an assessment of your business, you’ll naturally start to develop an action plan and want to start setting goals. Before you embark on this, it’s important to stay focused and adopt a balanced approach. The assessment part was vital in order to help uncover how your entire business is geared to drive key strategic indicators. As we move into the prioritisation part of building business value and long term sustainability, it’s important to shift your mindset to knowing that whatever you imagine is achievable. Once you have established this mindset, you’ll be more mentally prepared to start asking yourself defining questions that will reveal the core of your strategic and business plans. These could be: What would you have to do or change to reach what seems like the impossible. We recommend that you spend enough time visualising and defining your ultimate business objective. Do this before you jump into taking actionable steps such as mentally assigning projects and deadlines to your various team members. To simplify this process, we have provided a Practice Management Growth Steps Checklist which provides guidelines on the journey toward building business value. This will help you to prioritise your tasks and ultimately bring you closer to your overall business objectives. It’s the responsibility of the business owner to identify gaps within his/her business (based on the below checklist) that will have an impact on its operational effectiveness. Here are some examples that illustrate how you can start expanding on your Practice Management Goal Checklist: Marketing Foundation – We need to find a proactive plan for creating new sales from existing client referrals. Management Foundation – We need to establish a recruiting and hiring process that sources ideal employees for the business and ensure that the existing employees are operating at their most productive and efficient in support of business plans. Financial Foundation – We need to have an effective financial management system in order to track key financial indicators and manage annual budgets. Building long term sustainability and business value is at the core of streamlining the business. It’s important that you allocate a sufficient amount of time for applying your mind to these goals before moving ahead and addressing the more tactical components of your business plan. The more time you invest in this, the more creative you will become throughout the rest of the planning process and no matter what your budget or resource constraints may be, you’ll be able to take a significant step towards reaching your goals. Building a successful business only happens one step at a time and the initial steps are always the crucial one’s for ensuring maximum, long term growth, business value and long term sustainability. Masthead’s Practice Management Growth Steps Checklist: 1. Leadership Foundation – This requires an analysis of your current business disciplines. 2. Financial Foundation – This requires financial planning through an understanding of the relationship between your business budget and your business activities. 3. Management Foundation – The purpose of this is to create business continuity through the implementation of robust systems that run every aspect of the business; and then develop roles for people who can manage and monitor these systems effectively. 4. Marketing Foundation – This aims to deliver a single minded dedication to your client - getting to know who they are, what are their needs and how to engage them effectively. 5. Lead Generation – This is where income opportunities are created for the business by using structured business processes. 6. Lead Conversion - This is where potential leads can be converted into actual income. 7. Client Fulfilment – This is the bread and butter of your business and requires you to deliver an exceptional product/service so you can exceed client expectations and retain your customers. FPI partners with Sanlam Proficiency of financial planners to be enhanced T he recent global Comparator Research Survey, conducted by Financial Planning Standards Board (FPSB), revealed that the value of a certified financial planner (CFP)® professional to business has grown in recognition. According to the survey, 60% of firms surveyed in South Africa, saw an increased profitability as a result of employing CFP® professionals while 80% indicated that CFP® professionals (in general) generate higher levels of revenue. In addition, 60% found that these professionals lowered their compliance and legal risks. As a result, these firms are encouraging financial planners to attain the CFP® designation, a trend supported by the partnership between the Financial Planning Institute (FPI) and Sanlam – through The FPI Corporate Partner™ agreement. The FPI Corporate Partner™ agreement has been established to raise the competency levels of financial planners and financial advisers through various up-skilling initiatives. 60% of firms surveyed in South Africa saw an increased profitability as a result of employing CFP® professionals. 80% indicated that CFP® professionals (in general) generate higher levels of revenue “Sanlam is excited about becoming an FPI Corporate Partner™. This positive development is confirmation of Sanlam’s continued drive to professionalise our financial planning business to the benefit of our clients,” says Kobus Vlok, chikef executive of Sanlam Personal Finance. INVESTING 11 30 November 2014 Old Mutual Investment Group picks up global award O ld Mutual Investment Group has been awarded the Best African Fund Manager award at the African investor CEO Institutional Investment Summit and Index Awards 2014, a prestigious ceremony which took place at the New York Stock Exchange recently. The Africa investor (Ai) Awards are unique panAfrican business and capital market investment awards that recognise and reward the achievements of the private sector including stock markets, regulators, listed companies, fund managers, stockbrokers and analysts who follow African equities. Alongside each annual Africa investor Institutional Investment Summit, Ai offers a set of awards to that focus on the capital market successes across Africa. Old Mutual Investment Group director of Investments, Hywel George says that the asset manager is immensely proud of this achievement. “Our submission for the award highlighted the performance of the African Frontiers Active Equity Fund, managed by Cavan Osborne and his team at our Old Mutual Equities boutique,” he explains. “As the largest private investment manager in Africa, Old Mutual has a large African footprint, with a full complement of both listed and unlisted capabilities across the continent. With access to in-country expertise and contacts, we continue to ensure that our customers benefit from the outstanding investment potential of Africa’s stock exchanges, via both actively managed and index-tracker funds.” Old Mutual was chosen as the winner of ‘Best African Fund Manager 2014’ from a list of eight shortlisted candidates which included FBN Capital Asset Management, Investec Asset Management, Franklin Templeton Investments, Momentum Asset Managers, Emerging Capital Partners, Ashmore Group and Soros Fund Management. “It’s always an honour to be recognised for our work in Africa,” says Old Mutual South Africa CEO, Ralph Mupita. “Old Mutual has a long history of investing in Africa through retail and institutional life and pension funds. In addition to the contribution to growth and development in the region, our customers have also been rewarded with good returns. The African investor award motivates our business in its continued objective to become an African Financial Services Champion while growing our other emerging market businesses.” Delegates at the Awards ceremony included heads of African stock exchanges, leaders at the United Nations, Public Investment Corporation, large pension funds, the World Bank, the Central Bank of Central African States and CEOs, as well as senior government ministers in Africa. HOW MUCH IS ENOUGH TO GIVE YOUR DAUGHTER A DREAM WEDDING & STILL GROW YOUR INVESTMENTS LOCALLY & OFFSHORE? Let Old Mutual Investment Group deliver on your ‘enough’ by putting its 169 years of investment expertise to work. The rand’s performance is up today, down tomorrow, but one thing that doesn’t change - your dreams and goals. Whatever the rand does, what you really need to know is how many rands invested is enough for your lifestyle, today and tomorrow? How much is enough? At Old Mutual, we’ll help you work out exactly how much is enough for you. Then Old Mutual Investment Group provides the investment solutions to deliver on those goals. Solutions like the Old Mutual Global Equity Fund – a consistent top quartile performer over all periods and since inception*. Speak to your Financial Adviser today about how this fund can help ensure you have enough to do great things. Call 0860 INVEST (468378) or visit www.howmuchisenough.co.za ADVICE I INVESTMENTS I WEALTH Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium to long-term investments. Past performance is no indication of future performance. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. *Performance periods to 30 September 2014. Since inception 1994. FCB10016100JB/E 12 INVESTING 30 November 2014 Correlations not immutable … current events prove it By Chris Botha R ecently, correlations between share prices and underlying company fundamentals – as well as global stock markets – have broken down somewhat. The main reasons are excess global liquidity and the search for yield by investors. The principal driver of markets has been expectations around the timing of US interest rate hikes. Emerging markets have benefited due to higher real yields on offer compared to developed markets that in most cases yield negative real returns. Equity multiples in most emerging markets have expanded rapidly due to this carry trade, with prices, in general, not being supported by sufficient earnings growth, though the recent JSE pullback of 5% somewhat diminished this mismatch. The US and the Eurozone are juxtaposed in terms of economic growth and interest rate cycles. The Eurozone remains characterised by too much saving and hardly any spending. The Fed is in a different cycle and will remain data dependent in its decision on the timing of hiking interest rates (expected by mid-2015). I believe hikes will be implemented cautiously in order not to derail economic recovery. The dollar may therefore stay firm relative to other major currencies on expectations of higher US yields, with a potentially negative impact on commodities and emerging market assets. In these circumstances, the carry trade will probably reverse as investors chase the prospect C M Y Sculpture by Beth Diane Armstrong The principal driver of markets has been expectations around the timing of US interest rate hikes. I believe hikes will be implemented cautiously in order not to derail economic recovery Prescient Money Mktg 1-4 Goose Ad_r.pdf 1/6/14 12:47:53 of higher US yields at lower perceived risk. In many cases, foreign portfolio flows into emerging markets fund large current account deficits. Once funding dries up as investors exit, severe currency weakness will be a threat, forcing these markets to hike interest rates to realign their rate cycles with that of the US. Earnings optimism in the US, in particular, is likely to support equity prices for the foreseeable future, with the main risk being the timing of interest rate hikes. This is reflected in decreasing equity risk premiums, which are trading at near record lows on a medium term basis. Faced with deteriorating economic fundamentals in Europe, the ECB recently surprised markets by further cutting key policy rates. Mario Draghi announced PM that the deposit rate is now -0.20%, with the benchmark refinancing rate set at 0.05% while the marginal lending facility was reduced to 0.30%. These and other measures will likely cause a major expansion in the ECB’s balance sheet and hopefully in the balance sheets of commercial banks. The ECB set a target for its balance sheet to expand to EUR3000 billion – similar to 2012 levels. However, doubt remains whether this will translate into credit demand in the consumer economy, due to continued deleveraging and low consumer confidence. The need for further ECB action cannot be ruled out. Volatility will remain in the near term until global interest rates normalise. The JSE All Share fell 5% in September, with heightened volatility. Foreign selling may put further pressure on our market in the short term, as indicated by the weakening rand. The currency impact on earnings, however, should be positive. The market currently trades on a trailing price earnings ratio of 17x after reaching a high of 19.2x in May and is offering far better value at current levels. Reported earnings remain robust and our view remains that our market will largely be driven by expected interest rate movements by the Fed and the SARB reaction. Correlations between local share prices and underlying company fundamentals may therefore remain fuzzy for some time as the key driver could well be US rate hikes. Chris Botha is director: Fund Management of Imara Asset Management, South Africa WHILE OTHERS ZIG AND ZAG, WE STAY IN FORMATION. CM Yo u r m o n e y i s s a f e a t P re s c i e n t . T h a t ’s b e c a u s e o u r f u n d m a n a g e r s MY c o n s i s t e n t l y f o l l o w a re l i a b l e p ro c e s s c a l l e d Q u a n t P l u s ® . I t ’s t h e CY proven way to reduce investment risk, and increase wealth. CMY K To know more about any of our products and services, v i s i t w w w. p re s c i e n t . c o . z a . INVESTMENT MANAGEment LOCAL AND OFFSHORE INVESTMENT MANAGEMENT / UNIT TRUSTS / STOCKBROKING / RETIREMENT PRODUCTS UMBRELLA FUNDS / PROPERTY / ADMINISTRATION / AUTHORISED FINANCIAL SERVICES PROVIDER INVESTING 13 30 November 2014 Look offshore for equities G lobal equities are the preferred asset class for diversified portfolios going into the last months of 2014, as South African equities look relatively expensive, and fixed income investments like bonds possibly face more volatility as interest rates rise both locally and in the US, according to Graham Mason, chairman of Prudential Investment Managers. “Many global equity markets like the US remain reasonably priced despite having experienced good gains so far this year. For the MSCI World Index, both the forward price-toearnings ratio and the priceto-book ratio are still below their long term averages. Meanwhile, the FTSE/JSE All Share Index, with a price-tobook ratio of around 2.3, is expensive by historic measures – about 20% more expensive than global equities,” says Mason. “As active managers, we have been tempering our local equity exposure in multi-asset funds like the Prudential Balanced Fund while remaining overweight global equity. Together, our local and offshore equity holdings make us overweight equities in total – this reflects our belief that equities should still provide better returns than other asset classes over the medium term.” While industrial and randhedge shares remain expensive generally, Prudential sees pockets of value in financial stocks (like Investec) and diversified resource companies (like BHP Billiton), Mason says. Sasol has also been an overweight holding. “However, while many would consider resources a MSCI WORLD AND FTSE/JSE ALL SHARE PRICE-TO-BOOK buy, we are more cautious for two main reasons: 1) the time we think it will take for global commodity prices to turn; and 2) the quality of many resource companies.” Generally, he says, equity investing conditions have gotten tougher. “There are fewer opportunities for value managers like ourselves to find attractively valued shares that have the potential for outperformance going forward.” Meanwhile, listed property also remains a preferred asset class in the Prudential Balanced Fund. The solid earnings underpin from rental income, despite a stillweak office sector, should boost property companies’ distribution growth and contribute to attractive total returns of between 8-11% pa for the sector over the next few years. This compares favourably with longer-dated bonds. While South African bonds are vulnerable to rising interest rates both locally and overseas, the pricing of long bonds in the 20-30 year area is such that they offer fairly good value. Or put differently, says Mason, we believe that the yields at the long end of the curve are high enough to provide a cushion against the automatic transmission of rising rates in the US. Our bond holdings therefore favour longer-dated government bonds, as well as corporate bonds for the enhanced yield. So with the potential for unusually volatile markets as QE ends and interest rates normalise in the US, Prudential sees offshore equity as one of the preferred asset classes for diversified portfolios. Adds Mason: “The outlook for the rand is of course a critical element. Although we estimate that, at around R11/ USD the rand is undervalued by about 20% on a longer term fair-value basis, we remain Graham Mason Equities should still provide better returns , global equities preferred for the rest of 2014 concerned by the lack of export response, as evidenced by the large current account deficit. We are therefore retaining a full weighting of offshore assets in the Prudential Balanced Fund. Source: Bloomberg and FactSet 31.08.2014 Fund Management • Asset Consulting • Portfolio Management South Africa • Guernsey • Singapore • Isle of Man To learn more about our services: Call us on email us at or visit our website Advisory Services Fund Management October 2013 Banner Ad.indd 1 +27 (0)21 689 3579 [email protected] www.mitonoptimal.com MitonOptimal South Africa (Pty) Ltd is an authorised Financial Services Provider - License No. 28160 - Registration No. 2005/032750/07 12/6/2013 11:29:35 AM 14 INVESTING 30 November 2014 Private share portfolios versus unit trusts By Doug Turvey, private client portfolio manager, Cannon Asset Managers M ost investors and financial planners often only consider unit trusts as a way to access investment markets, and in many cases are unaware of, or don’t understand the option of using private share portfolios (PSPs). In this article, we highlight the difference between pooled investment vehicles such as unit trusts (UT’s) and PSP’s. This will help investors to make informed decisions that best suit their needs and objectives. Broadly speaking, PSP investing typically involves a bespoke investment portfolio in which shares and other securities are held in the client’s name, and are bought and sold on behalf of the individual client by the investment manager (a PSP can also exist within a wrapper such as a RA or Preservation fund). In other words, asset allocation and stock selection within the portfolio can be customised to suit the client’s current objectives, risk profile, return expectations and future needs. This may range from an equity-only portfolio that consists purely of listed shares, through to more moderaterisk or conservative portfolios that focus on giving investors a high income yield while at the same time enjoying some capital growth. PSP’s also typically entail a high level of engagement between the investment manager and may even involve the investor having a say in some of the stock decisions. Hence, clients that are interested in investment markets, feel closer to what is going on in their portfolio. Fees are also incredibly transparent in a PSP, as any charge in the portfolio has to be levied as a line item in the PRIVATE SHARE PORTFOLIOS UNIT TRUSTS AND OTHER POOLS Portfolio can be tailored to individual needs Generic, one size fits all approach Direct ownership Pooled ownership Negotiable management fees depending on portfolio size Fixed management fees Transparent costs clearly shown on monthly statements Standardised Total Expense Ratio (TER) which do not always reflect all costs Comprehensive monthly statements showing individual stock holdings Single line item showing number of units, price and total value (NAV) and quarterly holdings Customised face to face reporting on the contents of the portfolio. Usually quarterly holdings statements Immune to cash flow impacts from other investors Performance and expenses can be affected by the activities of other investors. Greater investment choice and opportunity, especially among smaller cap shares Large Units Trusts may restrict certain investment opportunities in smaller shares No lock-in periods or penalties on withdrawal Some pooled investments may have a term or notice period. Require larger investible assets Cater to the smaller investor for monthly and lump sum contributions Allows Financial Planners to bring additional assets under advice, where Unit Trusts are not attractive to the client Typically preferred by IFA’s for compulsory portfolios monthly statements which the clients see. On the other hand, unit trusts and other pooled funds are investment vehicles in which a number of investors co-invest their assets alongside other investors so they can be managed on a collective basis. Investors are issued units in the fund, which are re-priced regularly to reflect changes in the value of the underlying assets. Capital Gains Tax (CGT) is only levied when investors sell units in a fund, whereas every time a share is sold in a direct PSP, there will be a CGT event. While regulators have tried to standardise the measure of total cost to investors in a UT through a Total Expense Ratio (TER), not all costs associated with a fund are included in the TER, and the actual costs can be higher than those advertised. Interestingly, there are many cases where a pooled investment is ironically more expensive than a bespoke one. The table alongside highlights some of the differences between each type of investment choice. Given the choice available to individual investors, making decisions about investing for a better future can be a daunting task. There are a raft of products and solutions suited to a number of investor archetypes. These range from the newly employed young saver through to a sophisticated high net worth executive. The investment industry can, and given recent FAIS requirements, must do all it can to align itself with investor interests, the onus is also on the investor to understand fully the types of investment vehicles available to them. Things are constantly changing and global trends show that as investors and advisers demand greater transparency, there is increasing appetite for private share portfolios as part of an overall solution. While unit trusts have typically been the primary investment vehicle for most investors due to their ease of access, the demand, not only for transparent but also bespoke solutions has been growing significantly over the last few years, particularly in a Global context. Given this wider choice, flexibility on fees and greater transparency of bespoke solutions, South African Investors are now following suit. IMARA INVESTING IN AFRICA FA - Imara lower than average risk Ad 2014.indd 1 2014/08/25 2:36 PM 16 INVESTING 30 November 2014 Scale and margins in focus As regulatory costs escalate, fund managers look to build scale and improve margins A lthough fund management is a growth industry internationally, in South Africa an onerous regulatory burden is contributing significantly to rising costs and squeezed margins. According to Eldria Fraser, chief investment officer at Prescient Investment Management, “fund managers always have an eye on costs but these have become harder to control with increased regulation, compliance and reporting requiring more systems, software and staff. “That’s not going to change in the near future and fund managers, reliant on trust and confidence, will need to ensure that their businesses remain robust to ensure performance is maintained and the risks of compliance breaches are mitigated.” Fund management fees are under scrutiny as the National Treasury looks to broaden the savings base, improve preservation and reduce the costs of saving, which are regarded as important because they impact the end result. “That it is now compulsory to publish a total expense ratio (TER) on fund factsheets, which encapsulates management fees and costs, has also placed the focus on fees,” says Fraser. “However, a point often missed is that the asset management fee is only part of the overall cost of saving.” A pension fund, for example, can pay a negotiated asset management fee based on institutional bulk rates. But the fund will also need to pay an asset consultant, actuary or employee benefits consultant and administrator - resulting in multiple layers of fees and costs, all of which need to be looked at. Fraser says that when it comes to pricing, South African fund managers are competitive at both the retail and institutional levels when compared with international norms. This applies especially to equity and balanced funds. With bond mandates, some local fees are higher than those charged internationally where the ultra-large global index bond managers, because of their size, can charge unusually low fees.“What clients pay in terms of fees depends largely on whether they’re buying passive or active investment management services. Those paying 3% or more are likely to be invested in an active fund where the fee is a consequence of a performance component. “Many institutional clients prefer combined strategies that utilise lower cost passive or smart beta products with others that target active outperformance. This core-satellite approach can work well by maintaining costs while also building in a component to deliver outperformance,” she says. Managers negotiate fees either on a sliding scale basis with no performance element, or as a base fee plus a performance fee. Says Fraser: “Performance fees have received a lot of bad press, but can work well for both the investor and the manager. Investors should consider which is appropriate for them. One of the things to keep in mind when evaluating a performance fee is that the base fee should be lower than the opposing sliding scale fee offered. This ensures that the manager is giving up on the ongoing fee in favour of an added performance fee when doing well. The performance participation rate must be reasonable with the market norm to share between 10% and 15% of outperformance. The performance element must be linked to an appropriate benchmark and hurdle. Whether a composite index plus hurdle or inflationlinked hurdle, the benchmark must fit the mandate. It is also good to consider a cap on the total level of performance fee paid.” “After that, it’s a case of measuring the fund manager against the hurdle. In this regard, investors appointing managers will look for longer term consistency in an effort to avoid chopping and changing because of the costs involved.” Although there has not been a big reduction in the fees charged by traditional asset managers, new costeffective products like index funds have been introduced to the market. With retirement reform underway, these products have an important role and ETFs in particular have grown strongly internationally, while in SA the growth has largely been limited to commodity and offshore ETFs. However, it’s important to look carefully at what you’re paying for ETFs as the management fee or TER may not be the full cost of investing. If you buy the ETF on the market, take note of the difference between the bid and sell price and also check if there is an additional brokerage fee or entry charge. This all affects the actual return you achieve when buying the product, which is not reflected in the NAV performance. It can often be cheaper for a larger client to buy an index unit trust or negotiate a segregated account with a fund manager rather than buying an off the shelf ETF. In terms of building asset volumes, Fraser notes that the distribution of investment products in the institutional market is set to change as part of the reform of the retirement industry. Stand-alone pension funds will be encouraged to become part of umbrella platforms where fund mangers will need to be represented with the right products backed up by performance. Laurium Flexible Prescient Fund. Boutique manager performance at its best. www.lauriumcapital.com Laurium Capital (Pty) Limited is an authorised financial services provider (FSB License no. ). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. INVESTING - EMPLOYEE BENEFITS 17 30 November 2014 Member choice: does it add value? Too much member choice may not be in members’ interest T rustees of retirement funds have become used to giving members choice with regards to their benefits and investments. While members may like to be given these choices, they may actually be to their detriment. Trustees should consider the value of choice Michelle du Toit, principal consultant at Old Mutual Corporate, says that retirement fund members often make decisions that are not in their best interests. “Trustees often give members choices regarding retirement fund contribution levels, flexible risk benefits, investment options, retirement decisions and whether to preserve their retirement savings. Before offering choice to a member trustees should ask whether it adds value to the member’s retirement fund. Choice should encourage the member to consider the long term repercussions of their decisions, but often too much choice allows the member to make a decision that negatively impacts their retirement fund by eroding their contributions,” explains Du Toit. Trustees need to look at the value that each choice adds to the member’s retirement fund. “Does it encourage the member to save more? If the answer is no, then the choice offered may not deliver the best value to the member’s retirement savings.” Consider the member’s frame of mind Du Toit says that the member’s frame of mind must be considered before offering too many options, as when it comes to options at retirement, members’ decision-making is often based on taking the highest current ‘cash’ value. “Choices such as contribution rates of 2,5%, 6%, 7,5% or 10% of one’s salary are usually given to new members. However, if only the option of 10% were presented to the member, would the member still want to choose another contribution rate? Members often want to maximise their take-home pay, so removing the choices that are easiest to make, would actually increase the retirement fund value to the member. “Preservation has always been a choice offered to members exiting a fund, but members do not necessarily take the option of preservation, as they do not always take the long term benefit of increased savings at retirement into account.” Targeted communication strategy needed Du Toit says that a targeted communication and education strategy on investment choice should be put in place by trustees for members. Studies show that the greater the choice, the more likely it is that members will be conservative and risk averse, which is not necessarily the best strategy for the individual. “Trustees should weigh up how much time they versus their members spend on reviewing investment choice options, whether members fully understand high risk versus low risk portfolios and whether the information provided to the member will have a long or short term impact. Providing these choices adds a huge administrative burden to trustees. If the choice offered does not add value to the retirement fund, then it is best to reconsider the structure of communication to members. In addition, a clear and targeted communication strategy should be deployed to ensure that members understand the risks associated with choice. Key questions every trustee should consider before offering members choice • Are you considering the member’s wants or needs when offering the choice? • Does the choice add value to the member’s retirement plan? • What is the member’s mindset when making the choices being offered? • Is the appropriate default option in place? • Is there an appropriate communication strategy in place to educate members about their investment decision? • What would happen if this choice was removed? • What are the costs involved in offering this choice? • What are the long term consequences of getting the choice wrong? Investment choice badly managed FedGroup recommends abolition of member investment choice for retirement savings F edGroup, South Africa’s only independent life insurance provider, believes that the practice of offering member choice, in which members of retirement funds choose the assets in which their savings are invested, should be discontinued in the best interests of the public. FedGroup’s recommendation comes in the wake of the publication of the 2014 Sanlam Benchmark Survey, which shows that member choice retirement savings are badly managed by those who select the option. “What this means is that people who opted for member choice are retiring with far less money than they should,” says CEO of FedGroup Life, Walter van der Merwe. “Certainly, their retirement savings are typically well below what they should have been, making it much more difficult for them to maintain their standard of living. “Research indicated to us many years ago that we had a duty to refuse to include member choice in our retirement savings options. This latest survey not only provides objective validation that member choice is a wasteful product choice, it also makes it imperative that the dangers of member choice are pointed out to the public and that steps are taken to eliminate it as a People who opted for member choice are retiring with far less money than they should retirement savings option.” People who opt for member choice pay a substantial premium for it because it costs retirement savings providers more to administer individual choices. “However, because the cost for the member choice is levied from the retirement savings this additional fee is not transparent, and most people don’t realise that this cost is actually eroding their ultimate savings,” Van der Merwe says. In addition, the man and woman in the street are not trained to understand either the various financial instruments available or the financial markets in general. “Because they’re not industry professionals, they tend to be heavily influenced by sentiment and make irrational decisions about where to invest their money,” Van der Merwe says. “As a result, they try to time the market but do so after the markets have already moved. Increasing their exposure when the instruments are expensive and decreasing their exposure when the instruments are cheap exactly the opposite of what should be done.” “If you’re not looking at your returns at least weekly and you don’t know what your risk profile is, how do you avoid damage to your retirement savings when something like the collapse of African Bank happens?” Van der Merwe says. “When you choose member choice, you’re setting yourself up as an asset manager. But, if you were to choose a professional asset manager, you certainly wouldn’t choose one that had no qualifications or experience, made emotional decisions, couldn’t remember where your assets were invested, and didn’t watch your returns on a daily basis – and charged you extra for making you lose money. 94% look at returns less than 4 times a year 65% look at returns less than 2 times a year 42% do not know what risk profile they are invested in Sanlam 2014 Benchmark Survey “It really is very difficult to understand why members of the public are being allowed to be bad asset managers and deprive themselves of a liveable pension.” The benchmarking survey shows that of the people who choose member choice, 70% are not actively using it and are simply defaulting to the standard portfolio of assets offered by the retirement savings provider. “They’re the lucky ones,” van der Merwe says. “They might be paying unnecessary fees but at least they’re not gambling with their life savings.” 18 INVESTING - EMPLOYEE BENEFITS 30 November 2014 Costs and value C osts are an increasingly contentious concern for clients of the financial services industry, especially given the effects they can have over the long term, writes Anne CabotAlletzhauser in the Benefits Barometer. Cabot-Alletzhauser heads up the Alexander Forbes Research Institute. “Knowing whether costs are reasonable means we have to understand what functions add or detract value and how and when this takes place. It also means we have to understand how different pricing structures will affect individuals in different circumstances and the range of ways that the effects of costs can be measured.” Costs are continually in focus and have taken up a large chunk of the recent retirement reform debates. “If there is any debate destined to keep the financial services industry alienated from its clients, it’s the issue of costs. In an environment where successful outcomes depend largely on partnership and trust, the issue of costs will remain a constant source of questioning unless we can convey to clients a sense of fairness and transparency in the various pricing structures that they participate in,” notes Cabot-Alletzhauser. She says that we care about costs because they provide an undeniable drag on what value we can deliver to clients. “But the problem is not as simple as just saying costs are too high. If they were, it would be simple: determine how much it costs the provider to produce the service, tack on a sustainable margin and problem solved.” Cabot-Alletzhauser asserts that value to clients is the real issue, and “we need to broaden our definition of the problem and we need to understand all the dynamics at play.” Understanding fees Cabot-Alletzhauser says there are three aspects of price setting we need to understand: • The actual cost of production. This includes time and energy, talent level required, quantum of complexity, time frame for delivery, responsiveness, and complexity of client receiving a service. • The value-add of the service. This includes economic value to clients, strategic importance, time horizon of value-add, uniqueness of offering, degree of risk sharing, and intellectual property ownership. • A sustainable profit margin. Understanding costs involves both objective and subjective measures. Costs can be quantified, - value? “One further complication in price setting,” writes Cabot-Alletzhauser, “is that supply and demand must also be part of the debate. As with all products and services, prices can far exceed any justifiable value if they are on services that are in high demand. Two such examples PLACING YOUR OWN RETIREMENT INVESTMENT ASSETS? PLACE YOUR BETS. We’ve long been against the ‘member choice’ option for retirement savings. That’s because individuals who choose where and how to place their own investments invariably make wrong decisions. A recent survey, for example, shows that around 65% of people checked their returns less than twice a year. Seriously, would you hire an asset manager who did that? To find out how FedGroup can help, speak to your broker, or visit www.fedgroup.co.za. FedGroup FedGroup is an authorised financial services provider would be the cost of the best advocate in the country, or perhaps what the market perceives as the best fund manager.” But perceived value can be “easily manipulated with effective advertising.” She also notes that perceived value can also be manipulated by capitalising on behavioural finance factors. “Investors, for example, will happily overpay for downside protections simply to address their ‘sleeps well’ needs – coined in Hodgson, Breban, Ford, Streatfield & Urwin (2000) – in spite of all the literature that suggests that over the long term, the cost of such protection far outweighs the actual value.” According to CabotAlletzhauser, the challenge for trustees and investors in general is that the cost discussion is often couched in an absolute framework. “It’s easy to compare different fees for a specific service, but who is determining what the value side of the equation is worth?” “The problem in pension fund management is that every step in the value chain of delivery needs to be understood according to how it fits into the hierarchy of outcomes. This is more important when a ’product’ is made up of separate services, each subject to their own pricing negotiation. Which aspects of that value chain absolutely have to excel to maximise the ultimate value to the member? Which actually make a difference in the 30- to 40year scheme of things?” Pension fund investing is a very long term activity, and as Cabot-Alletzhauser notes, over such a long time frame, the compounding of costs overwhelms any potential value delivery if that delivery is inconsistent over time. And in asset management, performance can be notoriously inconsistent. “If we understand which areas add value over time, then perhaps these are the ones worth paying a fair price for to ensure value gets delivered.” Read more on costs in pension funds in a four part series on www. benefitsbarometer.co.za. INCOME PROTECTION FEATURE 19 30 November 2014 The best way to protect your future income? By Brad Toerien, CEO, FMI Income protection The term ‘income protection’ is most often associated with disability. If you can’t work due to an injury or illness, income protection will pay your income until you are able to return to work or retire. At FMI, however, we believe that income protection is much broader - it’s about protecting your future income against risks such as temporary disability, long-term disability, and death. Looking at income protection this way means that most individuals will be forced to re-think the cover they have in place. Protecting your most important asset Your greatest asset is not your house, bond, or car, or even the insurance policies used to protect those items - it is your ability to earn your income. Without an income (even for a short period), your entire livelihood is at risk. When one considers your ‘worth’ in the context of the value of future earnings, it gives a surprising result. That’s why protecting your ability to earn your income (rather than just protecting yourself against a particular risk) should be your first financial priority. How much are you worth? Kevin is 30, earning R30 000 per month. Assuming 7.5% annual increases, Kevin would be expected to produce gross income of around R46 million by the time he retires! His monthly premium for buying disability cover? R300 per month – 1% of his monthly income going towards insuring both his on-going monthly liquidity and the capital value of his income earning potential. Looking at income protection differently We believe all risk products should work to protect your ability to earn your future income. You are essentially protecting the same asset but against different risk events - temporary disability, longterm disability, or death. A properly constructed income protection plan will help protect that ability against short-term liquidity risks, as well as safeguard your longterm ‘capital value’. While the industry has traditionally offered lump sum solutions, we believe that income-based solutions are a more effective alternative when it comes to replacing future income as they remove timing, investment, inflation, and longevity risks by providing benefits that are the exact match for the asset being insured. However, the level of cover selected needs careful consideration – in most cases, less life cover is required as the life insured will no longer be around and the remaining beneficiaries require less income to maintain their current lifestyle. Advocating for an incomebased approach to income protection does not mean dismissing lump sum payouts. Lump-sum benefits are ideally suited to providing for once-off expenses for example settling debts or providing for estate expenses. Thus, to be truly effective, the best way to protect your future income is through a combination of monthly income and lump sum benefits. How does current industry behaviour compare? Research* into the South African life insurance market shows that 60% of cover sold is life cover, 30% is disability cover, and 10% is critical illness cover, meaning that life cover sold is at double the rate of disability cover. This raises the first warning bell as we believe that, in most cases, an individual requires more disability cover than life cover. The second key finding was that only 17% of the disability cover sold related to income benefits while the balance being lump sum benefits. There are two concerns here – lump sum disability benefits only provide for permanent disabilities and they are a poor match for needs that are often primarily income in nature. By correcting the above two concerns the disability income market has the potential to increase ten times in size! And this is before we consider the possible impact of the development of life income benefits. The time has come to look at income protection as essential insurance for your most valuable asset and to structure your insurance portfolio accordingly. * Disability Cover: Assessing the efficiency of the South African insurance market in its provision of disability cover. True South Report Actuaries and Consultants (2011). Two world firsts It’s not often that you’ll come across two world firsts, especially in the life insurance industry. With Myriad’s Longevity Protectors you can now, for the first time, enable your clients to: • cover 150% of their income if they become disabled • receive a payout for not claiming and living a long life. Only Myriad gives them access to this unique and affordable risk and retirement solution. For more information, simply contact your Momentum Marketing Adviser. Terms and Conditions apply. Momentum, a division of MMI Group Limited, an authorised financial services and credit provider. Reg. No. 1904/002186/06 Two world firsts advert.indd 1 2014/10/13 11:15 AM 20 INCOME PROTECTION FEATURE Temporary or permanent? Most periods where you cannot work are temporary, says Petrie Marx of Sanlam. This can be a bit of a challenge – because clients often perceive disability as something physical, and cover has traditionally been focused on permanent disability. “Temporary disability is a need that is often overlooked.” Marx says, and there is a big education job to establish the need for temporary income protection cover for when you are unable to work. “In terms of the numbers, the likelihood of a temporary disability is far more likely than permanent disability.” Gareth Friedlander says that at Discovery Life they see a mix of permanent and temporary claims. “One tends to think of income protection benefits as shorter term, but people underestimate the value of longer term claims.” Andre Froneman of Altrisk, says that they do see early claims, very few of which relate to permanent disability. Comparing temporary and permanent cover can be misleading – think of comparing cover of R3million versus a monthly benefit for R10 000. The R3m just looks bigger – but over a longer period of time – the R10 000 may offer more value. The question is – does the client understand this? “Income protection is a sophisticated product - it is a challenge to roll out,” says Marx. 30 November 2014 Review ahead of 2015 changes Quick recap The premiums for income protection benefits are currently generally tax deductible, but the claims paid out under these benefits are taxable, says Ryan Switala, head of risk product development at Liberty. “Insurers have designed their products around this tax treatment of the benefits. From 1 March 2015, the tax treatment of income protection benefits change so that the premiums are no longer tax deductible and claims paid out will no longer be taxable.” I ncome protection is a product that receives a lot of focus - and that focus will continue in the new year with the coming changes to how these products are taxed. Sanlam actuary Petrie Marx, says that some changes will be necessary when the tax changes are implemented and this will change the income protection market a lot. “But the need for income protection still stays the same.” Gareth Friedlander, head of research and development at Discovery Life, says that the industry is gearing up for the tax changes – and this will mean new product options. Friedlander says that the changes will also require looking at risk management issues – for example existing clients, and sums insured. Marx says that the “industry needs to get clients to have the right amount insured.” He says the tax changes may allow for innovation in the products on offer. For example – products now need to cover income loss in order to WHAT WILL HAPPEN TO EXISTING CLAIMANTS? Existing claimants are affected because their claim payouts will no longer be taxable. The question then becomes whether the insurer should continue to pay out the benefit at the current level and redirect the portion that would have been paid over to SARS to the client (in other words the after tax claim amount for the claimant would effectively increase) or whether the insurer should reduce the claims amount so that the claimant is in the same after tax position as they would have been prior to the tax changes. In some cases, insurers might not have the contractual right to reduce claim amounts and in our view they would be obligated to continue paying the same claim amount, with the result that the claimant would benefit from the higher claim amount. Even where insurers do have the contractual right to reduce or alter benefits after such a change in the tax legislation, they may choose not to make a change simply because of the risk that doing so might be perceived to be unfair when somebody is already in claim (whether it would or would not be fair is a different discussion altogether). As stated above, the key problem that insurers face is that if claimants suddenly receive a higher after-tax claim amount, for certain types of claim, the likelihood of the claimant ever returning to work significantly reduces. This means that insurers are likely to have to pay claims for longer than they were previously expecting, increasing the cost of these claims. Ryan Switala, Liberty make their premiums tax deductible. When this falls away – more covers may be added. How much cover to take will need to be revisited in light of the tax changes. Andre Froneman, product specialist at Altrisk, says that clients would previously have been insured for gross amounts of salary but will in future need to consider income replacement net of tax amounts. “Overinsurance is not a good thing,” says Marx, it can create an incentive to claim. Liberty’s Switala says that the practice of taking no more than 100% cover ensured that “claimants are unlikely to be in a better financial position claiming than they would be if they continued to work.” This risk management feature, he says, is allowed for in the expected rates of claim and the expected amount of time claims will last for in pricing the benefits. “It enables consumers to benefit through lower premiums than would otherwise be charged.” Clients with income protection benefits should review their cover If there are no changes to policies when the changes are implemented – this could result in an incentive to claim - “a higher net of tax income as a result of claiming,” and this will lead to an increase in costs – ultimately increasing premiums for these policies. Ryan Switala Switala says there are complexities in dealing with the changes – and insurers are likely to amend product design to take account of these. Marx says he expects most companies to offer a sliding scale of maximum benefits depending on the income. While the tax changes are due to take place from 1 March 2015. Marx encourages advisers to start looking at their books now to see if any adjustments might be appropriate. Switala says they recommend that everyone with income protection benefits review their cover. “Existing cover may be appropriate,” but even in this case tax issues may require changes. Froneman of Altrisk says that in addition to getting the right sum insured at inception – making sure this amount stays in line with the client’s salary is critical and this can be done by adding a voluntary escalator option as well as an in-claim escalator on to the sum insured. Froneman says the majority of their advisers are making sure policies have this. INCOME PROTECTION FEATURE 21 30 November 2014 Income tax and income protection By Schalk Malan director, BrightRock T he Draft Taxation Laws Amendment Bill announced last year is expected to simplify tax benefits for life insurance premiums. While this should benefit policyholders in the long term, many advisers will need to review their IP contracts to check for over-insurance during the transition to the new, simpler life insurance tax regime. As things currently stand, premiums for recurring income protection insurance policies are allowed as a tax deduction. The premiums for lumpsum life cover and permanent disability payments, whether temporary or permanent, are non-deductible. These differing tax treatments have been known to cause confusion for policyholders, adding complexity to the advice task. In light of this inconsistency in the legislation, Treasury has proposed that the same principles that apply to lumpsums (non-deductibility of premiums and tax-free pay-outs) be extended to recurring income protection policies too. This will ensure that there is uniformity in the treatment of policies that relate to personal cover for individuals. It will make things significantly simpler for advisers and clients, and reduce risk and uncertainty It will make things significantly simpler for advisers and clients, and reduce risk and uncertainty. Previously, because financial advisers had no way of knowing the income tax table that would apply to a specific client at the time of a claim, at policy inception advisers had to guess by what amount to increase the client’s cover to make provision for tax deductions. When there is no income tax liability on pay-outs, clients and advisers have the certainty of knowing that the cover amount they bought is what will be paid out and what they’ll receive at claim-stage. Once the Amendment Bill is passed through, as expected, in parliament in March next year 2015, insurance products will be expected to adjust accordingly. Because savvy advisers and their clients would have upped their sum insured for recurring income payouts to make provision for taxation of benefits, many policyholders will in effect be overinsured once the new regime applies. Where the insured amount exceeds the client’s take home (after tax) pay, cover will need to be reduced. Fortunately, recent innovations in the structure of life insurance products mean that not all policyholders and financial advisers will face these headaches. Two years ago, BrightRock launched a ‘best of both worlds’ feature – that allows policyholders to change their choice of a lump-sum pay-out to a recurring income pay-out at claim stage, with no impact on taxability of benefits (the pay-out, whether lump sum or recurring does not attract income tax). The pay-out with this option capitalises the expected future income into a once-off lump-sum and is an industry world-first. It is particularly beneficial where a client’s long term prognosis (only known at claims stage) is poor. Compare the value it offers a 45-year old, who becomes disabled and has a poor prognosis. This client will enjoy a much greater benefit from an up-front lump-sum of R6 million, versus receiving just R35 000 per month for a few months. Making this choice at claims stage ensures the client gets the ‘best of both worlds’. For policyholders who’ve taken advantage of this new thinking, the product is already suited to the changes in tax treatment of life insurance, and no adjustments will need to be made, helping to ensure their life insurance cover is already tax-change-ready. Advisers in the rest of the market will need to check each income protection client’s cover, and review all the income protection products they’ve recommended, and make downward cover adjustments to ensure their clients aren’t over-insured. The timing of this reduction is also important as it could cause the client to be exposed. Reducing the cover before the legislation change means that if the client claims between the cover reduction date and the legislation change, their (lower) pay-out may still be taxed, all the way to retirement. Waiting to after the change means that premium is effectively wasted, as if there is a claim, it will be reduced due to overinsurance. The reduction in cover will also require time and effort from the adviser and may incur a commission claw back for newer cases. RYNO Killing himself with 30 a day. Pays a packet for risk insurance as a smoker. Protection, for now, forever. TEMPORARY LONG-TERM LIFE We believe your ability to earn an income is your greatest asset and all risk benefits should be designed to protect it. Complete income protection cover. From the day you sign up, for the rest of your life. Contact us: 0860 10 52 08 • [email protected] • www.fmi.co.za Insured by Guardrisk Life. FMI is an authorised Financial Services Provider. FSP 2717. INCOME PROTECTION FEATURE 23 30 November 2014 Detailed underwriting required I ncome protection policies have a wide range of benefits and are designed to pay out when there is a loss of income. Dennis Booysen, head of underwriting at FMI says that these policies can pay out from the first day that income is lost. For many years the focus in the market was on lump sum insurance and permanent loss of income but temporary protection of income is possibly even more critical for the business owner. Because the products are so flexible – underwriting is detailed and onerous. “Without slowing down the process, we pay a lot of attention at the underwriting stage,” says Gareth Friedlander of Discovery Life. Andre Froneman of Altrisk says that because the benefit is for temporary loss of income there is a higher chance of a claim; and this means that underwriting is generally more thorough. Sanlam product actuary Petrie Marx says that underwriting can be a lot more intricate. “You have to quantify cover,” and financial underwriting is necessary along with medical underwriting. Income protection products serve specific needs - but they are more complex and clients need to understand this, says Marx. Occupation is an important part of any income protection policy especially at underwriting stage. The duties and roles in an occupation are also important to note – and these are likely to be more important than the actual job title, Booysen observes. Duties and roles also change over time, and can be both manual and administrative. Booysen comments that we used to think of manual work as not sitting behind a desk – but consider a mechanic who owns their own business - they have both manual and administrative duties. A general approach may not always work in this market – and applications will require more detail to ensure accurate underwriting and ultimately a good claims experience. Underwriting a temporary income protection policy is different to underwriting life and permanent disability products. Booysen explains that for a life policy an underwriter will look at the likelihood the individual may die earlier than expected. Information is provided by the proposer. If there are any disorders the severity of these need to be understood and “severity is easy to establish.” In underwriting a policy where temporary income benefits are offered, you have to consider more complex elements - for example if there is a disorder that is being treated – is there compliance with the recommended treatment guidelines - and could there be a recurrence of symptoms, because even a minor occurrence could result in a claim. According to Booysen, you have to determine the claims scenarios that may occur around conditions. There may also be situations where outside of work occupations could affect the ability to work. Booysen adds that another important point to consider is that a policyholder’s change in health is likely over years, and maintaining benefit levels in line with income growth over the years, even if substantial, can be allowed through guaranteed future insurability, which at FMI, happens without further medical underwriting How does waiting period affect underwriting? This can affect what conditions may be covered. For example some conditions may be temporary and of very short duration – minor impairments. In a policy with a 30 day waiting period minor impairments would not be likely to give rise to a claim – but in a 7 day waiting period policy they could. Financial underwriting is also important in income protection – and very different to that on a life policy. “We really need to know that you are earning the income you say you are earning,” says Booysen. Business expenses may also be covered and these need to be confirmed. In general he says around 70% of policies are accepted at standard rates and that underwriters may offer a different final solution to the client if necessary – for example additional benefits, or a change in waiting periods. SAVE THE RYNO Ryno needs to quit the killer. With a commitment to do so, Altrisk will give him a reduced premium from day one. Plus we’ll help him quit. If your clients smoke talk to them about Altrisk’s Proactive Smoker – it could save their life and their pocket. For more information speak to your Altrisk broker consultant or go to www.altrisk.co.za We’re your type of risk insurer. Altrisk is a division of Hollard Life Assurance, an authorised financial services provider (FSP 17697). 24 INCOME PROTECTION FEATURE 30 November 2014 Three questions you must ask By Nic Smit, product actuary, FMI C lients have more options than ever when it comes to choosing a provider for their income protection needs. How do you decide who to place this important cover with? Our research shows that the three most important questions you should ask of an income protection product are: 1 Will my claim get paid and how much will I receive? We buy insurance so that it will pay out when you need it so the question of claiming is the most important question you can ask about your income protection product. Most insurers have recently added more claim criteria. However, there is too much focus on the number of claim criteria and not on how each criterion works at claims stage. Income protection insurance replaces the income lost through your inability to work due to injury or sickness. It doesn’t matter whether or not you have children or other dependants – if illness would mean you couldn’t pay the bills, you should consider income protection insurance. www.moneyadviceservice. org.uk and www. moneysmart.gov.au Occupational Disability is still the criterion under which most income protection claims are paid and is therefore the most important criterion to focus on. Assessing claims on this basis requires expertise and experience in both claims assessment and underwriting. It is important to select an insurer that has the required experience in disability cover. Also, some insurers allow you to submit claims for certain common temporary conditions (like fractures) without requiring a full occupational assessment. These fast track options make it easier to claim for certain conditions and thus to receive your benefit pay-out as fast as possible. Any criteria that allows you to claim quickly with fewer requirements is to your advantage. Remember that 20% of all temporary disability claims are for partial disabilities. Partial claims are either assessed on percentage disabled approach or a loss of income basis. Neither approach is better than the other, which means it is important to ask if your insurer allows you to choose to be assessed on the approach that is best for you. Finally, you need to consider what the requirements are around aggregation and proof of loss of income at claims stage. These can reduce your benefit pay-out and different insurers have different rules. 2 Can I get cover that matches 100% of my needs? It is important that you obtain cover that is flexible enough to match your specific needs. You should check whether you can cover 100% of your income until the day you would have retired. Some insurers only allow you to cover 75% after the first two years of your disability, meaning that you retain 25% of the risk that you cannot work after two years of disability. You should also consider waiting periods. Shorter waiting periods cover more of your disability but longer waiting periods have a cheaper premium. A variety of waiting periods, as well as the option to select multiple waiting periods, will allow you to select the best cover at the lowest premium. For benefit terms, shorter benefit terms allow you to plug the gap in the existing PHI cover provided by your employer. For example, if you have a 3 month waiting period on your PHI cover, a 24 month benefit term results in you paying for cover you don’t need. Can I change my cover at a later stage without further underwriting? 3 Your income protection needs are likely to change over time, for a variety of reasons. It is impossible to predict these events upfront so it is important to consider what options are available on your policy to update your cover, without requiring you to be medically underwritten again. Medical underwriting is a risk because you may be healthy when you initially apply for cover, only for your health to deteriorate before you need to change your cover. If this happens, you are less likely to be able to update your policy.You should compare the options available to update your benefits once a policy has commenced. It is important to dig deep, because some options have restrictions buried in the small print. For example, you may not be able to use the option if you were accepted with a loading, exclusion, or if you have previously claimed. There are a number of different products on the market but to be effective it is important that they cover the fundamentals of income protection – protecting your future income with cover that is complete and flexible. Not just for the self employed I ncome protection is an incredibly powerful product, says Discovery Life’s Gareth Friedlander. It fills a need and is very appropriate. Income protection policies have a lot of flexibility – you can select how much of your income to cover and when to take cover from (waiting periods). This makes the product suitable for those who are self-employed, those who are employed but don’t have an income protection employee benefit, and those who are employed and do have an employee benefit but need a top up to cover gaps in cover. Temporary income replacement policies are no longer the sole domain of Replacement ratio: Sum assured relative to income Andre Froneman Gareth Friedlander the business owner – Dennis Booysen says at FMI they see a 50/50 split of business owners and employees taking income protection. Friedlander says that income protection that tops up existing group cover is very relevant. Many benefits offered do not often cover 100% of income, and many benefits can take a few months to kick in. If you are employed and have sick leave – cover with a notice period of more than a month makes sense as sick leave for an employee working a 5-day week is typically 30 days in a three year cycle. If you are self employed shorter waiting periods need to be considered, says Andre Froneman of Altrisk. “On average our clients select a one month waiting period.” INCOME PROTECTION FEATURE 25 30 November 2014 Assessing claims C laims assessment is a different process to underwriting. Most policies are underwritten at inception – and when it comes to claims the intention is to pay as quickly as possible. But an assessment process still needs to take place. Magda Briers is head of claims at FMI, and says that assessing a claim can be done within a day – if all the client, and doctor forms are complete. But for a standard claim a typical turnaround time is three days. Andre Froneman of Altrisk says that every claim is unique – and each claim needs to be validated. Assessing claims involves looking at both doctor and client forms and , international medical guidelines for recovery periods. In claims, Briers says nondisclosure (which may not be intentional) is a much bigger problem than fraud, making it the main reason claims are rejected. Briers says around 50% of their claims are as a result of surgical procedures, and around a quarter of claims relate to musculoskeletal problems. Almost 40% of claims are paid to individuals with previous claims on their policy. Magda Briers: 50% of claims a result of surgical procedures Underwriting versus claims A claims assessor will look at an event that has happened – how valid the event is and the duration of the event. An underwriter looks into the future and predicts the risk – the likelihood of a claim. FMI’s average claim duration is 76 days, and 80% of claims are within the 90 day period – so most are of a short duration with an average claim amount of R20 – 25 000 per month. Only around 5% of claims are for the full term. ABILITY TO EARN AN INCOME OFTEN YOUR BIGGEST ASSET EARLY IN YOUR CAREER According to our claims statistics report for 2013, retrenchment was the largest unnatural cause for claims on Loss of Income Protection insurance benefits (13.4%) and premium waiver type benefits (60.7%). Retrenchment accounted for 41.9% of loss of income claims in the under 35 age group, 37.2% in the 35 – 44 age group, and only 20.9% in the over 45’s age group Retrenchment was the second largest cause of loss of income claims for males younger than 35 at 11.6%, and it was the third largest cause for the same claims among females in the age group at 13.2%. Ryan Switala, Liberty 26 RISK - SHORT-TERM 30 November 2014 Robbery on the increase T he South African Police Services release annual crime stats. Their most recent stats were released in September for the 12 months ending 31 March 2014. In all the categories of robbery there were increases. On average, 53 homes were robbed violently each day, 714 homes were burgled, 31 motor vehicles were hijacked every day and each day 394 vehicles were broken into and property stolen out of them. Violent property crimes These are robberies where “armed perpetrators threaten or use violence against their victims in order to steal their belongings. When perpetrators use a weapon, it is recorded as ‘aggravated robbery’.” The number of aggravated robberies increased 12.7% from 105 888 cases in 2012/13 to 119 351 cases in 2013/14 • Street or public robberies increased by 8 598 cases to a total of 69 074 incidents. This is 14.2% higher than the previous year. • House robberies occur when people are confronted by armed gangs while they are in their homes. This crime increased by 7.4% to 19 284 incidents. On average 53 households were attacked each day in 2013/14. • Business robberies increased by 13.7% to 18 615 incidents. It is 461% higher now than it was in 2004/05. There were an additional 2 238 armed attacks on businesses in 2013/14 compared to the previous year. • Vehicle hijacking increased by 12.3% to 11 221 incidents. This means that 31 motor vehicles were hijacked every day on average in 2013/14. This is of particular concern given that most of these cases are as a result of organised crime syndicates. • Truck hijacking increased by 5.1% from 943 incidents in 2012/13 to 991 incidents in 2013/14. As with vehicle hijacking, this crime is generally perpetrated by organised crime syndicates and the increase in both types of hijacking suggests that organised crime is on the rise in South Africa. Property crime Where property is stolen without the use of violence or force. Between 2012/13 and 2013/14: • Residential burglary decreased by 0.6% (a reduction of 1 653 reported cases) to a total 260 460 incidents. This means that each day, on average, 714 households were burgled. • Business burglary has remained largely unchanged (a reduction of 30 reported cases) to a total of 73 600 incidents. This means that each day, on average, 202 businesses were burgled. • The number of cases of theft out of and from motor vehicles increased by 3% (an additional 4 154 cases) to a total of 143 812 incidents. This means that each day, on average, 394 vehicles were broken into and property was stolen. • Commercial crime incidents (which include several crimes like fraud and corruption) decreased by 13.6% (a reduction of 12 460 cases) to a total of 79 109 incidents. A single incident can involve tens of millions of rand. • The catch-all category called “all theft not mentioned elsewhere” increased by 1.6% to 368 664, an additional 5 848 reported cases. Source: Africa Check a non-partisan organisation which promotes accuracy in public debate and the media. Twitter @AfricaCheck and www.africacheck.org Quality advice vital for business insurance T hese days insurance cover is just a phone call or website click away, and the temptation to take short-cuts when arranging commercial insurance is always present. The reality is that seeking quality advice will assist a business in making sure that they purchase the correct commercial insurance solution for their business, says Standard Bank. “Even though most reputable insurers have the facilities to offer business insurance over the phone or via the Internet, these services have their limits,” says Bryan Verpoort, head of Corporate and Business Insurance at Standard Bank. “If a business is the same as many others, as is the case with Quick Service Restaurants (QSRs) for example, obtaining quotes this way can suffice. The reason being that the cover required would not differ markedly from other QSR businesses. Insurance would then be of a ‘one policy fits all’ variety.” “However, as soon as a business is unique, or operates in a defined niche, it is advisable to contact a professional adviser so that a detailed needs analysis can be undertaken. By taking out a generic policy only to find out that the business is either over or under- insured when lodging a claim could be costly at best, and disastrous for the business at worst.” Advantages of using an accredited adviser: • Offering a thorough audit of a business, its equipment and assets. This ensures that an accurate value assessment is made and the replacement costs of machinery, equipment and assets are accurately documented. Premiums would then reflect the true value of replacing equipment. • The adviser’s needs analysis would become As soon as a business is unique, or operates in a defined niche, it is advisable to contact a professional adviser a part of the insurance company’s records. This reduces the possibility of disputes arising about the assets involved and their value if a claim is lodged. • The insurance company’s assessor will point out shortcomings in safety, security or fire prevention equipment, such as fire extinguishers that have not been checked or maintained. As these vital elements could impact on a claim, the business owner has an opportunity to rectify the situation and mitigate the risk before the policy is written. If not rectified within a stipulated period, the insurance company could either accept or reject the risk. Acceptance of the risk, in these cases generally means that the insured will pay a higher premium and excess until such time that the risk is mitigated • Advice can be extended to include insurance against specific risks, such as the possibility of business interruption caused by non-delivery of materials or components locally and internationally following an insured event. As with all services and products offered by an insurance company, the quality of cover depends largely on the information provided by the client. “It is therefore in the interests of the insured to disclose all relevant information about the premises and operational risks being insured.” JHB 46757 We offer all sorts of worry-busting stuff. We just can’t fit it all in here. We’re super proud of being awarded the FIA Personal Lines Insurer of the Year 2014. It stands so nicely next to our 2013 award. But more importantly, it means we’re doing right by our brokers and partners. When we get accolades like this from people like you, boy do we celebrate. And then we go right back to working on how we can get better, so that we can help you to make everyone’s lives a lot less worrisome. Proud winner FIA Personal Lines Insurer of the Year 2013 and 2014, thanks to our brokers and partners. personal • commercial • corporate • investments The Hollard Insurance Co. Ltd, Hollard Life Assurance Co. Ltd and Hollard Investment Managers (PTY) Ltd are authorised Financial Services Providers. 28 RISK - HEALTH NHI has been widely misunderstood and it is evident that many view it as a threatening development. I do not believe that the introduction of NHI will mean the end of the private healthcare sector or medical schemes. Medical schemes will continue to play an important role for those individuals who wish to have healthcare cover over and above that which NHI will offer. The NHI process will bring about a greater degree of co-operation between the public and private healthcare sectors. The challenge is to develop innovative approaches to promote such collaboration and enable it to flourish. Professor Yosuf Veriava, CMS chairperson, CMS Annual Report Medical scheme beneficiaries and contributions 52.4% female beneficiaries, 47.6% male 7.1% pensioner ratio – 8.2% for open schemes, 5.7% for restricted schemes Average age 31.9 2014 contributions Average risk contribution cost for a principal member: R1 653 Average risk contribution for an adult dependant: R1421, for a child dependant: R560 30 November 2014 Look at solvency objectively S olvency is always mooted as a consideration when choosing a medical aid scheme. According to the latest Council for Medical Schemes Annual Report, schemes are required to have solvency of a minimum level of 25% of gross contributions. More commonly expressed as a solvency ratio of 25%. The industry average for 2013 was 33.3% solvency. Open schemes have a slightly lower solvency ratio than restricted schemes – 29.7% versus 38.2%. “While some schemes continued to face solvency challenges in 2013, the industry as a whole remained fairly stable.” When does the solvency level of a scheme become an issue? The CMS monitors schemes whose levels fall below the 25%, and those that “have reserves that are rapidly diminishing.” Six open schemes had reserves below the required The CMS report says that the most important factors impacting on solvency are: solvency level, three restricted schemes fell below 25%. Two of the largest schemes whose solvency levels fell below 25% include Discovery (52.9% of beneficiaries in the open market) which had a solvency of 24.3% (this which since moved above the 25% level); and GEMS. GEMS covers 47.2% of beneficiaries in the restricted market and had a solvency level of 11.7%. Although relatively new, GEMS has been operational since January 2006. Size of the scheme and reasons for low solvency levels must also be taken into account. Smaller schemes may be more vulnerable when solvency levels fall below the required minimum. •The pricing of contributions relative to benefits provided, including whether such benefits are provided from the risk pool of the scheme or from members’ savings accounts. •Non-healthcare expenditure. •Investment income. • Membership growth. “The membership profile of a medical scheme further affects its solvency.” This includes variables such as average age of members, pensioner ratio, gender and dependency ratios. “All of these impact on the frequency and extent of claims.” PMBs The provision that entitles all members and beneficiaries of medical schemes to a set of PMBs is arguably the most striking feature of the Medical Schemes Act. This guarantee protects members against health events which could otherwise result in financial ruin. Schemes must pay for PMB conditions in full, according to the healthcare provider’s invoice, from their risk pools. Schemes are not allowed to use members’ personal medical savings accounts to pay for PMB conditions. PMBs go hand-in-hand with the system of designated service providers (DSPs). These are doctors, pharmacists, hospitals and other healthcare providers that medical schemes select as the first option for beneficiaries when they need care for PMB conditions. Beneficiaries are entitled to use non-DSPs but may have to pay a portion of the bill as a co-payment should they do so. According to the CMS annual report, the scheme community rate for PMBs varied between R 332.30 and R 1,150.40 per beneficiary per month for 2013. The large variance in PMB cost across all medical schemes is symptomatic of the differences in membership profile between schemes. This highlights the unfair playing field and the fact that schemes are not competing fairly in terms of cost. The huge variance also points to the need for risk equalisation to level the playing field and allow schemes to compete on efficiency rather than membership profile amount; a point that the CMS acknowledges in the report. The expected industry community rate for 2013 was R 508.2 per beneficiary per month, which is an estimate of the cost of the PMB benefit package for 2013 while the total paid for PMBs in 2013 was R 54.01 billion. This amounted to 53% of all risk benefits paid out. Anthea Towert, head of Scheme Consulting for Technical and Actuarial Consulting Solutions, Alexander Forbes Health The Medical Schemes Act makes provision for the review of PMB regulations every two years. Draft regulations reviewing PMBs were submitted to the Ministry of Health in 2010 and were expected to be published in the Government Gazette in 2012/13. This had not happened by March 2014. The CMS has further undertaken to review the definition of various PMBs. Members of medical schemes are encouraged to familiarise themselves with PMBs, a fundamental provision enshrined in the Medical Schemes Act which sets schemes apart from other forms of health insurance. Most complaints that the CMS receives from members are related to schemes refusing to pay for PMB conditions as prescribed by law. Daniel Lehutjo, acting chief executive & registrar, Council for Medical Schemes Complaints to the CMS 5 609 complaints received in the year 2013 10.9% down from previous year 3 078 complaints resolved in 2013 related to clinical matters 2 116 of these relate to short payment on PMBs 620 non payment of PMBs 8 complaints for broker conduct and 6 for incorrect advice (Total number of accredited brokers 31 March 2014 8 757, 2146 broker organisations) Complaints resolved in favour of Complainant - 2 763 Medical Scheme - 1 845 Both – 400 Why pay for more healthcare cover if you can fund it through your lifestyle? Unlock the full potential of Momentum Health with Momentum's HealthReturns. It increases benefits without costing more. Visit www.momentumhealth.co.za for more Terms and conditions apply. Download your Momentum Health app now. Momentum Health members only. 30 RISK - HEALTH 30 November 2014 Client needs at the core A nnouncing an average annual contribution increase of 7.9% for 2015, Momentum Health cited stability in terms of its product, financials and service offering against the background of a volatile industry as the main factors contributing to the Scheme’s favourable outlook. The Scheme also noted that it was one of very few that managed to grow its membership without seeing a decline in its average member age. Explaining how the Scheme manages to continue growing its membership with a favourable member profile, Damian McHugh, head of Momentum Health Marketing and Sales, says Momentum’s HealthReturns pioneered a new approach to healthcare funding – one that puts the member in control and, unlike most incentive programmes, does not cost anything. “HealthReturns really set the ball rolling in terms of engineering healthcare benefits through a positive lifestyle,” he continues. “Our offering continues to gain popularity due to increased consumer demand for control over their benefits and budget. With the option to pay HealthReturns into a HealthSaver account, members can increase or, if they so choose, decrease their day-to-day funding as their needs change and can do so without having to change their option too.” The flexibility in the Momentum Health product range is further seen in terms of its provider choice model where members can save more than 35% on monthly contributions by choosing to make use of certain selected service providers. With affordability a key concern to healthcare consumers today, McHugh points out that an approach that encourages both members’ health and financial wellness is paramount. The South African healthcare environment has seen a lot of change over the past years, with consolidation and closing of schemes in many instances. As part of a greater global response to the burden of disease, and in an effort to prevent absenteeism in the workplace, healthcare funders are increasingly seeing the need to focus on pro-active health awareness and lifestyle changes. Contributions and benefits With medical inflation that outweighs CPI year-on-year and factors such as changing medical technology, usage of benefits and the pressure on schemes to maintain or reach a 25% solvency level, containing annual contribution increases can often prove challenging in the healthcare industry. With an average annual increase of 7.9% for 2015, McHugh noted that Momentum Health has provided for all the above factors and is well positioned to continue innovating healthcare solutions in the year to come that will speak to both the needs of its members as well as the longevity of the Scheme. Given the flexibility associated with the Momentum Health product range, he pointed out that family increases will vary based on the actual option and provider selections made. On the back of this increase, the Scheme still managed to increase benefit limits without having to increase any of its copayments. Other benefit changes endorse the focus on preventative wellness, and include the extension of benefits for mammograms to members from the age of 38. Momentum’s wellness and rewards programme, Multiply, is also continuously enhancing its offering through the addition of new partners and 2015 will be no exception. For instance, Multiply members will enjoy a 25% discount on membership fees at SmokeEnders, a unique way to assist smokers in giving up the deadly habit, and 30% discount on membership fees at EatForLife. With sponsorship support from Momentum, Multiply members will enjoy a host of golfing discounts and benefits, ranging from a significant discount on joining and monthly membership fees at playmoregolf SA, World of Golf and Golf Village practice and play packages, as well as discounts from the ProShop. Damian McHugh Technology has also brought about innovation to help today’s consumer better manage their time and increase access to healthcare information, through mobile sites and mobile apps. “Who would have thought ten years ago that you would be able to instantly check your Savings balance on your cellphone, then request authorisation for a procedure while you are in the doctor’s room – a network provider in your neighbourhood that you located via that same app?” McHugh enthuses. “Catering for members’ needs throughout different life stages and allowing clients greater control over the future of their healthcare is what schemes will rely on to distinguish themselves from the market going forward. The resulting innovation will in turn ensure that South Africans continue to enjoy world-class healthcare cover,” McHugh concludes. Innovation and better risk management vital T he future of medical schemes lies in preventative healthcare and wellness. This is the view of Peter Jordan, principal officer of Fedhealth, one of the larger medical schemes in the country. Jordan says to try and break the spiralling cycle of costs and high claim volumes, coupled with a diminishing member pool, member education will become increasingly important as well as a genuine commitment from schemes to generate conversations with members. “Not only will this enable the schemes to address their members’ concerns directly, but also to gain a better understanding of their wants and needs.” “Medical aids have a massive responsibility towards their members and transparency will be a key differentiator in future. We also need to change the way members view Medical Aid, thus a big focus for 2015 will be the coordination of members’ care through a 360 degree approach,” he says. This entails GP’s becoming the coordinator of a member’s care. Doctors and patients will work together closely, so that all healthcare needs are met and so that fragmented care, which is not only costly and time consuming, but also dangerous, can be avoided.” Identifying high-risk members who are likely to develop conditions that can be managed or even avoided is another way of ensuring sustainability. Networks will remain key in the coming year with the primary objective of ensuring members have access to first-rate healthcare without resorting to unnecessary out-of-pocket expenses. Jordan says schemes need to ensure their networks are wide enough to ensure access for the majority of members. “Ultimately this assists in managing scheme costs,” he says. He suggests that members of medical schemes ensure that they use a designated service providers (DSP) or health provider within their scheme’s network in order for their prescribed minimum benefits (PMBs) to be paid in full. An excellent way of maximising your benefits is by using the health care provider networks or DSPs specified in your particular medical scheme. “These networks have been created with scheme members and health providers’ interests at heart,” explains Jordan. “These partnership models ensure that medical scheme members have access and cost certainty when visiting one of the DPS providers and this ensures that their scheme benefits are maximised.” Jordan goes on to explain how these partnership models or networks of DSPs benefit all involved. Healthcare providers gain because they are ensured costcertainty, and the schemes in turn are able to anticipate future healthcare provider related costs via these models. This kind of collaboration is essential to ensuring the medical aid industry remains sustainable. From an intermediary perspective, brokers will continue to play a key role in helping consumers become more aware of the various options available to them, and how to get the most out of their medical aid. “While it may be tempting to select the cheapest option, members deserve reliable and value for money medical aid. Intermediaries guide members in choosing the best option for their budget and their health requirements,” explains Jordan. “We all want to get the most out of our medical aid schemes. The key to achieving this is by understanding and using your medical scheme benefits to their best effect.” 30 November 2014 RISK - HEALTH 31 Four ways to combat rising costs C ost-management techniques may be assisting to reduce overall costs within medical aids. This in turn reduces the contributions you have to make to your medical aid, but this doesn’t help if you end up paying more out of your back pocket. One key problem with this is that when the cost is inside your medical aid, it’s handled by experts. COMMUNICATION When it’s handed over to you, you may have far less information and knowledge to make a good decision. So, we need to find a way of keeping that expert insight available to you when you do make your decisions. What do we do? Kristin-Ann Cronje, Alexander Forbes, www.benefitsbarometer.co.za, looks at four ways to combat rising healthcare costs. SCREENING One solution would be communication. Medical aids need to ensure that you have adequate access to information, but balance this with the need for you to understand this information. This doesn’t mean throwing reams of information at you that nobody would understand if they ever bothered to read it at all. • The reality is that most people only check what their medical aid covers once they’re being affected by it directly. For instance, when you get diagnosed with a condition, you want to know if your medical aid will cover it. Of course, by then, it’s often too late. Early diagnosis of conditions through screening tests at wellness days could assist in reducing overall costs by treating diseases before they become too complex. Many medical aids now cover preventative care for this very reason. • So, check what kind of preventative cover your medical aid offers, and use it! TECHNOLOGY This is where advances in technology may actually assist in bridging the gap between individuals and experts, so that you can make appropriate decisions about your medical treatment: • Health information technology (HIT) is helping to provide doctors with more information on patients from a variety of sources. This enables the doctor to get a more holistic understanding of you, your medical history and the treatments that have or have not worked historically. With this information at hand, doctors should be able to prescribe more effective treatment, which should reduce overall costs in the long run. • Online mobile health applications (or apps) can also help in providing immediate information on where to go in an emergency or what medicines are approved under various treatment plans, helping you to make the correct decision quickly. • The use of telemetry can simultaneously assist medical providers and members where this technology is used to better manage the care of certain conditions. The reality is that balancing complexity and affordability is likely to remain a challenge into the future. Where possible, we need experts to manage this complexity for us as individuals, and then provide us with the information that is crucial for HEALTH EDUCATION Health education with the intention of improving health literacy is extremely important. This should ensure that you seek medical assistance where necessary and before it is too late. Health education should give you a better understanding of your conditions and required treatment so do a bit of reading and ask your doctor, pharmacist or medical aid for more information if you feel you don’t understand something fully. us to know in an easily digestible form. On the other hand, as members, we should also be as proactive as possible in ensuring that we understand our health and our healthcare benefits. NEWS 32 30 November 2013 32 CLOSING 30 November 2014 ONE FOR THE BODY, TWO FOR THE BRAIN... Health Care in South Africa 2014 If you want to know about health care in South Africa this is the book to read. Author Liz Still shares her insights into the industry, health care worldwide, and the many complexities in the local environment. Published by Profile Media this book is a must read for everyone in the industry. National Health Insurance remains a topic in the political arena, as does the discrepancy between private and public health care. While this polarising view continues to dominate some lines of thinking, health care carries on, medical aids continue, and many seek care from providers for medical conditions. How much does this cost, how much should it cost, what does it cost in other countries are just some of the issues Still looks at. Along with chapter on medical inflation and interviews with key role players, Still also looks at the ever popular topic of costs – health care and admin. With an independent eye she sheds light on how we could look at these more objectively. Brain rules How and why does your brain work? John Medina authored this best seller in 2008 –that includes 12 brain rules (things like exercise, sleep, repeat, explore) and a look at the differences between men’s and women’s brains. Stress also gets a chapter – the good and bad. And in case you were wondering – treadmills in the office and classroom are not a new fad – Medina writes emails on his treadmill. The book is an extremely interesting read and covers 12 principles for surviving and thriving in 12 chapters. Filled with anecdotes and examples – he also gives a few practical ideas that we can use to improve. Do one thing at a time is an example : “The brain is a sequential processor, unable to pay attention to two things at the same time.” The chapter on gender is an interesting one – is there a difference between men and women’s brains? Yes says Medina – women are genetically more complex. A very worthwhile read. Acronym heaven How well do you know your acronyms? Take our quick quiz below and see how you do 1.Which country is in the MIST but not the MINT? a) India b) South Korea c) Tanzania d) Indonesia 2. What would make the MINT a MINI? a) India b) Indonesia c) Iceland d) Iran 3. Which country is the needle in the PINE? a) New Zealand b) Norway c) Nigeria d) Northern Ireland 4. Which two African countries are part of the CIVETS? a) Egypt and Sudan b) Ethiopia and South Africa c) Ethiopia and Sudan d) Egypt and South Africa c) Emerging and Growth Leading Economies d) Endangered and Growth Losing Economies 5. The Eagles are.. 6. KETU is exclusively African a) An underperforming football side b) An endangered species a) True b) False Know your acronyms! MINT – Mexico, Indonesia, Nigeria, Turkey MINI – Mexico, Indonesia, Nigeria, India MIST - Mexico, Indonesia, South Korea, Turkey PINE – Philippines, Indonesia, Nigeria, Ethiopia EAGLES – Emerging and Growing Leading Economies including Brazil, China, Egypt, India, Indonesia, South Korea, Mexico, Russia, Taiwan and Turkey. CIVETS - Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa KETU – Kenya, Ethiopia, Tanzania, Uganda
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