Category Archives: Pension Funds

Normal service has resumed

I found myself facing a crisis recently. I have always promised clients that I would only invest their funds where I myself am prepared to invest for myself and my family and yet with the recent shenanigans from our president who saw fit to remove the finance minister, I found myself at a cross roads. From my very simplistic point of view, South Africa is facing one of two future outcomes:

  • We are either at the point where Zimbabwe was 20-25 years ago, or
  • We are facing a short-to-medium term of economic pain (5+ years) from which we will ultimately emerge.

The crisis for me is that if I believe that we are a future Zimbabwe then it requires action now, 10 years’ time will be too late. At the very least it would require financial emigration which would involve selling our house, taking the capital offshore and then renting. On top of that it would mean no longer contributing to retirement funds in SA. That’s a radical departure and advice of that nature could be considered reckless at the least. But it would be what I am doing and it would require telling my clients about the path of action that I have taken.

On the other hand, if I believe that our crisis is going to be short-to-medium term but that we will ultimately emerge then we can stay in SA, keep the house and still continue to make use of retirement funds here. That does not mean to say that regulations around retirement funds wont change (think prescribed assets and the withdrawing of asset swap facilities). If that happens then we adjust at that stage, but for now we continue. In addition to continuing to contribute to retirement funds in SA, it makes sense (from more than a fear point of view) to continue to invest discretionary funds outside of SA via the annual discretionary allowance. It’s a big wide world out there and if you sat on the moon and looked at the earth as an investment destination, you would not put 99% of your money into the very small economy at the tip of Africa. Diversify!

So with these two scenarios in mind I went looking for some answers. The problem is that there are few people who you can ask and who will give an honest answer. There are too many conflicts of interest. Pension fund managers’ incomes are a function of people investing in their products, so too for asset managers and there are few economists who are prepared to be quoted as saying that SA is a complete basket case and that it’s time to get out before it is too late. Yes, there are some “journalists” and commentators who have written about the doom filled future but their articles are too sensationalist, emotive and lacking in substance for me.

I finally managed to have a few off the record chats with some asset managers and strategists and last week I resolved the issue for myself.

I truly believe that we will emerge from the crisis that we are facing as a country. It’s going to be tough in the short term, even if Zuma is removed. There is still a lot that is rotten in Government and our State-Owned Enterprises and this is not going to change overnight. We are also facing an increasingly divided society with yet another generation of poorly educated youth. These are significant challenges that face us.

But there are brave, principled people who are finally starting to take a stand against the blatant and unashamed looting of state resources and our country. These are the future leaders of this beautiful land and this is one of the reasons that I have hope and am not selling my house. I will contribute to my pension fund this year and I will continue to diversify any surplus investments offshore. I also commit myself to building a fairer, less divided country for all. For now, “normal” service has resumed.

You should be ashamed of yourselves, Liberty Life

I just came across a client who has been sold a decreasing life annuity by someone representing Liberty Life. Yes, I know that there is no such thing (officially) as a decreasing life annuity (no one would buy it if there was) but this is effectively what a non-escalating life annuity is. You have condemned the client to future poverty!

While the initial income may look more attractive, in 20 years time (the guarantee period on the annuity for a 65 year old with stage 3 cancer and no financial dependents?) she will be getting an income which will be less than 1/2 of what she should be getting if there was an inflation linked escalation.

This is the kind of product and advice that gives our industry a bad name. If the insurance companies and ASISA wont act then perhaps it is time that the regulators banned this kind of product.

Is there anyone out there at Old Mutual, Liberty and Sanlam?

One of the frequent tasks we face for clients is something known as a Section 14 transfer – this involves moving a retirement annuity (or preservation fund) from one company to another. Typically this would be from an insurance company to a unit trust company. Reasons for clients wanting to do this are many, such as:

  • No/limited transparency from the insurance companies with respect to costs and performance of their investments. Many investors suspect that the fees are high and performance is poor but they are horrified when they find out the actual figures. The high fees are not limited to the “old generation” RA’s – there are many “new generation” products with very high annual fees! Investors should stay away from any investment via an insurance company…there are better options elsewhere – let the insurers focus on insurance!
  • No/limited flexibility when it comes to making changes to the contribution amount or term and did we mention the penalties that are frequently applied to anyone wanting to move their funds? This is a legacy to an archaic pricing model. People’s circumstances change, often through no fault of theirs and to penalise someone who can no longer afford to pay a premium as a result of being retrenched or being forced to join a work pension fund is immoral and a bad business practice. There are better ways to do business!

So, to any of the insurers out there, here is the message from consumers. There is something fundamentally wrong with the business model when the S14 dept is “understaffed and backlogged” to quote one of the employees. The longer you take to action S14 transfers (180 days is the “legal max and many of you are abusing this) the more the reputation of your company is damaged. This applies to all the insurers – you may think you are keeping the funds for longer and making it difficult for people to transfer and that as a result they might eventually give up in frustration, but the reality is that in the process you are losing clients forever.

Address the issues that are leading to so many clients wanting to move – and it’s not advisors chasing commissions! Rather, it is a fatally flawed business model that is constantly dependent on new business to survive.

Lies we tell ourselves

I recently had a conversation with someone who told me that when she was on her way (walking) to a very important meeting, a bird pooed on her head and clothes. That meant that she had to turn around, go home and shower and get changed into a fresh outfit. “Oh well” she said, “isn’t it supposed to be a sign of good luck?” Rubbish – it’s not lucky – you’ve just been crapped on!

This got me thinking about other lies we tell ourselves to make us feel better when it’s too difficult to face the truth. Like the client who is in debt up to his eyeballs and who was justifying spending R65k on an overseas holiday for the family on the grounds that 3 weeks, in SA over Easter, would not have been much cheaper. Rubbish – that’s a lie to justify willful spending of money they dont have.

Or the client who cant afford to save for retirement because they need to have a new car, or put their kids through a very expensive private school education – they will get to it later. What’s that they say about the road to hell being paved with good intentions?

There are so many examples of the lies that we tell ourselves to make us feel better about our poor relationship with money. It reminds me of the classic scene from the movie “A few good men” when, under cross-examination, Jack Nicolson’s character finally cracks and shouts out “the truth, you want the truth? You cant handle the truth!”

And so we tell ourselves little lies to make us feel better about what is actually happening – how else can you explain the folklore that it’s a sign of luck if a bird poos on your head?


Nedgroup Core Accelerated Fund

Regulation 28 has long been a frustration of many retirement fund investors with the Financial Services Board having applied a “one size fits all” approach. That means that within Regulation 28 confines, a 20-year-old investor in a retirement fund is treated the same way as a 64-year-old investor with respect to the maximum exposure that they can have to growth assets. This is insane!

In short, regulation 28 limits the exposure that an investor can have to certain of the asset classes. Equity exposure is limited to a maximum of 75% of the fund and property to 25%*. Reg 28 also limits offshore exposure to 25% of the investment.

And while it has been possible (in theory mostly) to construct an “aggressive” retirement portfolio with 75% in equities and 25% in property, the reality is that this has required frequent rebalancing in order not to fall foul of the regulation.

The resulting “default” has been for investors to make use of “balanced” or “managed” funds. Unfortunately for younger (and more adventurous) investors, who may have a 30+ year view on their retirement money or who are just wanting more growth, most balanced fund managers manage their portfolios with a 5-7 year time horizon because this is how they are measured (it makes no sense).

The result of this is that it unusual to find a balanced fund with more than 65% in equities and 5-7% in property. Over a 30 year term, this conservative approach could seriously undermine the returns that investors can achieve – further compounding the issue of most South Africans not being able to retire with sufficient funds.

Things were not looking all that attractive in the Reg 28 space…until recently, that is, when Nedgroup launched their Core Accelerated Fund.

The Core Accelerated Fund is the latest addition to their Core (passive) range of funds that is managed by Jannie Leach and his team. It is reg 28 compliant and has a static asset allocation of 75% in equities and 15% property at all times with the balance in bonds/cash. That’s 90% in growth assets at all times! The fund will also have 25% offshore exposure (as long as the legislation permits this). And the best thing about the fund is that being a passive fund, it has a very low annual fund fee of 0.35% (this is as low as 0.25% if you access it via one of the LISP platforms).

So now it is possible to have a high growth oriented retirement fund with an all-in annual fee of less than 1%**.

This fund gets a big thumbs up!



*This includes 25% offshore exposure.

** this includes the fund, admin and advice fees.

Sanlam Cumulus Echo RA

I was recently approached by someone for help with her Sanlam RA’s – they are the bad, old traditional life RA’s with opaque fees, poor returns and hefty penalties if you make any changes before the term ends. It seems that Sanlam has found a way around this though with their Cumulus Echo RA where they are encouraging clients to move. The “carrot” is no penalties when the move to this RA and bonuses if they see out the term. Sounds good, or does it?

It took quite a bit of digging to find the fees on these new RA’s but after a while I found 2 pages* on the Sanlam website that say it all. The first one is the advice and marketing costs which are “hidden” behind a “more information” button. Here is what it says…

“If you prefer to select your own funds and will be investing recurring monthly payments, the following marketing and administration charge is applicable:”

Fund value band Yearly marketing and administration charge % of the fund value of the plan
First R500 000 4.10
R500 001 – R1 000 000 3.75
Excess above R1 000 000 3.50

The fee for using internal funds is slightly lower but still far too high to make it attractive.

But I think that the most insightful part of the investigation was an example of how much an investor could expect if they used the RA (including future bonuses).  “The Example is based on a monthly payment of R1000, taking into account an annual inflation increase of 6% over 25 years. It assumes an investment return of inflation plus 2% after fees.”

2% after fees? We know, that it is reasonable to expect a “balanced” unit trust fund to generate CPI+5% (after fees) over the long term (25 years). Sanlam seems to be acknowledging that their fees are so high that an investor should expect to only receive inflation+2% over that time. The loss of the 3% to fees, compounded over 25 years, will be devastating to your retirement and will result in significant damage to your ultimate fund value (bonus or not).

My advice to anyone considering the Cumulus RA is to run far away – pay the penalty for transferring away from the old RA and find a unit trust RA with an underlying passive fund – your total annual fee should come in at around 1-1.25% pa (advice fee included).


*One of the pages:

To pay a penalty or not?

A client of mine presented a potential dilemma to me. He has a living annuity through Liberty Life but also has the bulk of his living annuity funds on a LISP platform. He was wanting to move the Liberty one to the LISP and consolidate his investments on one platform*.
Under normal circumstances there should be no penalty when transferring living annuities. However, in the fine print, Liberty had noted that there would be an exit penalty if the annuity was transferred anywhere else within the first 5 years of the investment. As such he was advised that he was going to pay a penalty of 1.2% (±R6500) to move his annuity and he balked at the prospect.
We told him to find out from Liberty what the total annual fee on his annuity is and it turns out that they are charging him a total of 2.15% pa (admin and fund fee, no advice fee included – the advisor took that maximum upfront fee).
By comparison his living annuity on the LISP has a total annual fee of 1.1% (fund and admin fee, no advice fee). Do the maths – the 1.2% penalty will be covered in the next 12 months and thereafter he will be better off because of the lower annual fee (less than half of the current annual fee and there would still be a penalty to move for the next 24 months).
The real question I have for him is why anyone would ever invest in a product where there is any kind of exit penalty? There is no need to ever pay penalties when it comes to investing – there are far better (and cheaper) products out there than those offered by the life insurance companies. Stay away from them unless it is insurance you need!

*Note: he pays us directly for advice and there are no on-going advice fees on his investments so the advice we give to him is not affected by the desire to grow assets on which we earn fees.

Is everyone thinking it but no one prepared to say it?

What if SA is where Zimbabwe was ±20-25 years ago? With the benefit of hindsight, what would the average Zimbabwean do differently? Would they have stopped investing into their pension funds and bought more foreign currency? Would they have emigrated? Would they have bonded their houses to the hilt and taken the funds offshore?

I have always promised my clients that I would not invest their funds where I am not investing myself…if it is good enough for me it is good enough for them. In the same way, I have been a massive proponent of retirement annuities (and pension funds) in SA – they have made so much tax sense (as well as estate duty sense). But what if this is all about to change? If SA goes the way of Zim then I am afraid that your pension fund in SA will be worthless. If the state re-introduces prescribed assets for pension funds, then possibly it will be better to have funds offshore. If Zuma has been paid his commission for the nuclear deal, as some are suggesting, then we are facing a bleak future and a very weak currency – then it will be better to have funds offshore.

They say you should never ask a barber if he thinks you need a haircut and unfortunately this seems to apply to fund managers and pension funds too? If you ask them if it still makes sense to invest into your pension fund in SA they are likely to answer yes – their income depends on it. But what are they doing with their own money? I’ve asked a few of them but no one is prepared to stick their necks out – I suspect that they are all moving as much money offshore as quickly as they can but no one seems to be brave enough to say this in public.

So perhaps it’s time that we had a frank discussion about the future of pension funds in SA – we might not be Zimbabwe yet but perhaps we are the proverbial frog in the pot of water and perhaps we are reaching the point where we will no longer be able to jump out? So how about it, anyone brave enough to express an opinion on this one?

RA’s still make so much sense

I must admit to feeling quite deflated post the budget speech – kind of feels like we are just getting squeezed even more and that there is little motive to working hard and attempting to save when in reality we are just being taxed more and more and are given little incentive to save (R33000 into a tax-free savings account is not going to get you anywhere meaningful).

Dividend tax has gone up by 33% (15 to 20%) , capital gains tax has gone up for the maximum marginal tax payers and there was also no increase in the maximum tax deductible contribution to retirement saving – it is still capped at R350k per annum.

And then I got to thinking about the tax advantages of using RA’s and of even over-contributing to one where there is no tax relief on the contribution. Think about it…

  • You will get tax free growth on the investment – there is no tax on interest, no dividend taxes and no capital gains tax in the RA.
  • Any contributions where there has been no tax relief roll over to the following year or to retirement when you can take them out tax-free. This can either be as a lump sum (tax-free) or as income via your living annuity. I know that this is currently a bit of a process as SARS’s systems cant deal with it so you end up getting a tax refund not tax-free income. But if you take it out as a tax-free lump sum you could then invest it into some UT funds and draw income from it by way of sale of units. This would allow you to reduce the income draw on your annuity (which is taxable) by supplementing it with income from your UT portfolio (which would be close to tax-free income).
  • If you were to die with excess contributions in your RA then currently they would still form part of your estate but your beneficiaries could take them out as a tax-free lump sum.

So maybe there was little in the way of incentive to encourage people to save but with a little bit of thought we can make use of the prevailing tax laws to maximise retirement saving and find the light at the end of the tunnel.

I’m off to do another RA top-up!


When Stocks Plunge

Some thoughts on the market’s slide – with thanks to the Motley Fool

“Global jitters” was used in the media 933 times last week to describe why the market was falling, according to Google. Thanks, that’s really helpful. It’s the equivalent of a doctor diagnosing you with “general illness.”

S&P 500 companies earned something around $38 billion in profits over the last two weeks. Over time, that number will matter far more than what the market did during the last two weeks.

The biggest impediments to a comfortable retirement are impatience, pessimism, gullibility, self-interest of middlemen, ignorance of the exponential function, and overconfidence. All six come out during market downturns.

President Obama was briefed after the market fell 10%. I guarantee you he’s not briefed after it rises 10%. Asymmetric emotional responses explain so much of why investing is difficult.

Daily market prices are determined by computers in New Jersey fighting to be a billionth of a second closer to exchanges than other computers. Business values are determined by 7 billion people waking up every morning trying to better themselves. If you bet on the latter and laugh at the former, you’ve figured half this game out.

If this decline keeps up, it could be as bad as the 2011, 2010, and 2004 downturns that no one remembers or cares about anymore.

When no one knows what the economy or stock market will do next, people say there’s high uncertainty. This is different from low uncertainty, when people think they know what the economy and stock market will do next, invariably followed by being wrong, which they blame on high uncertainty.

U.S. investors have $16 trillion in mutual funds. It sounds huge when they withdraw $20 billion, but it’s a fraction of 1% of what’s outstanding. Even during big downturns, “Nearly all investors do nothing; go about their day; couldn’t care less about yuan devaluation” is the most accurate headline.

“Be greedy when others are fearful” sounds obvious during bull markets, smart during small pullbacks, reasonable during medium pullbacks, and impossible during big downturns.

Your odds of dying in a car accident during your life are 1 in 74. That rarely makes headlines. The odds of an investor experiencing a big market crash during their life are 100%. But we treat it like it’s something rare and dangerous.

Stocks are down a lot in the last month, down a little in the last year, up a lot over the last six years, and up a little over the last eight years. Pick your narrative, and you can tell a persuasive story.

I greatly appreciate your volatility outlook of continued weakness given your prescient forecast of 96 of the last two bear markets.

Ninety-three percent of the world does not own stocks. Zero percent of market commentators can believe this.