Insight magazine for SEB

Sanlam Employee Benefits SEPTEMBER 2015
A future
worth
saving for
Sanlam Benchmark
Symposium 2015
Why can’t consumers stick
to a retirement plan?

september 2015 1
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due care to ensure that the views
and opinions expressed are based
on information that is relevant and
accurate at the time of publishing, no
representation, warranty or undertaking
is given and no responsibility or liability
is accepted by any member of Sanlam
as to the accuracy of any information
contained herein.
Please note that this document is
intended to assist financial advisers
with a view to Sanlam products and
does not constitute advice or other
services as defined under the Financial
Advisory and Intermediary Services
Act of 2002. A financial adviser must
be consulted as far as the unique
needs of the investor are concerned
and therefore any parties relying on
any view, opinion or model contained
herein do so at own risk and Sanlam
disclaims all responsibility and liability
for positions taken based on such
reliance. insight is published by Sanlam
Employee Benefits (SEB).
Send your comments or questions
to the editor
Hubre Stripp
tel: 021 947 1297
email: hubre.stripp@sanlam.co.za
website: www.seb.co.za
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insight@sanlaminvestments.com
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Saving
for your
future self
Mayuri Reddy
‘77% of members who
withdrew from a fund
due to retrenchment
or resignation took
some or all of their
retirement benefits
in cash.’
What is the
Benchmark
Symposium?
Dawie de Villiers
‘We unpacked the
consumer space
to highlight the
all-pervasive
issue of debt.’
Why don’t
we turn the
retirement
model on
its head?
Yegs Ramiah
‘The one thing that
engages consumers in
choosing a brand or
product is simplicity
in the decision-
making process.
The future retirement
product must
therefore be easy
to find, understand,
evaluate and buy.’
We need
to engage
more
Viresh Maharaj
‘New employees are
under tremendous
pressure to make
decisions about
their lifetime savings
goals and investment
strategies at a
stressful time in
their employment
– on the first day.’
What can
be done
to enhance
returns?
Cora Fernandez
‘One of the most
significant trends
across the globe is the
continuing increase
in human longevity,
mainly due to ongoing
improvements in
nutrition, public
health and medical
technology.’
Reform in
action
David Gluckman
‘In my view, there
are some significant
structural problems
associated with group
RAs that make them
sub-optimal choices
for most employer
groups.’
september 2015 1
4
10
18
22 26
30
Contents
insight is
also available as
a digimag. To receive
a copy please email:
hubre.stripp@
sanlam.co.za
SANLAM BENCHMARK SYMPOSIUM 2015

SANLAM BENCHMARK SYMPOSIUM 2015 SANLAM BENCHMARK SYMPOSIUM 2015
september 2015insight 32
In May we hosted another successful Benchmark
Symposium where we presented insights from our
annual Sanlam Benchmark Survey, which focused on
current trends in the Employee Benefits industry. We
again managed to retain a carbon neutral status for
both conferences, held in Sandton and Cape Town.
As always, we provided insights to stimulate
conversation and create meaningful opportunities
for further engagement with industry stakeholders.
With our dedicated focus of improving the retirement
outcomes for our members, we aim to provide them
with a greater probability of retiring comfortably.
I am especially proud to mention that this year’s
Benchmark theme, A future worth saving for, is at
the heart of everything we do. At Sanlam Employee
Benefits (SEB) we understand that financial resources
are a key enabler to realising life goals. We firmly
believe that unless we have a deeper level of
understanding of the issues which impact retirement
funding, we would not able to assist employers
effectively in the design of their benefit structures.
In this edition of Insight, Mayuri Reddy identifies
the various life events that play a role in adequate
retirement provisions, highlighting a key finding
on how a low level of understanding of retirement
preservation has a profound effect on adequate
retirement outcomes.
Yegs Ramiah considers the role of the brand
of the retirement model and how to change fund
members’ perception of their future.
Viresh Maharaj takes another view – he suggests
the role of the employer as a catalyst in the members’
journey to retirement is pivotal to improve retirement
outcomes.
As always, David Gluckman challenges the industry
with his thought-provoking analysis of group
Retirement Annuities as an alternative offering to
umbrella funds, and the fundamental differences
between these two products.
Last but not least, we are honoured to have won the
2015 FIA Award for Product Supplier of the year in
the Employee Benefits category. It’s the fourth time in
five years we’ve won this particular award, and it’s one
of our favourites because it is voted for by financial
advisors. For you it means extra reassurance that
your retirement savings are in good hands.
I am proud of our achievements at Sanlam Employee
Benefits and look forward to everyone’s continued
efforts and contribution as we race towards the last
quarter of 2015 with a renewed and energised
commitment to exceeding our own capabilities.
I trust you will find this issue insightful and
user-friendly.
Kind regards
Dawie de Villiers
CEO: Sanlam Employee Benefits
Dear reader
insight2 insight2 SEPTEMBER 2015

South Africans spend more on bonds, vehicles and groceries
than on insured benefits such as life insurance, funeral plans
and short-term insurance. Debt is the big culprit, the
2015 Sanlam Employee Benefits Benchmark Survey shows.
SEPTEMBER 2015insight 54
A future worth
saving for
The Sanlam Employee Benefits (SEB) Benchmark
Survey is South Africa’s most comprehensive annual
retirement industry research among retirement fund
principal officers, participating employers in umbrella
funds, members of retirement or retirement annuity
funds and retirees.
The survey’s insights stimulate conversation and
create meaningful opportunities for engagement with
industry stakeholders. This year’s theme is A future
worth saving for.
‘We unpacked the consumer space to highlight
the all-pervasive issue of debt,’ says Dawie de Villiers,
CEO: SEB.
‘We investigated the extent to which debt has had
an impact on the financial and emotional well-being
of employees,’ he adds.
Through the qualitative member survey, SEB ex-
plored how indebtedness encourages members
to withdraw from their employer-sponsored funds
to access retirement benefits prematurely.
How the study was conducted
The respondents in the survey are permanently
employed or self-employed, and are either members
of their employers’ sponsored retirement funds (75%
of the sample) or self-employed and members of
a retirement annuity fund (25% of the sample).
A total of 503 randomly selected respondents
were interviewed. Telephonic interviews were conduct-
ed in English, Afrikaans, isiZulu, isiXhosa and Sesotho,
and each lasted about 20 minutes. Field work was
conducted between February and March this year.
Turn the page for some of the most interesting
findings of the survey.

What did you spend the cash on?
(Each respondent could select up to eight options)
Reduced short-term debt,
for example car, credit
cards or loans
50,7%
Living expenses
33,3%
Made home
improvements
28%
Started own
business
26,7%
Education
20%
Settled or reduced
mortgage bond
16%
Invested in other
non-retirement
savings 10,7%
Travel 4%Other 4%
Have you ever withdrawn
from a retirement fund through
resignation or retrenchment
from a previous employer?
Yes
19,5%
No
80,5%
At the time of the withdrawal
did you realise the level of tax
you would be expected to pay?
Yes
50,7%
No
49,3%
Have you ever revisited
your original decisions
regarding your retirement
and risk benefits?
Yes
27,6%
Would you consider using
your retirement savings
to reduce your debt?
No, I would
not touch it
71,4%
Yes, I would
use some of
it but not all
24,1%
Yes, I would use all
of it if I could 4,6%
What is your debt philosophy?
I attempt to
pay off my debt
before saving
28,2%
I don’t let the amount
of debt I have exceed
a certain percentage
of my income
26%
I use debt only for
transactional purposes
7,8%
Prefer cash 2%
Pay off debt
irregularly 0,4%
Currently under
debt review 0,2%
I access debt only
for large purchases
35,4%
Yes
38,7%
No
61,3%
Have you ever regretted the
decision to withdraw the cash
benefit, bearing in mind the
level of tax you had to pay?
insight 76
No
72,4%
Key
findings
SEPTEMBER 2015

This year’s
Symposium
saw MC Maya
Fisher-French
work closely with
millennial Thumi,
helping her to negotiate
financial pitfalls in her life.
What
does the
future
hold?
Financial journalist Maya Fisher-French, who was the
MC at this year’s Symposium, was not alone on the
stage. Her ‘co-presenter’ Thumi is a young graduate,
just starting out in life.
When Thumi first took to the stage she was full of
big hopes and dreams for her future. She shared her
milestones with Maya – getting engaged, having a child
and coping with financial hardship.
When Thumi got to the point where she had run
into financial trouble, Maya turned to the audience for
advice on what Thumi should do, based on real-life
options. Maya used this information to give Thumi tips
on reducing debt and getting her finances in order.
By the end of the symposium Thumi’s future looked
secure, thanks to timely advice.
insight 98 SEPTEMBER 2015
Participating
Employers in
Commercial
Umbrella Funds
100
Active Members
of Retirement
Funds
503
Stand-alone Trade
Union Defined
Contribution
Funds
10
Thumi turns to Maya Fisher-
French for support and advice.
Viresh Maharaj, Chief Marketing Actuary for Sanlam Employee Benefits, speaks about
the importance of engaging with employees every step of the journey.
David Gluckman, Head: Special Projects at Sanlam Employee Benefits, explains why he
believes umbrella funds offer a viable alternative to the National Social Security System.
Maya Fisher-French addresses delegates
at the Symposium.
Inset: Maya Fisher-French chats to Dawie de
Villiers, CEO: Sanlam Employee Benefits.
Stand-alone
Defined
Contribution
Funds
90

According to the research results of our 2015 Sanlam
Benchmark Survey, only a quarter of South African
retirees are expected to be able to maintain their
standard of living in retirement.
Why?
The two main reasons for this dismal statistic are:
1. Retirement fund members cashing in on their
savings after retrenchment or resignation, and
2. Apathy towards making provision for their own
retirement.
Not preserving retirement savings when changing
jobs or becoming retrenched is one of the biggest
mistake fund members make on their retirement
savings journey.
11
By Mayuri Reddy,
Marketing Strategist
at Sanlam Employee
Benefits
insight10
Saving
for your
future selfOur survey reveals that
employees are not fully
aware of the impact of
their decisions on their
future. Why is this so
and what can be done?

The survey results indicate that many people are not
aware of the tax implications of non-preservation (49%
of members surveyed), nor do they fully understand
the impact on their retirement outcomes (45%).
Another big decision which fund members are
not engaging with is understanding the investment
decisions that are made either by the trustees of the
fund, or by the member themselves.
Of the 42% of members invested in their fund’s
default investment portfolio:
the majority (70%) did so because they trusted
the trustees of the fund to make sound investment
choices – but a staggering 87% said they had not
voted for the trustees and 75% could not name
a fund trustee.
the second most common reason members gave
for investing in the default portfolio was to achieve
growth, and they were not overly concerned with
exactly how they were invested to do this.
72% never come back to reconsider their initial
decisions regarding their retirement benefit options
which they make during their first few days of
employment.
The member apathy that is apparent from the reasons
given for being invested in the default investment
portfolio, together with the fact that few members
will revisit their retirement decisions during their
working lifetimes, means trustees are taking on
huge responsibility for ensuring that members are
appropriately invested at various stages of their lives.
As a result, we see many trustees (61%) using life
stage investment strategies as the default option to
provide younger members with sufficient exposure
to growth assets, while ensuring that members closer
to retirement are not exposed to excessive risk.
Unfortunately, members also seem to be relying
heavily on trustees to ensure that they are on target for
a comfortable retirement – for every 10 members, only
three know their fund has a stated target amount of
savings they should be working towards (typically this
amount is capital sufficient generate an income of
70 – 75% of pre-retirement income), and of those
insight12
three only two know what the stated target pension is.
One of the key messages that emerged from this
year’s results is the crucial importance of a retirement
fund, and the need to consider alternatives to ensure
members are not forced to tap into these funds. An
outstanding 85% of members would not opt out of
compulsory savings through their retirement fund if
given the option, and similarly 89% would not reduce
their current contribution rates if given the option,
indicating an appreciation of this benefit. However,
77%of members who withdrew from a fund due to
retrenchment or resignation took some or all of their
retirement benefit in cash. Much of this is because 36%
of members (moving upward from 25% in 2014 and
21% in 2013) have no other personal savings aside from
their retirement savings, and when faced with access to
a large lump sum of money, see this as a great windfall.
The non-preservation of retirement funds is having a
huge impact on people’s retirement outcomes – however,
we can’t just ignore people’s short-term financial needs.
Members should be considering using Tax-Free
Savings Vehicles, a new product line launched by
various providers in March this year, to fulfill the
purpose of savings for emergency situations,
rather than viewing their retirement savings as this.
Unfortunately, only 31% of members surveyed were
aware of the existence of Tax-Free Savings Vehicles,
and of those are aware of the product, only two thirds
are considering making use of it.
Pensioner study results
The behaviours being exhibited by members on
preservation and apathy towards their retirement
savings choices results in poor outcomes in retirement.
We look to our pensioner study for a glimpse into the
future for members:
62% of pensioners experienced a reduction in
income at the point of retirement, while only 43%
believe they have sufficient capital to last for the
rest of their lives.
On top of that, 66% of pensioners still have either adult
or child dependents who rely on them financially.
‘Members must
realise that dipping into
their retirement savings –
which they are doing by not
preserving – is like borrowing
from your future self, at a very
high interest rate and with
no intention of ever
paying it back.’

15
Regarding non-preservation:
• Of the pensioners who had withdrawn from
a retirement fund through resignation or
retrenchment from their previous employer,
74% took some or all of their retirement benefit in
cash. Only 54% of pensioners indicated that they
regretted the decision to withdraw, while 41% said
they could have considered an alternative option.
Regarding debt:
• 57% of pensioners who did not preserve their
retirement benefits at withdrawal used it to reduce
debt, while a concerning 43% of pensioners are
still paying off debt in retirement.
Regarding advice:
• On average, pensioners first received financial
advice on retirement 10.5 years before retirement.
• Only 24% were advised to consider converting
their risk benefits from a group policy to an
individual life policy at retirement (in order to
benefit from possible preferential rates).
• 44% sought retirement advice from their financial
adviser or broker, while 41% turned to their
employer or HR officer for advice.
Members must realise that dipping into their
retirement savings – which they are effectively doing
by not preserving – is like borrowing from your future
self, at a very high interest rate and with no intention
of ever paying it back. We need to start being more
self-disciplined with our finances in order to have
a self-sufficient and enjoyable retirement.
The recently introduced Tax-Free Savings Vehicles
could go a long way towards creating awareness that
there are other ways to address these needs without
dipping into retirement savings, but members also
need to start saving for the needs of their future selves
rather than spending on their current wants – there
are other ways to address these needs without dipping
into retirement savings.
25%of South African
retirees expect to
maintain
their standard of
living in retirement.
SEPTEMBER 2015insight14

1716
Sanlam Benchmark research highlights the need for women
to focus on female-specific retirement issues in order to
build and protect lifetime wealth.
Living longer than men, but saving less
When women plan retirement savings:
Women show less financial awareness
about retirement savings than men
The approximate number of
years women can expect
to live longer, and therefore
be in retirement longer,
than men*
The average amount women
earn less than men**, often
not considered when
deciding what percentage
of salary to save
Revisited decisions made on first day of employment
Know state target of the pension fund
Understood tax implications of taking withdrawal benefit
in cash on retrenchment / resignation
Understood implications on retirement monies of taking
withdrawal benefit in cash on retrenchment / resignation
Only 11%consider
impact of break in
employment due to
maternity leave
Only 15%consider
difference in salary
levels
Only 10%consider
impact of divorce or
spouse passing away
before they do
Only 34%consider
higher longevity
of women
28%
24%
55%
41%
30%
72%
55%
4 yrs
South African
women
and retirement
0 10 20 30 40 50 70
Jane saves a smaller amount, over a shorter career – meaning
she has a smaller pot of funds at retirement that she will need
to spread over a longer time in retirement
21.7STARTS
WORK
23.5STARTS WORK
26.1STARTS SAVING
AVERAGE OF
R1 838.60
28.8STARTS SAVING
AVERAGE OF
R1 569.08
57.9PLANS TO
RETIRE
55.3PLANS TO
RETIRE
60.2ACTUALLY
RETIRES
60.2ACTUALLY
RETIRES
Average
Joe
Average
Jane
Age 60
41% 60%
To avoid having to live longer on less, women
should consult a qualified financial advisor.
*Stats SA 2014 mid-year population estimates. **Stats SA 2013. All other statistics from Sanlam Benchmark Survey 2015. Information compiled by Sanlam www.sanlam.co.za
SEPTEMBER 2015

Why don’t
we turn the
retirement model
on its head?Brand innovation is needed to transform
retirement model in South Africa.
The recent 2015 Sanlam Benchmark retirement study
has revealed that 84% of respondents dismissed
a comfortable retirement as nothing more than
a romantic fantasy.
A possible reason for this view is because the
retirement industry has so frequently broadcasted
the message that fund members won’t have enough
money to retire on that many no longer try to save.
The industry will have to rise to the challenge
and come up with innovative initiatives to turn this
perception around. Financial services firms will need
to adopt unconventional approaches and implement
these with a common purpose if they hope to secure
the country’s retirement future. One such approach
might be to apply the lessons learnt by the world’s
leading brands to the local retirement savings industry.
Today’s up-and-comers interact with brands and
products differently from the preceding generations.
Consider the taxi-substitute Uber as an example: at
the touch of a button you can get a vehicle to pick you
insight 1918
By Yegs Ramiah,
Chief Executive of Brand
at Sanlam
SEPTEMBER 2015

up and take you wherever you want to go – there’s no
need for a car, no need for cash and no need to make
plans before the time. SnapScan is another example:
simply install the app, link your credit or debit card
and shop at any merchant with a SnapScan scanner.
Keep it simple
Savings products currently don’t offer the simplicity
and ease of use that technology-enabled lifestyle
solutions such as Uber and SnapScan do. Yet this is
the space investment firms should occupy if they want
to assist people in suppressing the urge to spend in
favour of saving.
The Harvard Business Review has reported a study
among 7000 consumers, which found the one thing
that engages consumers in choosing a brand or
product is simplicity in the decision-making process.
The future retirement product must therefore be
easy to find, understand, evaluate and buy.
One question, one answer
The annual benefit statement is a case in point.
Imagine if, instead of a page littered with numbers,
the statement provided an answer to one simple
question: ‘Will I have enough money to fund my
preferred lifestyle in my later years?’
With a bit of planning, the industry could enable
savers to benchmark their savings against a lifestyle
dream by informing them of the type of lifestyle they
are on track for. Their future could then be defined
by saving for a certain retirement lifestyle rather
‘With a bit of planning, the industry could enable savers to
benchmark their savings against a lifestyle dream by informing
them of the type of lifestyle they are on track for.’
84%OF RESPONDENTS
DISMISSED A
COMFORTABLE
RETIREMENT AS A
ROMANTIC FANTASY.
than accumulating a notional capital lump sum.
Against this backdrop, financial services brands
should investigate how to turn their clients’ money
into meaning by showing respect for what went into
making this money and sharing with them what can
be done with it.
At Sanlam, our measure of success is not solely
about how much money we make. It also includes our
ability to impact the lives of our clients, our employees,
our communities and the country at large. The key is
to move from a world of fear to one of optimism by
setting aside ‘the orange that will cost you $68’ or
the ‘gourmet cabbage dinner’ advertising campaigns
in favour of campaigns that reinforce the lifestyle
benefits of sensible saving.
How can the industry accomplish this? The
lesson from leading brands is to create a movement
consisting of individuals whose desires resonate with
that of the brand.
Millennial Generation
The retirement industry should identify a market
segment that has the potential to influence the
generations that precede and follow it. The best group
for the retirement industry to focus on is the so-called
Millennial Generation – people born between 1982 and
the early 2000s who are known to be keen to save and
have both the attitude and desire to change the world.
Our challenge is to influence the generations to
come – but the real opportunity lies in attaining the
nirvana where retirement is bought and not sold.
insight 2120 SEPTEMBER 2015

About 80% of employees in the formal sector in South
Africa belong to an employer-sponsored retirement
fund. As new employees, they usually have to make
important decisions about fund investment strategies
shortly after their induction on ‘day one’, but according
to the recent 2015 Sanlam Benchmark retirement study,
7 out of 10 employees never review these initial
decisions regarding their retirement benefit options.
Such a high number of fund members not engaging
with their retirement savings at all after joining an
employer-sponsored retirement fund is a matter
of serious concern.
In taking a system’s view of the retirement funding
challenge, it is clear that employers – who are the
critical link between employees and the fund – need to
play a much more engaged role in combating member
Employers who engage with employees create
an opportunity to improve retirement outcomes
for fund members. What does it involve?
We need
to engage
more
70%of employees never
review initial decisions
regarding their
retirement benefit options.
insight 2322
By Viresh Maharaj,
Chief Marketing Actuary
for Sanlam Employee
Benefits
Are
you
ready
to
retire?apathy while influencing better behaviour and
ultimately ensuring superior retirement outcomes.
First-day pressure
The entire retirement funding journey – from joining
an employer and reviewing investment and insurance
options to changing jobs and in the end retirement –
needs to be revisited in order to optimise the system
to set up employees for success rather than failure.
For instance, new employees are under tremendous
pressure to make decisions about their lifetime savings
goals and investment strategies at a stressful time in
their employment – on the first day.
This practice has negative consequences, since
employees typically do not have the financial nous,
advice or guidance at this point to make appropriate
SEPTEMBER 2015

choices – and 72% do not revisit these decisions.
The effect of poor decisions is exacerbated by the
finding that they simply wait too long to materially
affect their retirement outcomes positively, with 5 out
of every 10 only starting to plan for their retirement
within 10 years of retirement.
Crucial decisions are made without proper advice,
adequate communication or appropriate guidance,
when new employees are on the spot and under
pressure. Engaged employerism could therefore
make a crucial difference to retirement outcomes.
An area of concern is at benefit review stage as,
in the context of poor mathematical and financial
literacy, annual benefit statements do not engage
employees. This raises the question whether the
information contained in such statements actually
gets through to employees as they are usually too
complex for the average employee to understand.
‘Crucial decisions
are made without
proper advice,
adequate
communication
or appropriate
guidance.’
wealth value, delivered to each fund member by SMS
could spark ownership of their respective retirement
funding journeys as it creates top-of-mind awareness.
Obstacle to better outcomes
Another major obstacle to achieving better retirement
outcomes for fund members is the capability of human
resources (HR) departments in many corporates.
HR departments are typically focused on procedural
commitments and typically do not possess the right
skills to provide financial guidance and/or are
constrained by FAIS.
Also, retirement fund outcomes are not part of their
key performance measures but we believe they should
be – HR plays a critical role in moving employees to
a better retirement outcome as they are effectively
the link between the fund and the members.
In fact, the Benchmark Survey highlighted that
1 in 3 employees view HR as their single port of call
for retirement funding matters. What gets measured
gets done, and we’re not measuring the employer’s
efficacy in moving employees towards better
retirement outcomes despite their critical role
in the retirement funding system.
Motivated employers
Employers have a significant incentive to care for
the financial wellbeing of their employees, as research
strongly suggests it can be a source of long-term value
and a competitive advantage arising from increased
productivity and reduced absenteeism.
It is time for employers to take bold steps to
improve their financial wellness programmes, of
which retirement funding is a core pillar.
The culture of funding under abdication and apathy
has to come to an end so we can move towards a win-
win situation where employees are better equipped to
build lifetime wealth and employers benefit from a more
productive workforce arising from reduced financial
stress. This requires a shift to engaged employerism,
and it can be done pragmatically and professionally.
insight 2524
Simple visual cues
What about a series of visual cues – such as presenting
figures using a traffic robot type format (red, yellow
and green) – that provide an immediate visual impact
anyone can understand in order to engage employees
to take corrective action to build lifetime wealth?
These cues could then be accompanied by
recommendations derived via algorithms to mitigate
any shortfalls and immediate employer-based access
to financial products.
A further improvement would be to communicate
the tax consequences of early withdrawal from a fund,
as the lack of preservation is one of the leading
drivers for the poor retirement outcomes faced by
South African fund members. Employees are not
aware of the immediate effect of not preserving
and are even less aware of the overall impact on
their ability to create lifetime wealth.
Employees should be informed when leaving an
employer that under current tax laws:
• an early withdrawal of, say, R1 million will result in
a tax payment of R207 000, not to mention the
loss in growth of these savings over many years.
• for a 45-year-old who earns 10% per annum until
retirement, a sacrifice of R207 000 would result in
a roughly R1.4-million reduction in their lifetime wealth.
By transparently communicating with and engaging
employees at the decision point, employers can
influence them towards making more financially
responsible decisions.
Explore initiatives
Employers should explore multiple initiatives to raise
awareness about the retirement savings journey.
People are used to banks sending them SMSs when
their salaries are paid in and when their debit orders
start going off – so why not leverage employees’
existing familiarity with this platform to engage
them on their retirement wealth creation?
A detailed breakdown of their monthly retirement
contributions and deductions, plus their retirement

It has been well documented that average retirees have not saved enough to
maintain their lifestyles after retirement, and many will exhaust their funds altogether.
A real concern facing trustees therefore is that of members’ retirement outcomes
not being achieved. Ensuring members have accumulated enough for retirement
and that they have a basic standard of living and sustainable income for life after
they retire is a major focus area for industry and pension funds alike.
The key question for trustees is: What can be done to enhance investment
returns that will benefit active members to afford them the best chance of success
in retirement?
Investing too conservatively before retirement can be dangerous to your members’
financial well-being. As trustees and principal officers, are you confident that the
pension plan options you provide for your members will help towards achieving the
best possible retirement outcomes? Are you providing aggressive enough growth
investment options for younger members with longer time horizons?
One of the most significant trends across the globe is the continuing increase in
human longevity, mainly due to ongoing improvements in nutrition, public health
and medical technology.
Add to this the reality of an expected low-return environment – coupled
with a trend of lower interest rates for longer – and many individuals could find
themselves at the mercy of poor returns from their retirement savings.
In this dual context of a low-return environment and increased life expectancy,
to ensure the best possible retirement outcomes, we believe it is better to maximise
the equity allocations in your pension fund for the best inflation-beating returns
over the long term. Provided your members have a long enough investment horizon,
equities still yield the best possible returns over the long term.
What can be done to boost returns?Trustees face a situation where members’
retirement outcomes are not being achieved.
How can returns be enhanced?
By Cora Fernandez,
Chief Executive for the
Institutional Business
at Sanlam Investments

4 ways to maximise retirement fund returns
In South Africa we are controlled by Regulation 28, which prescribes the maximum
limits for retirement funds to invest in certain asset classes – no more than 75% in
equities (local & offshore); 25% in property (local & offshore); 25% in international
assets (excluding African investments); 15% in hedge funds and private equity
combined (10% maximum for each of these) and 5% in African investments.
There are a number of levers to increase returns in retirement portfolios within
the limits of Regulation 28, and trustees could consider the following:
Use the full 75% equity allocation
We believe it is important to max out the full 75% allocation to equities to
ensure the best possible returns – provided your members have a sufficiently
long investment horizon to stomach volatility – as over the long term
a higher allocation to equities can enhance portfolio returns considerably.
Source: INET, December 2014
The graph above illustrates that over the long term, equities (growth assets) have
outperformed cash and bonds (income assets) significantly. In the short term, stock
markets experience sharp movements and it is this volatility that discourages many
members and trustees from investing in equities. In the long run, however, no other
asset class produces comparable returns.
Historically we have seen that shorter investment time horizons (up to 5 years)
are generally associated with greater volatility and risk of capital losses. As the
investment time horizon increases (5 years+), however, the volatility of returns
and the probability of losses reduce dramatically. In other words, the longer you
remain invested, the lower the risk of losing your invested capital.
We believe that the unpredictability and short-term volatility of the markets
is perfectly normal, and as we have seen from the past five decades, equities
reward investors over the long term.
Add alternative and other investment allocations
Alternative investments, specifically fund of hedge funds and
fund of private equity funds, offer relatively uncorrelated returns in
comparison to traditional asset classes like equity, bonds and cash.
Hedge funds are designed to reduce market volatility for investors by applying
specialist strategies and should be considered one of the building blocks of
a well-diversified investment portfolio.
Add more property
There is no maximum on the combined exposure of equity and
property, meaning these two asset classes combined could
theoretically take up the entire portfolio.
Use the Africa allocation
Additional geographic diversification is allowed through Africa
exposure of up to 5% in addition to the 25% exposure to international
assets generically. Total foreign exposure can therefore reach 30%.
challenges for trustees
As trustees, you have challenging goals – above all, ensuring the best possible
retirement outcomes for your members and enabling them to save enough for
retirement. Ultimately, however, members and trustees alike all share one primary
risk: failing to meet their retirement objectives. In attempting to resolve this problem,
we have focused on investing wisely before retirement – selecting equities and other
growth assets as an effective, long-term, pre-retirement investment strategy.
01Dec59
01Jun62
01Dec64
01Jun67
01Dec69
01Jun72
01Dec74
01Jun77
01Dec79
01June82
01Dec84
01June87
01Dec89
01June92
01Dec94
01June97
01Dec99
01June02
01Dec04
01June07
01Dec09
01June12
01Dec14
10 000
1 000
100
10
1
SA Equity
SA Bonds
SA Cash
SA CPI
Asset Class Returns:
Jan 1960-Dec 2014 (log scale) ‘To ensure the higher
longer-term capital
growth necessary
to outpace inflation,
sufficient exposure
to equities and other
growth assets in
a retirement fund
is essential.’

The Umbrella
Fund strategy
is a viable
alternative to the
National Social
Security System.
Reform in actionSouth Africa’s retirement reform debate started in
earnest around 2007 when government first unveiled
some details regarding a proposed National Social
Security System (NSSS).
Our Sanlam Umbrella Fund strategy can be
considered a response to these proposals. Our vision
as then announced in Insight was: ‘Sanlam’s practical
solution going forward is premised on using all of its
intellectual capital to build the best multi-employer
packaged retirement savings, risk insurance and
administration offering in the market’.
In other words, we regard the commercial umbrella
fund model as a viable alternative to NSSS – and
a model that avoids the very significant transition
risks and costs associated with NSSS.
Although South African commercial umbrella
funds have been around since the mid-1980s, the early
models were often criticised for offering poor value for
money and side-stepping many of the governance and
representativity features of standalone retirement funds.
But few can dispute that there has been significant
improvements in commercial umbrella funds since
that time.
Cleaned-up act
Umbrella funds have really cleaned up their act, and
the major funds are now leading models for good
governance and value for money. Industry-leading
independent professionals, often elected via members
to comprise 50% of the board of trustees, are
becoming the norm rather than the exception.
These findings and trends are borne out by our
Benchmark Survey results. Cost savings, better
administration, less fiduciary responsibility and better
investment expertise now rank as the major reasons
insight 3130
By David Gluckman,
Head: Special Projects
at Sanlam Employee
Benefits
why so many standalone retirement funds have opted to
transfer members to leading commercial umbrella funds.
The market has clearly taken to this new model, and
we have witnessed massive growth of the commercial
umbrella fund market since 2009 when Association for
Savings and Investment South Africa (ASISA) research
indicated that umbrella funds needed to grow from
around 786 000 members to around 1.6 million
members to optimise the infrastructure.
The latest available Financial Services Board (FSB)
published data shows that this hurdle has recently
been achieved, and assets under management in
commercial umbrella funds probably now stand at
close to R250 billion.
New trend
A new trend we’ve recently witnessed is the emergence
of group retirement annuities (group RAs) being
promoted as viable alternatives to umbrella funds.
These products are mainly promoted by asset
managers who perhaps are concerned about the
business threat of the continued success of commercial
umbrella funds, and who do not wish to invest in
building an employee benefits administration capability.
But there are, in my view, some significant structural
problems associated with group RAs that make them
sub-optimal choices for most employer groups.
These problems include worse tax deductibility,
inaccessibility of savings before age 55, the voluntary
nature of such arrangements, and the possible
exclusion of many ordinary workers.
But there is a social cohesion aspect to the debate.
Solidarity was one of the cornerstone principles behind
the government’s NSSS proposals. Group RAs endanger
this fundamental principle, and it is not impossible in
SEPTEMBER 2015

insight32
the long term that such a trend (if unchallenged) could
result in higher savings and insurance costs for many
workers plus the erosion of valuable cross-subsidies
inherent in the current system, thereby placing many
ordinary South Africans in a more vulnerable situation.
In the long term, such developments could even
threaten the continued existence of the entire private
sector retirement funding system.
Alternative path
Therefore we choose an alternative path – one that
embraces the solidarity principle but also takes on
board and tries to improve on aspects where there
might be valid criticism of existing benefit designs
in the employee benefits industry, in particular:
• Can a more cost-effective governance model be
introduced for small employers?
• Can we find simpler ways to charge fees that make
product comparability simpler for consumers and
consultants?
• Can we find ways to eliminate unnecessary bells and
whistles for ordinary members where cost efficiency
is vital, while simultaneously allowing greater
flexibility and customisation for the very important
but relatively small number of affluent members who
have such demands and are prepared to pay for such
additional features?
I believe we can, and these conversations and
competitive pressures can only be healthy for
commercial umbrella funds as these offerings continue
to evolve. New-generation umbrella funds that offer the
best of both the institutional and retail worlds are the
likely result. There is no reason why National Treasury’s
call for defaults and lower charges cannot go hand in
hand with customisation for the appropriate category
of member.
Exciting times
Now that commercial umbrella funds have achieved the
necessary scale, I foresee exciting times ahead as these
models continue to evolve and adapt to serve as the
instrument to reform the retirements fund industry
for the ultimate benefit of members.
‘Let us therefore brace ourselves to our
duty, and so bear ourselves that if the
British Empire and its Commonwealth
last for a thousand years, men will still
say, “This was their finest hour”.’
– Winston Churchill, British Statesman and Prime Minister, 1940
Same legal entity as retail RA product offering
Member is contracting party
Worse tax deductibility pre T-Day
No employer-level governance & communication structure
FAIS – retail products
FAIS – employee level advice
No approved risk benefits
+ Unapproved risk benefits
Each employer negotiates own risk rates
basis points pricing
• simpler more understandable pricing?
• performance fees very common?
No encashment before age 55
• Small balances must be administered
Pension Fund retirement pay-out only
LISP administrator
Flexible contributions as determined by employee
Not necessarily a condition of employment – voluntary
Some staff might be excluded
Wide range of collective investment schemes
• investment choice under advice
• arguably more suitable for executives
Seamless transfer to LISP’s preservation fund and ILLA
Umbrella Fund is legal entity
Employer is contracting party
Better tax deductibility pre T-Day
Joint Forum governance & communication structure
FAIS – pension funds benefit
FAIS – employer level advice
Approved risk benefits
+ Unapproved risk benefits
Umbrella fund economies of scale might help risk rates
% salary & R pmpm & basis points pricing
• complicated and hence non-transparent pricing?
• performance fees not as common?
Encashment possible upon withdrawal
• Small balances can be encashed
Provident Fund retirement pay-out possibility
Employee benefits administrator
Flexible contributions within employer-agreed limits
Condition of employment – membership compulsory
Must cater for all eligible staff
Limited choice institutional investment options
• default option selected by employer
• arguably overly restrictive for executives
Seamless transfer might be possible
New-Generation
Group ra
umbrella
funds
32

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