1. Art and Diseño

SOUTH AFRICA's
VOLUME 28.2 FEBRUARY 2015
INSURANCE TIMES
INFORMING BROKERS AND FINANCIAL ADVISERS SINCE 1988
Why are South Africans not
saving more? - page 3
Problems with alcohol in
the workplace - page 4
How to kickstart SA’s
economy - page 5
Managing debt wisely page 10
Family is the leading cause
of stress - page 11
Opening an offshore bank
account - page 13
Paper manufacturers still a
worthwhile bet? - page 14
Why index tracking is better - page 17
The four myths of market
volatility - page 18
Take-home pay keeps rising in real terms - page 21
Paul de Chalain of PwC
on Global Company
Tax Trends - page 8
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South Africa’s
INSURANCE TIMES
Informing Brokers and Financial Advisers since 1988 - in print and also Online at: www.insurance-times.net
1st February 2015
Volume 28.2
Economy
Poor culture
Why are South Africans not saving more?
S
outh Africans are frequently criticised for being bad savers. This label is borne out by a recent study
that shows only 20% of South Africans
have any kind of formal savings
with a recognised financial institution. “We don’t compare well internationally either: even compared to
other BRICS countries South Africa
has the lowest savings rate at 13.5%
with a household savings rate of just
1.7%,” says René Grobler, Investec
Specialist Bank’s Head of Cash Investments.
The adult salaried population
may have grown in the past decade
from 7.2 million to 12.4 million. But
that’s little comfort as the dependence on government grants has
grown significantly in the same period from 19% to 30%, according to
the recently released FinScope Consumer Survey South Africa 2014. Of
particular concern, notes the survey,
is the fact that only 44% of salaried
individuals have long term savings or
retirement products.
But a lack of a savings culture has
consequences. According to a recent
Moneyweb report only 29% of South
Africans of retirement age with retirement funds are able to maintain their
standard of living when they retire,
while more than half of individuals over
the age of 60 qualify for old age social
grants, clear indications that South Africans are not saving enough.
“There are a number of reasons for
South Africa’s lamentably low levels
of savings,” explains Grobler. Firstly,
South Africans still have a high level
of debt as they face increased pressure
of higher interest rates and debt repayment. Household debt continues to be a
problem locally as disposable household
income grows below inflation. Factor in
a SARS estimate that only two million
individuals earn over R250 000 a year
and it’s not hard to see why South African consumers are under pressure and
not saving sufficiently. These factors
have, in turn, forced many South African households to rely on retirement
savings to cover cost-of-living expenses
creased in the past year from 4.8 million (13%) to 3.9 million (11%).
That could all be changing going
forward, points out Grobler, as government reviews current practices with
the aim of enabling an improved retirement income, increased preservation,
portability and governance. The reviews are set to improve tax incentives,
execute some much needed reform
within the local retirement fund landscape, and create new savings vehicles
such as the non-retirement Tax Free
Individual Savings Accounts - publicly
available next year - which will carry no
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and to meet their investment needs.
Recent figures reveal that more than
57% of consumers are delinquent in
debt - meaning that their debt is more
than 30 days overdue – while impairments are at their highest level since
2009. Compare this to US figures where
just 35% of consumers are delinquent in
debt (and this is considered a significant
problem) according to an Urban Institute study released in July 2014.
“This situation is exacerbated by the
current pensions industry which allows
for a great deal of leakage and does not
encourage a savings culture.” Perceptions that government will nationalise
pension funds and uncertainty around
the Government Employees Pension
Fund (GEPF) haven’t helped matters.
Contributions to pension funds has de-
South Africa Insurance Times - February 2015
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Page 3
tax on capital gains, interest or dividend
income.
Providing more education around
savings, as well as making easily understandable information accessible, will
help South Africans to compare the
savings options and assess the risks,
maintains Grobler. “Only a small percentage of South Africans seek financial advice from professionals such as
financial advisers or their bankers when
making investment decisions. Many potential investors don’t seek out professional advisers believing they don’t have
sufficient assets to warrant appointing
an advisor.”
In countries such as the UK, she
points out, consumers are taking a
more proactive approach and increasingly comparing and investing in bank
and other savings products directly via
aggregator websites. She admits this
practice has not yet taken off in South
Africa.
Grobler advises investors who are
looking to save to consider cash investments. She explains that cash investments are particularly relevant for
investors who don’t want their funds
tied up for the long term and have short
term savings goals – up to three years.
“It’s one of the safest places to enter
the savings world. While cash returns
can appear less exciting compared to
more volatile equity markets, the reality is that many investors these days are
choosing the safety and stability of cash
as they wait out unpredictable equity
markets.”
In fact, one of the world’s most successful investors, Warren Buffett, has
long appreciated the optionality of cash.
According to one of his biographers he
considers cash as a call option with no
expiration date. “Cash is not boring and
it should not be considered merely as
an asset class with low returns. On the
contrary, in uncertain financial markets
cash provides investors with greater
flexibility and guaranteed returns.”
Safety and security
Knock-on effect
A multi-faceted approach is
needed
Problems with alcohol in the workplace
O
rganisations are required by
law to comply with the Occupational Health and Safety Act
(OHSA), which specifies a zero tolerance approach to intoxication in the
workplace. Employees who are under
the influence of alcohol are a danger
to themselves and their co-workers, as
alcohol lowers inhibitions, fuels aggression and affects judgment. In hazardous
environments such as mining, manufacturing and construction, where employees need to operate machinery that
requires sound judgment, alcohol use is
a serious area of concern. Importantly,
the on-going behavioural impact of alcohol use in the workplace can have a
negative knock-on effect to health and
safety, increasing risk for organisations
and their employees alike.
Employees operating with impaired
judgment as a result of alcohol consumption disregard policies put into
place for their safety, and make poor
decisions regarding their jobs. In the
‘Activator, Behaviour, Consequence’
(ABC) model of behaviour, alcohol acts
as an activator for undesirable behaviours. Employees who are under the influence of alcohol may fail to assess a
situation accurately, underestimate the
danger involved, and subsequently act
in a manner that puts themselves and
their fellow workers at risk.
Page 4
is liable for damages as well as breaching the OHSA, impacting the morale of
workers.”
For example, an employee who is
qualified to lift a certain load with a forklift may feel, under the influence, that
he is able to exceed the load limit. It is
well known that alcohol can also create
a feeling of ‘bravado’. This may cause
them to injure themselves or damage
equipment. If there is no consequence it
imparts the impression that this type of
behaviour is acceptable. A vicious cycle
is then created with employees ignoring
processes and regulations put into place
to ensure their safety. Neither of these
situations result in a desirable outcome.
Evans says undesirable behaviours
can also potentially impact the company’s bottom line in a negative fashion. Loss of time and an overall loss of
productivity in the long run can affect a
company’s profits and their production
abilities, and thus has a corresponding
effect on the bottom line. Addressing
this challenge will help to ensure that
businesses are operating effectively and
with maximum productivity, which will
therefore ensure profitability is maximised.
Creating negative feedback loops
Comments Rhys Evans, Director of
ALCO-Safe, “The consequences of the
action can also negatively impact the
behaviour of the colleagues of the offender. If nothing negative occurs,
the perpetrator may feel that they can
continue with such behaviour. Colleagues may also see this and emulate
the undesirable behaviour, which further increases the employees risk not to
mention the company’s. If someone is
injured or even killed, the organisation
“Overcoming problems with alcohol
consumption in the workplace requires
a combined approach of the right policies, education and equipment to curb
alcohol use and abuse in the working
environment,” says Evans.
Alcohol abuse policies are a crucial
first step. These must clearly define and
outline an organisation’s zero tolerance
approach to alcohol consumption, as well as all of
the procedures involved.
Policies must define the
parameters for the company and employees to adhere to in order to ensure
compliance with OHSA
standards. The policy must
also outline the full process for testing for alcohol
consumption, as well as a
complete explanation of
disciplinary
procedures
should employees test
positive.
In addition to creating
policies, it is also essential
to drive awareness of the
policy, the consequences
of breaching it, and the effects of alcohol on behaviour. “Often, employees are
unaware of the harmful consequences
of alcohol, on their health, their personal lives and the safety of those around
them,” he notes. “Education needs to
South Africa Insurance Times - February 2015
form a vital foundational pillar of any
approach to reducing risk behaviour
such as the consumption of intoxicating substances in the workplace. The
behavioural changes affected by the use
of alcohol are often not understood,
and education can help employees to
understand the benefits of abstaining
or reducing alcohol consumption.”
Finally, policies and education
should be backed by the use of appropriate technology for testing alcohol
consumption.
Without the ability to check employees, the policies will be ineffective in
changing behaviours. The possibility of
random testing or specific tests should
employees be suspected of being intoxicated can be a significant deterring factor.
Alcohol in the workplace is a serious
challenge across many industries. It can
have negative behavioural implications
that can create a cycle of negativity that
can adversely affect the organisation,
and can also have a long-term negative
impact on productivity, profitability and
the bottom line. Changing behaviours
requires a combination of policies, education and appropriate technology to
ensure that risk can be minimised and
adherence to OHSA better assured.
opment Plan incorporates it, we have
yet to see meaningful progress in this
area.
“One culprit that explains our lack
of progress in accessing regional markets,” says Saville, “is our low rate of
productivity. Statistics show that from
a peak in 1993, output per worker per
unit of capital in South Africa has fallen
dramatically, yielding the lowest level in
46 years. We are below our emerging
market counterparts in terms of labour
Economy
Easier than you think
How to kick-start the SA economy
I
t’s no secret that
the South African
economy is growing at rates well
below its potential. What is perhaps
less well understood is that there are
some quick wins that could kick-start
the economy, yielding swift results.
And from that position, it would be far
easier to take the economy to a more elevated position, leading to more meaningful job creation.
“Notwithstanding the current local
slump, South Africa’s growth rate for
the last 20 years has mimicked world
economic growth, which infers that
global growth is the best indicator of
what our structural growth rates are
likely to be into the future,” says Adrian
Saville, CIO of Cannon Asset Managers. “We believe that for the next 10
years, advanced economies (that make
up half the world economy) will grow
at 1.5%, and developing economies at
5.1%, giving an average annual global
growth rate in the region of 3.0% to
3.5%.”
The good news among the current
gloom is that we should grow at about
3% p.a. for the next 10 years. And the
bad news is that we will grow at about
3% p.a. for the next 10 years. This is
well below the 5.4% rate targeted by the
National Development Plan that is required to dent unemployment, dramatically reduce poverty and redress income
inequality.
“While the country urgently needs
major structural changes to education,
government economic policy, infrastructural capacity and state institutions
(to name just a few problem areas,” he
says, “to raise our growth rate above
6%, there are two relatively easy wins
we can achieve as a nation to lift us
above the low-growth trap in which we
are caught. These are:
1. Integrate properly with Africa:
Through boosting interregional trade,
investment and capital flows, South Africa would be able to tap into the outstanding growth rates of plus-6% being
experienced in the rest of sub-Saharan
Africa. We estimate that effective integration with the sub-continent could
add 1.5% p.a. to South Africa’s economic growth rate. While the Department
of Trade and Industry has recognised
this as a factor and the National Devel-
South Africa Insurance Times - February 2015
competitiveness.”
In a study conducted last year, the
World Bank [See note 1] found three
areas of opportunity to improve our
export competitiveness: boosting local
competition by opening SA markets to
domestic and foreign entry; promoting
deeper regional integration in goods
and services within Africa; and alleviating infrastructure bottlenecks. Which
brings us to the second factor which
would enhance South Africa’s growth
rate.
2. Meaningful roll out the R1 trillion
infrastructure expenditure programme.
“We believe this has the potential to
enhance South Africa’s growth by a
further 1.5% a year,” says Saville. Infrastructure development has one of the
greatest multiplier effects in terms of
job creation, especially with regard to
the promotion of low-skilled jobs.
Several studies [See note 2] have
shown that investment in economic
infrastructure has the capacity to act
as one of the most effective policies in
terms of promoting economic growth.
In addition, employment is created during the construction phase as well as for
operation and maintenance. “Moreover,
one of the key drivers of private sector
investment is public sector investment.
Where the government goes, the private sector will follow. It should not be
a surprise that, given the current low
levels of government infrastructural in-
Page 5
vestment, private sector investment in
the economy is also low.”
On this score, South Africa adopted
the National Infrastructure Plan in
2012, whereby R827 billion would be
invested in building new and upgrading
existing infrastructure from 2013/14.
However, by last year’s budget speech,
these still were overwhelmingly plans
with the low pace of delivery frustrated
by the fact that some key projects that
have come into being have run over capital and time budgets. In addition, sadly,
some of the budgeted expenditure is
being diverted just to keep the lights on
during this phase of exceptionally tight
electricity supply, rather than creating
new infrastructure.
“Despite the frustrations, our economic modelling efforts show that if
harnessed effectively, these two steps
of infrastructure delivery and regional
integration could boost South Africa’s
growth rate from 3% to 6% putting us
on a high road to economic and sustained social repair and upliftment.”
Notes:
1] South Africa Economic Update –
Focus on Export Competitiveness
(World Bank, 2014)
2] For example: Infrastructure Investment and Economic Growth in
South Africa (African Development
Bank working paper, 2012)
Financial services
Tip of the iceberg
Experian SA launches new fraud prevention solution
E
xperian SA has launched the National Fraud Prevention Solution
(NFPS) to address the significant
threat of identity and credit application
fraud in South Africa. And SA’s largest
mobile company, Vodacom, is the first
to join.
South African companies experience more fraud and bribery than their
counterparts elsewhere in the world, the
PricewaterhouseCoopers Global Economic Crime Survey 2014 found earlier
this year. And according to the South
African Banking Risk Information Centre (SABRIC), the country lost more
than R2.2 billion through fraud and related cybercrime in 2013. Meanwhile,
data from the South African Fraud
Prevention Services (SAFPS) revealed
that the number of identity theft cases
reported by the end of April 2014 had
increased 16% year-on-year. Experian
believes this is only the tip of the iceberg as many frauds still go undetected
in the absence of more effective fraud
prevention systems.
The most effective strategy is to prevent fraud occurring at the point of application. This requires the detection of
potentially fraudulent applications before the customer is accepted, without
adversely affecting customer service
levels and speed of decision-making.
Experian’s NFPS offers South African credit providers an online, real-time
credit application fraud prevention service. The solution highlights potentially
fraudulent activity within seconds of
someone applying for any loan or credit
across a company’s own data or a con-
Page 6
trolled match against other companies’
credit application data. The solution
compares new applications for credit
with previous applications and other
data sets to identify inconsistencies and
anomalies that indicate the likelihood of
fraud occurring.
For example, if someone applies for
a mobile phone contract using their
name, address and a monthly salary of
R10 000, and then applies for a store
card using the same name and address
but states a monthly salary of R30 000,
a red flag will be raised.
Sophisticated detection rules are
also used to screen for and identify any
potential syndicate frauds across the
participating companies. These rules
can be customised by sector to enhance
the interpretation of the data.
Vodacom’s Warrick Love, Managing Executive: Credit and Risk says,
“Unfortunately, fraud is a reality we
cannot ignore. Through Experian’s
NFPS we look forward to improving
our own efficiency in detecting fraud
and attempted fraud. Collaborations
such as this are essential for organisations seeking to stem the associated
losses.”
To demonstrate the potential savings to companies and credit providers, David Coleman, Head of Analytics
at Experian SA explains, “Prior to the
launch of the new solution, we conducted a pilot programme with 12 companies from different sectors, including
financial services, telecommunications,
retail and automotive.
Pilot programme
“The pilot programme identified 1.7
million credit application matches in
the shared community pool. A total of
138 000 fraudulent and bad applications
were identified across this pool, which
amounted to approximately R175 million in potentially preventable losses
over that three-month period.”
The NFPS works on the principle of
data reciprocity, with members contributing non-competitive data to a shared
database. The solution enables controlled cross-referencing of applications
across the industry without revealing
any commercially sensitive information
and uses a sophisticated software solution to identify potential fraud.
Experian SA MD Michelle Beetar
elaborates, “As more organisations join
the national fraud prevention solution,
the fraud detection efficiency of each
organisation dramatically increases.
Once a fraudster is identified, the entire membership is protected from repeat attacks. Through collaborative
and non-competitive fraud data sharing, organisations will have access to a
wider breath of data that will assist in
the early identification of potentially
fraudulent applications.”
Fraudsters exploit the fact that organisations deal with limited information during a short period of time.
Criminals can create, confuse and control identities piece by piece and can
keep their activities ‘under the radar’ as
long as companies operate in isolation.
Often fraud is only detected at customer default or is even left unidentified as
bad debt.
A picture of the fraudster’s ‘true’
identity can only be seen in full by join-
South Africa Insurance Times - February 2015
ing up and collating all of the pieces of
the identity jigsaw from the systems
they have been recorded in across industries. Entity data matching can link
networks of suspicious activity, rapidly
identifying potential fraud rings and
spotting false identities earlier. When
this is done across industries, the power
of data matching increases significantly.
“Organisations are aware that fraudsters target the whole industry rather
than opportunistic strikes at individual
companies. As such, they are starting to
realise the benefits and power of noncompetitive collaboration and enhanced
fraud intelligence,” says Beetar.
Experian has proved that facilitated
collaboration can work on a large scale.
The solution has already been launched
and is operating successfully in a number of other countries including the UK
and Russia. Experian is recognised as
the global leader in fraud prevention
and credit risk management providing
data and analytical tools to clients in
more than 80 countries. Experian helps
organisations to reduce impairment
losses and prevent fraud across half a
million applications every day, providing businesses with the tools they need
to build trusted relationships with legitimate customers.
Financial planning
Distrust the banks
Get physically and financially fit for the New
Year
T
hanks to year-end savings payouts, bonuses or 13th cheques,
and so on, many of us are fortunate enough to earn some financial
breathing space. It’s also when we
should plan to start the New Year with
resolutions to get into better physical
and financial shape.
John Manyike, head of financial
education at Old Mutual, says, “Too
often, South Africans who’ve worked
hard throughout the year end up being pressurised to overspend. Many
succumb to aggressive marketing and
clever advertising, and end buying stuff
they don’t need. This can become a real
problem when they are faced with January expenses such as school fees, uniforms and text-books.”
There are some direct correlations
between physical fitness and building personal wealth. Neither can be
achieved instantly and both hold longterm benefits for you and your family
if you’re willing to stick to basic prin-
ciples. “It’s never too late or too early
to start getting into shape and to get
advice on financial planning.”
Good personal financial management and financial advice is more important than ever, he notes. “The most
recent Old Mutual Savings and Investment Monitor found that more than
80% of working metropolitan South
Africans want help on how to save. “The
pressure to ‘splash out’ can put breadwinners and especially parents in an
unenviable position. Some spend their
bonuses excitedly before they’ve even
been paid and end up in more financial
trouble than if they hadn’t been paid a
bonus at all.
“Many, too many, feel it’s easy to
spend on credit and deal with the consequences in January or February,” says
Manyike. This can be hard on relationships too, he adds, especially when one
partner is more careful with money
than the other. “The cautious one can
end up feeling like a killjoy who’s always
saying ‘no’.”
It’s not only marketers who are putting pressure on people to spend.
Youngsters who expect the kind of gifts
their friends get, or expect expensive
holidays, put pressure on parents who
don’t want to disappoint their children
or make them feel neglected. This can
trap families in a spiral of high interest
and debt, and can even lead to blacklisting, garnishee orders and repossessions.
One way to try to avoid this is to enlist your family’s help. “Kids can be
subject to peer pressure and pass that
on to their parents, who end up feeling
they’re depriving their families by not
splurging. It can be a difficult conversation and it can initially lead to tears
and tantrums. But it’s worth working
through this. Instead of being badgered
into buying new cell phones, for example, keep using the same ones and save
up for a seaside holiday or something
the whole family can enjoy. But more
importantly, says Manyike, turn budgeting and being debt-free into a family
project. “This may require a complete
turn-around in your attitude towards
money, from ‘spend-first-and-save-therest’ to ‘save-first-and-spend-the-rest’.”
He suggests the following steps,
adapted from Old Mutual’s On the
Money financial education programme. Where am I?
Make a list
1 Make a list of what you spend.
Nowadays, money can seem unreal,
just a swipe here and there and ignore a
number on a screen. Many of us know
that we’re overspending, but hide from
the ugly truth.
1 Write down your fixed expenses:
South Africa Insurance Times - February 2015
rent or bond repayments, insurance
premiums, school fees, union membership fees.
1 Now list your variable expenses:
food, transport, rates, cell phone, clothing and entertainment. Don’t sabotage
your efforts by underestimating costs.
1 List your irregular expenses: car
maintenance, home repairs and so on.
Try to work out an average monthly
cost. Again, if in doubt, it’s better to
overestimate slightly than get caught
short.
1 Add them up. If they total more
than your earnings, you need to act.
But even so, pat yourself on the back:
now that you know exactly where you
are financially, you’ve already put yourself in a stronger position.
1 List your expenses in order of importance. You need accommodation,
transport and food. Apart from that,
ask yourself whether an expense is crucial, or whether it can be cut out. Typically the items that can be eliminated
will be things such as entertainment
and clothing.
1 Use the money you’ve saved to reduce your debt, especially credit card
and store card debt, which carries higher interest rates.
Debt free
1 Once you’re debt free, establish a
basic emergency fund for unexpected
expenses. A month’s salary is a good
start. While it may take a while to build
up, it’ll give you a real sense of security
once you have it. Many people are just
one month away from poverty because
if their salary was not paid for a month,
it would take nearly 12 months for
them to recover financially.
1 Invest some money each month for
your long term and medium term financial goals, like saving for your retirement and your kids’ education. This excludes your employer’s pension scheme
or your own retirement investments. A
financial adviser can help you.
1 Empower yourself with knowledge:
Old Mutual’s free On the Money programme helps people develop clear and
specific plans that are realistic, achievable and inspiring.
And, remember this. Banks need to
lend money otherwise they cannot
make a profit. So their main goal in life
is to acquire clients and put them into
debt. Once indebted the client loses
control, loses the initiative. That’s OK
from the bank’s point of view because
it can then call the shots. It can increase
the interest rate to earn more money;
apply more charges, and pretty well do
anything once you are trapped. Do you
really want that?
Page 7
Taxation
Cheaper compliance
International trends
point to reduced
administrative burden
P
taxes has become easier
over the past year for mediumsized companies around the world,
according to a new report released by
the World Bank and PricewaterhouseCoopers. The time it takes such a
company to meet its tax obligations
dropped by four hours on average in
2013, according to the Paying Taxes,
2015 study. The report also discloses
that the average total tax rate such a
company paid and the number of payments also declined. This is a trend seen
every year over the ten-year period covered by the publication.
Over the ten years of the study, 78%
of the 189 economies covered in the report have made significant changes to
their tax regimes at least once. The time
and the number of payments required
to comply with tax obligations have
fallen over the ten-year period, as has
the average total tax rate. The fastest
rate of decline for the total tax rate occurred during the financial crisis from
2008-2010 with an average decline of
1.8 percentage points per year during
that period. The rate of decline then
started slowing in 2011.
Paul de Chalain, PwC Head of Tax,
Africa, says, “The latest results from
the Paying Taxes study show that many
countries are continuing to make progress in tax reform, but there is still
scope to streamline and simplify tax
systems.
“Tax reform is set to remain an important topic for governments around
the world for some years to come, and
this will include the need to take on
board the proposals from the Organisation for Economic Co-operation and
Development (‘OECD’) to modernise
the international tax system to cater for
today’s globalised business.”
South Africa’s total tax rate saw a
further decline in 2013, falling from
30.1% to 28.8%. Overall, South Africa’s
worldwide paying tax ranking dropped
from 24th position to 19. Kyle Mandy,
PwC Head of National Tax Technical,
says, “Both the fall in the total tax rate
and the improved ranking can largely be
attributed to the changes made in the
Paying Taxes methodology, rather than
tax reforms. These changes have been
made in response to calls for the data
to remain current, to take into account
the potential for differences in the tax
aying
Page 8
systems across the larger economies in
the study, and to more closely reflect
the improvements that are made when
implementing reform.
The report shows that the average
Total Tax Rate across African economies has dropped by 6.3 percentage
points. Africa now has the second highest tax cost of the regions (46.6%) with
South America having the highest average rate (55.4%).The African Total Tax
Rate has been falling consistently since
its peak of 72.2% in 2005. The replace-
ment of cascading sales taxes in The
Gambia with VAT caused the most significant movement in the Total Tax Rate
in 2013. The average Total Tax Rate for
Africa is, however, still affected by the
cascading sales tax in Comoros.
The Total Tax Rate measures the
burden of all the taxes that a company
must pay in relation to its commercial
profit. Therefore all kinds of taxes that
impose a cost on the business are considered, such as property taxes, labour
taxes, and other payments that do not
require filing, such as dividend tax,
capital gains tax, environmental tax, financial transaction tax, and vehicle and
road tax. The study uses a standardised
company to measure the taxes and contributions paid by a company in each of
the countries forming part of the study,
allowing for comparisons across countries.
The purpose of the study is to provide analytical data to facilitate the debate on tax policy and tax administration and encourage tax reform.
The average time to comply in the
African region is 317 hours, which is
well above the world average and the
second highest of any region. Consumption taxes take the longest to
comply within the region – 125 hours
on average.
The average number of payments
for the region at 36.2 is well above the
world average (25.9) and the highest of
any region. The majority of payments
relate to ‘other’ taxes and labour taxes
and mandatory contributions.
Although Africa has made some
progress around tax reform, it is the
lack of electronic filing in the region
that contributes mostly to the difficulty in paying taxes. Only 9% of the
economies in Africa have already implemented electronic systems for filing and
paying taxes that are used by the majority of companies. This is the lowest
level of implementation of electronic
systems across the regions. Some African economies have electronic systems
available, but they are either not used
by the majority of companies or the systems do not cover both online filing and
payment of taxes.
“An electronic system that is well
implemented can be of benefit to both
tax authorities and taxpayers. For tax
authorities, electronic filing lightens
workloads and reduces operational
costs.
“For taxpayers, electronic filing reduces the time and cost required to
comply with tax obligations and eliminates the need to wait in the line at the
tax office. It can also lead to a lower
rate of errors,” adds Mandy. Electronic
systems for filing and paying taxes have
become common worldwide, with 43%
of economies now having electronic filing and payment systems in place.
The time taken for companies to
comply with their tax obligation in
South Africa (200 hours) has declined
significantly since electronic filing was
introduced more than a decade ago.
Since then, a number of improvements
have been made to streamline the tax
system, including a reduction in the
amount of information to be submitted
with a corporate tax return.
South Africa’s tax system continues
to be ranked number one among the
BRICS economies (Brazil, Russia, India,
China and South Africa) in terms of its
efficiency and easing the compliance
burden for taxpayers.
The top reformer for the third consecutive year was the United Arab
Emirates where the time to comply
is the lowest. The highest number of
hours to comply is still taken by Brazil where it takes 2,600 hours, or more
than a year for a full time person, with
more than half of this time being spent
on consumption taxes. The lowest Total
Tax Rate is found in Macedonia FYR
with most of its 7.4% generated by
profit taxes. The highest Total Tax Rate
in 2013 is found in Comoros at 216.5%
due to the cascading sales tax.
South Africa Insurance Times - February 2015
Pension funds
Old chestnut
Pension funds that adopt a responsible investment
approach
M
South Africans
would like to look forward to
a comfortable retirement. But
industry research has shown that less
than 10% of South Africans will be able
to retire financially comfortably. It’s an
old chestnut.
Those that are able to retire, will do
so on limited income, while others will
either be forced to work until they die,
or rely on family and friends for some
assistance. The latter is likely not the
dignified retirement that most envisioned. For those that are able to retire
and buy a pension, a few tough decisions are crucial at this time of one’s life
to secure a promising future.
ost working
The current regulatory environment
allows for members who retire from
provident funds to take their benefit as
a lump sum (after they have paid tax).
However, for members retiring from
pension funds they are required to buy
a pension with a minimum of two-thirds
of their benefit. Most members, of either a pension fund or a provident fund,
would find that buying a pension results
in lower tax being paid on their retirement income.
Various pension options are available, ranging from living annuities, life
annuities and with-profits annuities. The
distinguishing factor between the various options lies in the amount of risk a
pensioner takes in terms of future pension benefits and the increases thereof.
A further risk that is common to all
these types of pensions is the credit risk
Page 10
associated with the pension provider.
When buying a pension, the benefit
could be paid from retirement to death,
and this could be for 20 years plus. As a
result, one needs to make sure that the
insurance company from which the pension is bought has an appropriate credit
rating and sufficient capital adequacy.
This will ensure it can honour your pension promise, even after extreme events
such as a market crash or pensioners
enjoying a longer than expected life.
An insurer’s capital adequacy ratio
(CAR) is often used in assessing the
company’s future ability to deliver on
the benefits promised. A higher capital
adequacy ratio is normally considered
to provide more certainty for pensioners. For the average pensioner, taking
all of the above into account would normally be quite a daunting task. As such,
appropriately qualified financial advisers can play a crucial role in this regard.
Furthermore, with treasury’s retirement
reform, financial advisers would like to
empower trustees of retirement funds
to play a more prominent role in guiding members when they retire. Even
though there is no legislation currently
in place forcing trustees to pick default
pension options for their members,
there is already a large number of funds
that have been proactive in either selecting default pension options or alternatively, preferred pension options for
their members.
Members can therefore be guided
by the due diligence processes of
boards of trustees in making their decision around their pension options. This
should significantly reduce the risk of
members buying a pension from a provider with either an inadequate credit
rating or one that might not survive
life’s inevitable extremes. By Regard
Budler
Consumer Affairs
Saving for a rainy day
Managing debt wisely
G
volumes
were already higher in the fourth
quarter 2014 than they were in
the same period the previous year, according to the results from Stellenbosch
rowth in retail sales
University’s Bureau for Economic Research’s latest retail survey.
Craig Whittaker, Head of Product
at Wonga.com SA, points out that
those who received a year-end bonus or
13th cheque should take a cautious approach to retail therapy and rather save
a portion for a rainy day. “While the
extra income is always welcome during
one of the most expensive periods of
the year. But even those receiving yearend bonuses can still find themselves
overspending and incurring unnecessary debt.”
He says that budgeting and constant
tracking of what is spent, especially on
incidental purchases such as a quick
lunch while shopping, is essential in order to avoid overspending. “By drawing
up a budget and tracking what is spent,
consumers will be able to plan and manage costs to prevent themselves from
overspending. This will enable consumers to have more money available for
the things that they really need.”
Whittaker explains that, as most
people are often paid earlier in December, overspending can quickly put strain
on January’s monthly budget. Instead,
he advises consumers to use the extra
money to pay off any existing debt before spending it elsewhere. “Whether
the money goes toward credit card,
personal loan or in-store account payments, it will be extremely beneficial to
start the New Year with a clear or lower
credit balance.”
He adds that consumers should also
spend the extra money on items that
will bring real benefits in the New Year.
“Consumers should use their bonus to
pay for essential items such as: tyres for
a vehicle, school fees, gym or club fees,
or even paying off clothing accounts.”
In addition, a bonus can also prove a
great booster for an emergency or rainy
South Africa Insurance Times - February 2015
day fund. A recent Wonga customer
survey revealed that only 31% of the
respondents had a separate savings account for an emergency expense. Many
financial experts recommend that consumers have at least three months’
worth of income in an emergency fund.
Healthcare
Patterns of disease
Software solutions to
combat heavy fraud
H
to
cost South Africa between R22
billion and R26 billion every
year,” says Wilma Liebenberg, Chief
Executive Officer of Knowledge Objects Healthcare (KOH). “But while
fraudsters are getting more savvy, so
too is the healthcare funding industry,
and the solution to fraud is not as complicated as some may think.”
South Africa is not alone in this, as
international studies reveal that the
ongoing battle between the medical
schemes, health insurers, their administrators and unscrupulous members and
service providers is costing the healthcare industry billions all over the world.
According to a 2013 report entitled,
The resilience to fraud of medical
schemes in South Africa, “Latest global
research shows that $415 billion (over
R4 trillion) is lost due to healthcare
fraud globally.” To put this into context,
that is enough money to provide clean,
safe drinking water around the globe,
bring malaria under control in Africa,
provide the Diptheria, Tetanus and Pertussis vaccine to all 23.5 million children
under one years old who are currently
not immunised and still have over $320
billion (more than R3 trillion) spare to
fund healthcare to honest members.
“The current healthcare environment is unfortunately one that is highly
conducive to fraud,” admits Liebenberg. “Scams include the submission
of fraudulent or phantom claims with
or without the member’s knowledge,
incorrect prescription submissions,
unbundling or bundling of treatment
codes, code farming and over-servicing.
In certain instances, members and providers collude in order to defraud medical schemes,” she adds.
“No matter which way one looks at
it, fraud is costing the healthcare industry dearly and has therefore resulted in
substantially inflated healthcare costs.
What is needed to nip this in the bud
is a pro-active, pre-emptive approach to
fully address the problem,” asserts Liebenberg.
ealthcare fraud is estimated
She says KOH has invested considerable resources into developing a solid
strategy to decrease fraudulent behaviour, which is common in the healthcare
funding industry. KOH is a South African based healthcare risk management
company, and has representation internationally.
To combat fraud the company provides its healthcare funding clients
(medical schemes and administrators)
with advanced artificial intelligence
software known as HealthPower™.
This pre-emptively flags inappropriate
claims. It can also detect risk patterns
while assisting in identifying suspect
role players early in order to take corrective action proactively.
“This technology not only addresses
the glaring inefficiencies in the traditional component based model of
managed healthcare but also radically
decreases the chance of fraudsters gaining a foothold in the industry,” says Liebenberg.
“KOH came into existence in 2001
and has achieved phenomenal success
in the past thirteen years. We have provided technology and risk management
solutions to a number of South African
medical schemes, Australian Health
Funds, African Health Insurers, as well
as Health Insurers in the Middle East
during this time. In the process we have
continuously enhanced our systems and
rules. One of the greatest attributes of
the KOH system is that it is fully flexible and totally modular, so much so that
it can be deployed in collaboration with
any existing administration or managed
healthcare system. There is therefore
no need for any data transfers. This
enables the medical scheme and administrator to remain fully in control of
their data management processes while
South Africa Insurance Times - February 2015
achieving improved results. The KOH
system also replaces various ‘point solutions’ that administrators and medical
schemes contract to focus only on one
discipline such as for example, dental,
optical, radiology, pathology and pharmacy in order to validate claims received,” explains Liebenberg.
Resolution Health Medical Scheme,
South Africa’s tenth largest open medical scheme, have been using the KOH
system with great success for close on
four years and the Scheme has reported a significant decrease in fraudulent
claims.
According to Mark Arnold, Principal Officer of Resolution Health,
“KOH is the first company of its kind
in South Africa to come up with a practical, cost-effective solution that allows
medical schemes to pick up on fraudulent claims and also radically reduce
non-healthcare costs.”
“The only way to deal with 21st century fraudsters is to implement 21st
century solutions. Advanced technologies are certainly making it easier for
medical scheme administrators to tackle fraud. This is most certainly the way
forward for the healthcare funding industry,” adds Arnold.
Healthcare
Professional assessment
Family the leading
cause of stress
S
Africa’s graduate profesare more stressed by their
families than any other reason, including financial commitments or their
occupation. This is according to a recent
survey of nearly 3 000 of Profmed’s
graduate professional members on the
levels of stress facing this demographic.
According to Graham Anderson,
Principal Officer and CEO of Profmed,
the medical scheme that caters exclusively for the graduate professional
market, the Profmed Stress Index
shows that 40% of respondents ranked
family as the leading cause of stress,
with 27% citing Health, 17% Work and
only 16% citing Financial.
“There are myriad factors that may
be attributed to this result including
the fact that some professions such as
the medical sector demand long hours
that could cause friction for other family members. Graduate professionals
also tend to demand a higher salary
as a result of their skills, which are often in short supply, and this supports
outh
sionals
Page 11
why finances is the least cause of stress
amongst this market. It is however positive to note that these people appear
happy with their chosen occupation,
particularly given the scarcity of skills
we have in South Africa in the graduate
professional market.”
When questioned about the effects
of stress, 60% of respondents said it had
both a physical and emotional effect on
them. “It’s important for working professionals to be aware that stress takes
a toll on the body, as well as the mind
- which can be just as harmful to their
overall wellbeing,” explains Anderson.
When asked to evaluate their stress
levels on a scale of 1 to 5, the majority of respondents do appear to have
relatively high stress levels. Only 20%
chose 1 or 2, indicating a low level of
stress. 66% said they were moderately
to highly stressed, whilst 14% said they
were extremely stressed.
A further finding from the survey
showed that 38% of professionals use
exercise to cope with any stress they
may have, with 20% saying a holiday is
the preferred method of dealing with
stress. 17% said they would speak to
someone about their stress and only 8%
said they would use medication.
“It is very positive that professionals
would first turn to exercise as a way to
relieve their stress levels. Many studies
have shown that regular exercise reduces stress hormone levels such as adrenaline and cortisol, whilst increasing the
production of endorphins, which are
the body’s natural mood elevators.”
It is also encouraging that 73% of
respondents believe they manage their
stress levels well. “Effective management of stress is extremely important
as high stress levels can lead to a number of health related issues such as heart
disease, gastrointestinal problems, migraines, anxiety and depression.”
Anderson says an interesting result
from the survey is that relatively few
professionals have taken time off work
in the last six months due to stress, with
only 8% citing this as a cause.
“There are some very positive results
in the Index, particularly the fact that
graduate professionals feel they are well
equipped to manage their stress and appear to do so through positive methods,
such as exercise, which has consequent
health and emotional benefits.”
Notes
Further information on the respondents:
14% of respondents were between
the ages of 21 – 29, 19% between 30 –
39, 14% between 40 – 49, 21% between
50 – 59 and 34% were over the age of
60;
Page 12
57% of respondents were male;
40% of respondents were in the
Medical field, 14% Engineering, 11%
Legal, 6% Accounting, 6% Science and
24% cited Other.
About Profmed
Profmed is a restricted medical aid
scheme that is open to professionals
who have obtained a postgraduate qualification. Profmed offers these individuals exclusive yet affordable medical cover. The company’s vision is to address
the healthcare needs of professionals
through appropriate and comprehensive benefit design. For more information, please visit www.profmed.co.za or
follow Profmed on Facebook.
rocked by corporate scandals and financial scams,” comments Corné Heymans of ARGEN Actuarial Solutions,
one of the largest independent actuarial
firms in Africa. “Given this, along with
the weighty responsibility of influencing how large sums of fund members’
life savings will be managed, it is not
surprising that the independence and
transparency of actuarial decisions
are increasingly subject to scrutiny,
as stakeholders seek reassurance that
these decisions are based on only one
consideration: the best interests of fund
members.”
Heymans explains that there has
been much debate whether the interests of members are best served by
appointing an in-house actuary who is
employed by one of the fund’s service
providers such as the administrator or
investment consultant, or by contracting an independent third party actuary
or actuarial firm. “In reality, the decision is often dictated by simple economics and practical considerations,”
says Heymans, who has acted as both
an in-house and independent actuary at
different points in his career.
“For smaller funds, the economically
viable option is often to appoint a ‘onestop-shop’ service provider to provide
administration, consulting and actuarial
services. Over and above potential cost
savings, this has the advantage that
there is a close working relationship
between the valuator, administrator and
consultant so that problems can be iden-
Retirement funds
Professional responsibility
Two-pronged strategy
for transparency
P
ension fund actuaries face a substantial moral and professional
responsibility to fund members in
advising on, designing and maintaining
sustainable retirement funds. Utilising
complex financial calculations and forward-looking statistical projections, actuaries provide funds with greater clarity in an increasingly uncertain world, to
ensure adequate funding of retirement
plans.
“Actuaries operate in a market characterised by increasing uncertainty,
volatility and risk, in a world too often
tified and addressed more efficiently.
Larger funds often avoid any potential
conflicts of interest by appointing an
administrator, along with an independent third party actuarial firm, with the
consulting services provided by one of
these specialists or another independent service provider. Independence has
benefited many defined contribution
South Africa Insurance Times - February 2015
funds where the actuary, looking from
the outside, is able to help the trustees
in identifying gaps or areas of improvement.”
Either way, the trustees remain ultimately responsible to ensure the transparency and independence of all decisions in the fund and they often rely on
the actuary to assist them in this regard.
“But trustees do not necessarily always
perceive the actuary to be completely
unbiased, especially if the remuneration
of the actuary includes performance
bonuses linked to his/her employer’s
performance or, more explicitly, to
commissions earned from placing investments,” comments Heymans.
“While it can be argued that the decisions of the in-house actuary may be
swayed by fear of jeopardising his/her
remuneration, the same can be true of
a third party actuary who may also have
a business relationship with the fund’s
service providers or be eligible for the
same commissions.”
So how do funds ensure that they
are getting appropriate actuarial advice?
Arthur Els, director of ARGEN and one
of only a few Chartered Enterprise Risk
Actuaries in South Africa, suggests a
two-pronged strategy. “First, the fund
needs to check that the designated actuary – whether in-house or third party
- is bound by the strict Code of Professional Conduct of the Actuarial Society
of South Africa (ASSA). This demands
honesty, integrity, competence and due
care, as well as an upfront, complete
declaration of any existing or potential
conflict of interest. Such an actuary can
be expected to make ethical calls in the
interest of the fund and its members,
without being influenced by any personal consequences.”
“Secondly, an additional level of risk
management and corporate governance, regardless of whether an in-house
or third party actuary is used, can be
added through independent peer review
of any major actuarial decisions taken
by the trustees. This provides a fresh
perspective and ensures transparency to
the trustees.
“It is an excellent risk management
approach which gives all stakeholders
peace of mind that the actuarial decisions taken by the fund have been corroborated by an independent outside
third party actuary,” says Els. “Such
peer review or independent oversight is
highly recommended by both ASSA and
the Financial Services Board (FSB).”
“Some funds may not be able to afford to implement the two-pronged
strategy, but it nevertheless remains the
ultimate solution for funds that value
transparency, intelligent risk management, and exemplary corporate governance.”
International
Formal introduction
Opening an offshore
bank account
A
n increasing number of South
Africans are sending substantial amounts of money offshore
each year due to frequent travel, a
greater appetite for offshore investing,
business interests abroad and a growing
trend to educating their children outside
of South Africa.
The UK has proven to be the popular choice due largely to the similar time
zones and legal systems and also the
shared language. Opening a UK bank
account has, however, been a long winded and complicated process for South
Africans, as it is for most overseas investors.
control regulations over a decade ago
South Africans have been able to externalise more and more funds into other
currencies, a change that has been welcomed by investors looking to diversify
their portfolio. The legal amounts are
currently a R4 million investment allowance per taxpayer per calendar year
and an additional single discretionary
amount of R1 million per calendar year.
Investec Bank in South Africa, in
collaboration with Investec Bank plc
in the UK, says it has made opening a
UK Private bank account a seamless
South Africans who are not UK residents often require a formal introduction to a UK bank, a process that normally requires among other things, a
letter of good standing from a relative
who is an account holder in the UK.
The strict UK regulatory environment
that includes measures put in place to
ensure AML (anti-money laundering)
has translated into a waiting period of
up to six months for bank account applications for non-residents.
This presents real challenges for
South Africa’s ‘global’ citizens, many
of whom are not restricted by South
African borders in their income generation and preservation. With just 0,5% of
global assets residing in South Africa,
the case for investing in other jurisdictions becomes clear.
Since the relaxation of exchange
South Africa Insurance Times - February 2015
Page 13
process for its ‘global’ South African
clients. Along with frequent travellers
and those with dependants and material
assets in the UK, the new account offering is ideal for young South African
professionals on secondment or working there.
Deon Katz, Head of Banking at Investec Private Bank SA says, “There has
been a substantial demand from our clients looking for options in the UK, and
in fact we know that it’s the destination
for around two-thirds of their offshore
investments.
“The next logical step was for us to
create a seamless environment to take
the hassle and time wastage out of
opening an account there. It currently
takes around three weeks to open and
this time frame will come down to a
matter of days in the near future.”
According to Wayne Preston, Head
of Banking at Investec Bank plc, the
UK Private bank account has been
designed specifically to remove pain
points previously associated with opening a UK facility. “Investec is differenti-
ated in the market due to its specialist
approach and distinctive client experience. A dedicated telephonic banking
team available 24/7 along with worldwide emergency assistance, and sophisticated, secure online and mobile banking form part of Investec’s One Place
offering,” he says.
In the UK, Investec is the third largest private client investment manager
with £73 billion under management
whilst the South African business holds
the leading position with assets in excess of R747 billion in SA. The business
was recently announced as the Best
Private Bank and Wealth Manager in
South Africa, at the Annual Global Private Banking Awards held in Geneva.
With approximately 75% of JSE
earnings currently generated offshore,
interest in investments beyond local borders is set to continue. The UK remains
a key strategic priority for Investec, an
approach that seems to be shared by its
client base. It’s now become a great deal
easier with the new UK Private bank account.
Investments
Digital danger
Are paper manufacturers still a worthwhile bet?
T
he shares of global paper companies were hit hard by changing
patterns in media consumption
and reduced business activity following
the financial crisis. But certain companies enjoy good strategic positioning
or inherent competitive advantages and
have managed to prosper while their
peers have struggled.
While the advent of the internet age
and the global financial crisis had a big
influence on paper consumption, according to Paul Whitburn, a portfolio
manager at RECM, some of the paper
industry’s woes were of their own making. “For many years paper companies
had easy access to debt and therefore
overinvested in capacity. The resulting
oversupply could take decades to take
up in a lower growth environment.”
The paper companies that have
managed to survive the difficult trading conditions have been those that
invested in more efficient plants and
those able to fully vertically integrate by
owning their own timber resource and
pulp manufacturing plants. “Companies
focused on coated wood-free paper,
which is used in glossy magazines, have
struggled,” says Whitburn. “As consumers have switched to digital channels,
demand for coated wood-free paper has
declined, leaving companies like Sappi
Page 14
with excess capacity and declining product pricing. Their strategy of trying to
consolidate the coated wood-free market backfired and they had to later impair and close these operations leading
to substantial capital destruction.”
Mondi’s diversification away from
South Africa proved a shrewd move
when their acquisitions in Eastern Europe and Russia benefitted from fundamental shifts in the European paper
market. “These regions were seen as
high risk at the time Mondi bought into
them,” says Whitburn.
“But they acquired the assets cheaply and then modernised them to make
them more cost competitive. When
these regions became the manufacturing and packaging hubs for Europe,
Mondi were well positioned and went
on to grow strongly. But from an investor point of view, their good positioning is already very evident in their high
valuation.”
RECM visited Portugal shortly after
the global financial crisis in search of
quality companies that might have been
oversold. “At the time, the southern
European countries were known as the
PIGS (Portugal, Italy, Greece and Spain)
and were heavily out of favour,” says
Whitburn. “We found a paper company
– Portucel – that has consistently generated higher returns than its European
paper industry peers despite the low
growth environment.”
Portucel has a number of competitive advantages that make them the
lowest cost global producer of printing
paper, says Whitburn. “They’re fully
vertically integrated and have access
to a rare variant of timber that grows
faster, yields more and requires substantially fewer chemicals in processing
pulp to paper. They have minimal gearing, are close to their main market in
Europe and they sell a higher proportion of premium paper giving them a
higher average price per ton. They’re
also developing a timber plantation in
Mozambique that will be roughly the
same size as their Portuguese timber
operations and will serve demand in the
Chinese market.”
Portucel is 81% owned by Semapa, a
family-owned industrial conglomerate.
“Semapa also owns 100% of Secil Cement, the second largest cement manufacturer in Portugal, with operations in
Brazil, Tunisia, Lebanon and Angola,”
says Whitburn.
“At current prices, an investment
into Semapa not only provides investors
access to Portucel’s compelling competitive advantages at an attractive valuation, but you also get the entire cement
business for free, including the equivalent of seven million tonnes of global
capacity.”
Even with the shift to digital, paper
demand is still closely linked to economic activity. As economic activity picks
up again in Europe, paper consumption
should increase and RECM expects
Portucel to benefit, especially if it has
fewer well-funded competitors.
South Africa Insurance Times - February 2015
Retirement annuities
The best of both worlds
New approach: guarantees with flexibility
O
ffering and assuring an attractive, meaningful income that is
sustainable for life is a challenge
facing many product providers and intermediaries, especially in an era where
the client’s life expectancy is longer due
to health improvement interventions.
This situation requires product providers to develop innovative and sustainable retirement products that match a
client’s unique needs. At the same time,
it demands the financial advice community to make the correct determinations
to offer a suitable vehicle that can secure their client a comfortable future.
The common retirement income vehicles in the market include Fixed Annuities and Living Annuities, both of
which have their advantages and disadvantages.
Living Annuities have come to outpace Fixed Annuities to draw the majority of new business. For various
reasons, many advisers convince their
clients to go with Living Annuities –
which are the most popular because
they provide flexibility and potentially
high returns provided the market returns are good. Any remaining capital is
also transferred to beneficiaries on the
death of the annuitant. The downside of
the option is that the client is exposed
to market falls. This requires that there
be good investment decisions made in
order to preserve the capital as best as
possible. To achieve that, the portfolio
would have to be managed by someone
with competent experience and the ability to manage investment risk well.
“Fixed Annuities, by contrast, are
used to guarantee income for as long
as a client is alive ensuring that there is
no risk of outliving the income or exposure to market dynamics – good or
bad. However, the amount guaranteed
depends on rates at the time of taking
out the annuity and there is a risk that
the client locks into a poor rate,” says
Craig Sher, Head of Product Development at Discovery Invest. Fixed annuities also lack flexibility to adapt the
income amount each year in line with
clients’ changing needs. In addition, the
client’s capital is forfeited in full if he
dies early. Some fixed annuities, however, provide options for the client’s beneficiary, a spouse for example, to receive
their income after death. However, this
option has the impact of lowering the
fixed income that the retiree will receive
each year.
Common as they maybe, the two
product types have proven to have challenges that prevent them from optimally addressing today’s retirement needs.
To provide the best product and advice, a focus has been put on developing an innovative annuity vehicle that
can deliver the best of linked and fixed
annuities without the downsides. “This
new breed of annuities that is developing aims to capture the best of both
worlds. It allows clients to guarantee a
minimum income level as long as they
live, while still providing flexibility of income choice each year and any remaining funds are transferred to beneficiaries upon death. Discovery’s product,
the Guaranteed Escalator annuity, is designed to meet this need. This product
provides a guaranteed minimum income
level that ratchets up each year when
markets rise, ensuring that no matter
how long a client lives, he will never outlive his savings,” says Sher.
Healthcare
Real headache
Consider the financial implications of Alzheimer’s
A
lzheimer’s is the most common
form of dementia and, according to research, which further
suggests there will be a dramatic increase in this condition. Indeed the organisation, Alzheimer’s in Action, estimates that SA currently has 750 000
people with Alzheimer’s, a number that
will double by 2030.
Another worrying concern is a report from the South African Federation for Mental Health, which claims
that 75% of people with various mental
health disorders are untreated. It further believes that a quarter of South Africans will suffer from a mental health
condition in their lifetime and, as Dr
Peter Bond, Chief Medical Officer at
Old Mutual, affirms, “This should spur
breadwinners to prepare financially for
the costs of treating such patients.”
He says this sharp increase places a
responsibility on financial service providers to explain clearly the extent of
the cover their various products provide. Importantly the onus is on consumers to inform themselves and seek
out sound advice. “Being aware and preparing for Alzheimer’s possible onset
should form part of everybody’s financial lifestyle planning,” says Dr Bond.
South Africa Insurance Times - February 2015
September was World Alzheimer’s
awareness month. The aim is to raise
awareness about the most common
form of dementia, which can affect
anyone, as it’s not associated with any
particular race, gender or lifestyle. “Advances in treatment mean that people
live longer with the disease than previously. While this is good news, it may
also increase the financial burden on
families who have to cover the cost of
treatment as well as part or full-time
carers should they be needed.
“In its advanced stages, the deterioration of the sufferer’s mental state often places great strain on loved ones,
who may then opt to admit them for
full-time care in a medical facility. That
can cost many thousands of rands a
month.”
He emphasises the need for support
of not only the patient, but also the
caregiver and spouse. “There is nothing
that can prepare you for this disease.
Not only is your loved one no longer
the person they were, but friends may
also disappear. The caregiver feels
trapped with the patient and misses the
companionship - it is very lonely and
isolating.”
Dr Bond adds that the impact of the
Page 15
disease is compounded by the fact that
its onset is late in life. Most people who
develop Alzheimer’s do so when they’re
retired and many South Africans are financially under-prepared for retirement.
The most recent update of the Old
Mutual Savings and Investment Monitor found that more than a third of
working South Africans have no provision for their retirement at all. It also
noted a steady increase in the number
of breadwinners providing financially
for children as well as parents – the socalled ‘Sandwich Generation’.
Insurance providers offer
products called severe illness
cover, which pay out a benefit
if you’re diagnosed with one
of the listed severe illnesses, to
take care of the lifestyle adjustments you may need to make.
A person with so-called
dread diseases such as stroke,
heart attack or cancer are paid
out upon diagnosis, but with
degenerative diseases such as
Alzheimer’s this pay-out is
made when a certain level of
disability is reached, such as no
longer being able to drive.
“When initially diagnosed with a degenerative disease, the patient may still
have a fairly good quality of life for a
long time. The severe illness benefit
kicks in at a later stage, when families
are taking physical and emotional strain
and need the help of a carer or a specialised home – a cost that is unlikely to be
covered by a medical aid.
“The peace of mind that goes with
being financially prepared helps to alleviate some of the stress families experience at this time. It’s vital to prepare
financially for all life’s stages.”
Life assurance
Cause and effect
Survey reveals the nature of death
T
hinking about how we will die one
day is uncomfortable. Most of us
expect (and hope) that we will
pass away peacefully from
natural causes. But in reality a
significant number of people
die from unexpected, unnatural causes – and if proper financial plans are not in place,
these can leave loved ones in
dire financial straits.
A recent ‘Life Surprises’
survey by Sanlam, conducted
among South Africans over
the age of 50, found that
nearly half of respondents
(46%) expected to die of old
age, and 13.8% of illness.
6.7% expected to die of unnatural causes. According to
Sanlam chief medical adviser
Dr Pieter Coetzer, Sanlam’s
claims statistics indicate that
more than 10% of the deaths claimed
for were the result of unnatural causes,
including road traffic and other accidents, homicide, suicide, fire, drowning,
poisoning and animal bites. Over a third
of these deaths were of people aged between 36 and 45 years.
Page 16
Figures released recently by the
Medical Research Council show that
men in South Africa are three times
more likely to die as
a result of injuries
(around 240 deaths
per 100 000 every
year) than women
(70 per 100 000). For
men, the main cause
of unnatural death is
homicide, followed
by road traffic accidents, suicide and
fire. For women, the
leading cause is road
traffic accidents, followed by homicide,
fire and suicide.
“People don’t anticipate dying from
unnatural causes –
they tend to have an
attitude of ‘it won’t happen to me’. This
means they often don’t have appropriate financial strategies in place, which
can have severe financial consequences
for their families if the unexpected does
happen,” says Coetzer.
He says the most important meas-
ures financial advisers should encourage
their clients to take to prevent unnecessary hardship to loved ones include ensuring that all debt is paid off as quickly
as possible, that the family will continue
to have an income should something
happen to the client, and that education
benefits are in place if there are minor
children.
Some form of life cover is also essential. “Traditional life cover – which
is advisable – will automatically also include accidental death cover. However,
if for some reason clients don’t qualify
for a traditional life insurance policy –
for health reasons, for example – then
they should at least look at accidental
death cover. The premiums are much
lower than conventional life cover, and
they won’t be subjected to underwriting
based on their health.”
Coetzer says Sanlam’s claims statistics have revealed certain ‘red flags’,
which increase the chances for unnatural death:
1 A body mass index (BMI) over 30
1 Smoking (smokers’ mortality rate is
double that of non-smokers – for all
causes of death)
1 Riding a motorbike
1 Mood disorders, including depression
“We are not certain what the reasons
are for the strong correlation between
these factors and unnatural deaths – it
may be because people who smoke or
ride a motorbike are more likely to be
risk-takers.”
Coetzer says whether or not these
‘red flags’ apply to your clients; accidents can happen to anyone, at any age.
“Financial advisers should discuss with
their clients a holistic financial strategy to ensure their loved ones will not
be impacted financially should they no
longer be around,” he says.
Summary of key findings
1 78.5% of people claim to have had
unexpected life events (good or bad) in
either their own lives or that of a member of their family.
1 Just less than a third of the sample
(28.2%) expect to outlive their partners.
1 Of those who expect to outlive
their partner, the majority (35.0%) are
uncertain about how many years longer
they will live, but just over a fifth (21.4%)
expect to outlive them by between five
and 10 years and 29.7% say they expect
to live for more than 10 years after their
partner dies.
1 Over half expect to live well into
their 80s but only 1.3% of believe they
will live to be over 120.
1 Most expect to die of old age (46%)
or illness (13.8%).
South Africa Insurance Times - February 2015
1 Half the sample (49.5%) reported a
death in the family as being the event
that has had the biggest emotional impact on them.
1 97.2% of those that lost savings or
pension savings rated this event as having a devastating or high financial impact, whereas 93.7 % of people that
faced the closure of their own business
rated the financial impact as being devastating or high. 89.2% of people that
lost their income or were retrenched
rated this as having a devastating or
high financial impact.
1 People find themselves largely unprepared for the financial impact of
these events.
1 40.5% currently support a family
member that they were not expecting
to support. Grandchildren (44%), children (43.6%), extended family members
(20.2%), parents (12.8%) and spouses
(11.1%) are cited most as having to be
unexpectedly supported.
1 Respondents have many financial
regrets - 74.3% of the people surveyed
would change something in their financial preparation and 82.3% wished that
they had done more to be better financially prepared for life.
1 Things that they would change: to
save more of their earnings (54%), start
saving for retirement earlier (47.5%),
provide for unexpected life events
(43.7%), spend less (42.6%) and get advice from a financial planner (14.3%).
1 Over a third of the sample (31.7%)
got their financial advice from a financial planner, but 28.5% did their own
research and planning, and 23.2% obtained advice from their parents or noone (21%).
Investing
Getting mobile
Opportunity for new channels of investing
T
smartphones
and tablets has made transacting
with banks much easier, but are
customers ready to interact with investment firms in the same way? The results
of a new Deloitte US survey augment
the case for going mobile. The study
reveals that because of the growth of
the use of smartphones and tablets and
the increasing interaction of financial
service clients with investment firms via
mobile devices, there is a lucrative opportunity for mobile expansion in the
investment management space.
The 2 193 respondents (of whom
1 488 were investment management
account holders) were asked in the
survey about their awareness, usage,
preferences and concerns when it came
to interacting with financial services
firms via mobile devices. According to
the survey, typical mobile investors are
potentially very attractive clients, being
predominantly homeowners, university
graduates and high earners.
“Because of the fact that a significant percentage of investment management account holders do interact with
investment firms via mobile devices,
we expect the majority of investment
firms to continue to invest in mobile,”
says George Cavaleros CFA, a partner
at Deloitte.
Despite only 27% of investors stating that mobile offerings are extremely
important or important, with 36% stating that mobile is unimportant, the
survey finds that the majority of investment management account holders are
he increasing use of
in fact interacting with a financial institution and using their mobile devices
for some financial services activities.
“Another factor in favour of investing in mobile is that nearly all respondents between the ages of 21 and 59 use
a smart phone to interact with financial
institutions,” says Cavaleros.
vice for doing direct transactions. Their
main concern was the security of mobile
investment transactions, with 78% being “fairly concerned” about this. However, respondents were more likely to
find mobile banking services extremely
important (39%) when compared with
investment services (23%).
“One possible reason for this is that
banking tends to involve more routine
transactions, and therefore the interaction is more familiar,” explains Cavaleros. “Another factor is that the investment manager does not always have a
direct relationship with the end client
because an advisor is often in the middle.”
Integrating customer touch
points
The survey results show that investors interact with financial institutions
via multiple channels. “This means investment firms cannot think of mobile
as a discrete channel,” asserts Cavaleros.
“Rather, it is part of a customer-service
ecosystem that must be integrated with
other customer touch points.”
Addressing
investors’
concerns
about mobile security is another top
priority. “Investment firms should strive
to ensure the security of their mobile
offerings if they want full investor engagement.”
Investment strategy
Reducing costs
Why index tracking is
better
O
ne of the world’s
Security concerns
Most respondents said they used their
cell phones for getting information
from their investment firms, but very
few (only 15%) used their mobile de-
South Africa Insurance Times - February 2015
largest asset
consultants, Towers Watson,
made a startling admission recently: “Only a small subset of…active
managers and…hedge funds are useful
to society.” They also state “shuffling
of ownership rights between investors adds no value in aggregate.” This
is the essential principle underlying the
zero-sum nature of active management.
“Index-tracking managers are useful to
society because they perform the necessary oversight for minimum cost.”
Comments Steven Nathan Chief Executive of 10X Investments, “The authors estimate that index funds presently oversee 15% of global assets, but
charge less than 2% of total fees. The
other 98% of fees are charged by active
managers and hedge funds.” Yet the authors see only a limited benefit to society, related to the screening and pricing
of new assets. They see “the excessive
shuffling of ownership rights (that is,
Page 17
pursuit of ‘alpha’) as value destructive.”
The authors’ conclusion: “We should
have less active management. Not none,
but less.” Their useful services could still
be rendered adequately, if active managers oversaw only 25% of assets, thereby
saving owners some 40% in fees (an estimated annual saving of between R800
billion and R1 600 billion globally).
“The facts are clear,” says Nathan.
“The industry’s business model is selfserving and fails most investors. This
evidence is supported by research from
several Nobel laureates (William Sharpe,
Eugene Fama and Robert Schiller) and
leading investment experts such as
Warren Buffett, David Swenson (Yale)
and John Bogle (Vanguard).
“For the industry, this issue has
moved beyond an intellectual discussion to a moral dilemma,” as Towers
Watson notes, “None of us is going to
ask voluntarily for a 41% pay cut, but if
we were really putting our clients first,
we should.” They go on to call for a
new moral environment that provides
“the socially useful function of adapting
portfolios to fit the risk level to the mission of the investor. This is an important role undertaken by the industry but
is not part of our current focus.”
Notes Nathan, “At 10X we are
pleased to say this is exactly what we focus on and supports our long held view
that the best way for most people to
invest is via a well-structured, low cost
tracker fund. Since inception almost
seven years ago, 10X’s life-stage tracker
funds have proven to be simpler, better
and cheaper than the vast majority of
actively managed funds, including during the 2008 Global Financial Crises.”
Investment strategy
tion, which, in the case of unit trusts,
can be found on the fund’s fact sheet. In
the table below, Fund A has quite dramatic swings between stellar and pedestrian monthly returns, but no negative
months. It therefore has a higher volatility (1.8) than Fund B (0.8), which has
poor but consistent monthly returns
(see Table).
As the table illustrates, high volatility does not necessarily mean an index
or a fund’s returns have been negative
often (although this could very well be
the case). It means the returns fluctuate in a wider range than is the case for
an investment with a lower volatility.
When interested in an investment’s negative returns, it’s therefore more useful
to request a table with all the monthly
returns and check the quantity and the
extent of the drawdowns than looking
at volatility measures.
Staying the course
The four myths of market volatility
N
Taleb, renowned author
and fierce critic of all who take
comfort in statistics, once chose
the snappy title of ‘We Don’t Quite
Know What We are Talking About
When We Talk About Volatility’ for
one of his papers. Even if you haven’t
read this particular Taleb paper, you
may have heard comments such as:
1 I rather stay away from volatile investments. I don’t want to lose money.
1 The markets are becoming more
volatile. It’s time to get out.
1 I’ve got another 20 years until I retire. I’m saving for retirement through
a conservative product to protect my
capital.
assim
“These are just a few of the statements,”
says Carl Roothman, chief executive of
retail business at Sanlam Investments,
“that reveal how little many of us know
about volatility.
“Since the FTSE/JSE All Share Index
hit an all-time high on 29th July 2014,
we’ve witnessed the return of index ups
and downs – locally and internationally.
Already investors are becoming jittery
and checking with their advisers whether it’s time to get out of the market.”
Maybe now is a good time to debunk some of the myths surrounding
market volatility?
FUND A
FUND B
Page 18
Jan
4.1
0.9
Feb
2.1
-0.1
Mar
5.2
1.1
The good news for investors, employers and trustees is that you have no
conflict or vested interest, other than to
do the best for yourself, your employees or your members.
Myth #2: High volatility = an approaching bear market
Myth #1: High volatility = negative historical returns.
He says we sometimes forget that volatility is simply the extent to which an
investment’s monthly returns deviate
from their average on a month-bymonth basis. The most common measure of volatility is the standard devia-
Apr
1
0.1
May
3.9
0.5
Jun
0.5
-0.4
Jul
4.4
1.9
Aug
0.2
-0.2
It is quite common for investors to believe that increased volatility is a precursor to a bear market. But there is little
evidence of a causal relationship. The
VIX or ‘fear index’ is the most commonly used indicator of the level of volatility
that global markets are expecting over
the next 30-day period (looking forward), and has a high correlation with
the historical standard deviation of the
markets (looking back). When the VIX
spikes, it’s a sign that the market is expecting returns to either shoot upwards
or downwards - not only downwards.
Over the past 15 years, there were
Sept
3.8
0.8
Oct
0.9
-0.8
Nov
2.2
1
Dec Std dev
0.1 1.8
-0.4 0.8
South Africa Insurance Times - February 2015
three periods during which the VIX exceeded 35 (around 20 is the average):
August 1998, September 2002 and
March 2009.
To investigate whether higher volatility introduces a bear market, we’ve
plotted the VIX index against the
monthly and quarterly returns of the
FTSE/JSE All Share Index and the
MSCI World Index for the three periods following the VIX peaks.
Says Roothman, “Yes, there were
some negative monthly returns after
each volatility spike, but one or two
months hardly count as a bear market.
In contrast, if you look at the quarterly
returns after each spike in the VIX index, there are no drawdowns.”
Therefore, although we refer to the
VIX as the ‘fear index’, there is no evidence that a rise in the VIX necessarily introduces a bear market. It doesn’t
mean that a rise in volatility cannot lead
to a bear market, though.
Myth #3: Volatility is a good reason to
stay out of the market.
“Despite the fact that there’s no evidence that a rise in volatility leads to a
bear market, there are investors who
take their money out of the equity market soon after experiencing one or two
sharp negative months.” By sitting on
the side, he says, they run the risk of
missing out on some of the best returns
of the decade. The bar chart shows the
impact in case you missed the best 10,
20 and 30 days of the last 10 years. And
the longer you stay out of the market,
the greater risk you run of sacrificing
returns because of your fear of a bear
market (which may never materialise).
Please see the chart (Source: Morningstar Direct – 10 years to 31 August
2014 and SI calculations).
Myth #4: Volatility matters over the
long term.
“Yes and no. It depends on the angle
from which you view volatility,” says
Roothman. “Volatility is important to
long-term investors because they need
to invest in riskier, more volatile assets
to beat inflation over time. Volatility is
therefore one of the tools that they use
to outperform the conservative portfolios aimed at short-term investors. So,
yes, volatility as a tool to unlock longterm value matters.”
However, the fear or avoidance of
volatility should only matter to shortterm investors. Long-term investors
have time on their side to sit out the ups
and downs of the equity market. In the
graph below we show how unscathed
long-term investors are by negative
short-term returns.
Over a number of periods measured
from 1976 to August 2014, the probability of capital loss (measured as the
number of negative return periods divided by the total number of measured
periods) decreases to zero over a fiveyear period. This indicates that, provided investors are willing to remain
invested in the ALSI for at least five
years, there is little likelihood of capital
loss over the full investment term.
Investing
No such thing as a
risk free asset
Money market funds
T
South African money market funds from the collapse
of African Bank is a timely reminder that these investments are not
completely risk free. Small capital losses
have sparked big runs on money marhe fallout in
Stay the course
To conclude, volatility is the friend of
the long-term investor.
By staying the course and ignoring
the ‘noise’ of short-term market fluctuations, and remaining invested through
all market cycles, long-term investors
will reap the rewards of patience and
persistence.
ket funds in other markets. Investors
should be sure to put as much emphasis
on return of capital as they do on return
on capital, regardless of asset class.
Investors may not be aware of the
risks involved in their money market investments, says Doug Thomson, Head
of Business Development at RECM.
“Investors who think that putting
money into a money market fund is always as safe as money in a bank should
check those assumptions,” says Thomson. “The highly competitive nature of
the money market industry has made it
harder for most funds to generate good
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Page 19
returns without either increasing the
duration of the fund or taking on more
credit risk.”
Thomson points out that the losses
investors incurred as a consequence of
ABIL’s curatorship are by no means the
first suffered by money market investors. In the US in 2008, news that The
Reserve Primary Fund had exposure to
Lehman Brothers sparked a run on the
fund. Despite being one of the oldest
and biggest money market funds, investors withdrew $40 billion in two days
and the fund’s assets fell more than
60%. In the two days that followed,
investors withdrew nearly 10% of the
total assets across US money market
funds until the Federal Reserve stepped
in to provide liquidity.
“The interesting thing is that the Primary Fund’s exposure to Lehman Brothers was only around 1.3% of the fund,
but it still started a $200 billion run on
money market funds,” says Thomson.
“The meltdown of African Bank and
its impact on money market funds locally demonstrates that money market
losses can also happen here. While investors may be mentally prepared for a
decline in the value of an equity fund,
most don’t expect that kind of thing to
happen in a money market fund. Given
the lower returns compared to equities,
even a few percentage points loss on a
money market fund is a big deal.”
“RECM’s Money Market Fund occupies an interesting niche, in that it
aims to generate a competitive yield
while not compromising on the quality
of the underlying assets,” says Thomson. The Fund has been a consistent top
performer in the South African money
market and currently leads MoneyMarket.co.za’s ‘Top 6 Money Market
Funds’. “This performance is as much
a function of its investment strategy as
the low fees we charge on the Fund. In
the case of money market funds, fees
have a significant impact on investment
returns over time.”
Page 20
According to Thomson, it is well
worth taking the time to understand
how a money market fund is being
managed and what risk the managers
may be taking on to improve returns.
“People that rank money market funds
only on the basis of their historic re-
turns are likely to misjudge the risk in
their money market portfolios. Capital
loss seldom manifests in money market funds – but it just has. It’s critical
to look deeper than yield to understand
a money market fund’s liquidity, its fee
structure and how the yield is derived.”
Financial services
Hip-hip Hippo
New advice model and the Retail Distribution Review
T
Financial Service Board (FSB)
released the Retail Distribution
Review (RDR) on 7th November
2014. The review is based on the framework of Treating Customers Fairly
(TCF) and proposes 55 policy decisions
in order to alleviate issues such as poor
customer outcomes and mis-selling of
financial products.
Derek Wilson, Head of the online
quote and benefits comparison site,
Hippo.co.za, says, “We welcome the
proposals from the FSB’s Retail Distribution Review. As an insurance and
financial services aggregator, we aim to
align with the RDR objectives. The objective that really stood out for us was
the new advice model, which aims to ensure affordable and fair advice to consumers on products and services across
the whole market, enabling customers
and service providers to benefit from
fair competition.”
he
Treating customers fairly
The Internet provides consumers with
easy access to information on various
products and services. This has resulted
in the digital world being hit by a consumer culture known as “The Switching
Economy”, which places the power in
the hands of the consumer by enabling
them to make informed decisions in
order to switch from one brand to the
next. “This is the space we play in as a
consumer champion,” says Wilson.
The RDRs proposed framework of
Treating Customers Fairly provides a
blueprint for financial services aggregators to further empower consumers
as it encourages advisers to consider
an extensive range of products from
a wide selection of financial providers
within the South African market.
“Online financial products and services comparison sites such as Hippo.
co.za help consumers utilise their power to make better financial choices by
comparing quotes and benefits from
a range of insurers and other financial
service providers,” says Wilson, “We are
aligned with the TCF framework in that
our new business model aims to educate
consumers on financial products and
services in order to make sound financial choices.”
The RDR proposes interventions intended to change incentives, relationships and business models within the financial market that warrants consistent
delivery of fair outcomes to customers.
One such intervention is to provide a
truly independent advice model. Current independent advice models allow
for intermediaries to be incentivised by
insurers, and insurers in turn recoup the
costs from consumers.
“Our business is based on a truly independent advice model as we provide
a free of charge online comparison
service to the consumer, without them
being charged a brokers fee by the insurer. We make money by simply charging our partners a fee when a customer
chooses to find out more about their
products.
“The results you see and the order in
which they are presented are in no way
influenced by the fee we charge our
partners or any other factors other than
price,” says Wilson.
This model ensures a change in incentive, a more competitive financial
market and fair outcome to customers
as per the RDR proposed interventions.
“Our business model also provides
smaller insurers with greater access to
the financial market. Smaller insurers
who are unable to afford marketing
and advertising campaigns have the opportunity to piggy back of our marketing strategies in order to promote their
products and services.
Hippo.co.za acts as an independent
comparison website that helps consumers,” says Wilson, “We are continually
adding more and more brands to our
aggregation offering such as Standard Bank, FNB, ADT and Hollard. We
are always looking to add more nonTelesure providers to join the panel and
encourage providers to get in touch
with to discuss a possible partnership.”
South Africa Insurance Times - February 2015
Economy
Salary trends
Real increases
Considerable rise in take-home pay of formal employees
T
of formal sector
employees increased by 11,2% in
October 2014 on a year ago, which
was an increase of 5% in real terms.
This is according to research by Mike
Schüssler, Chief Economist at dotcoza.
“The average real increase in take home
pay, as measured by the BankservAfrica Disposable Salary Index (BDSI), is
2,5% overall for the whole of the last 12
months from November 2013 to October 2014 over the same period a year
ago.”
Comments Dr Caroline Belrose,
Head of Fraud and Data Analytics at
BankservAfrica, “Once again, the theme
of those in work being able to maintain
increases in their lifestyle is borne out,
as both private and public sector employees take home more after taxes,
pensions, medical insurance as well as
garnishee orders and firm-deducted micro loans.”
With most of the strikes now behind
us the increases in the formal sector are
quite astounding once again. The average salary that gets banked is R12 542
per month in the South African formal
sector payments system. This is the
sixth month that the average disposable
salary is above R12 000 per month.
Adds Schüssler, “We estimate that
there were only about 2 907 725 account holders in October receiving formal electronic salary payments through
BankservAfrica. This is a decline of 1,2%
he take home pay
when we would normally expect an increase in the number of accounts receiving electronic salaries due to the general
shift towards electronic payments. This
decline may have to do with both the
post office strike and the fact that some
bigger firms such as mines may have
laid off employees.”
According to the BDSI, the increases
are lifting people out of the lower disposable salary bands, as the number of
people earning less than R4 000 per
month in disposable income has declined to less than 19% for the first time
in the history of the BDSI. This may
also partly be due to the reduction in
garnishee orders over the last few years
as well as consumers becoming more
wary of micro loans. Of course, higher
salaries must also form part of the equation.
Belrose says, “The most interesting
Chart 2: Percentage of accounts that get more than R10 000 take home salary
(Source: BankservAfrica and economists dotcoza).
Chart 1: The percentage of employees in each of two categories over time
(Source: BankservAfrica and economists dotcoza)
South Africa Insurance Times - February 2015
aspect this month, however, is that the
number of people who received between R10 000 and R25 000 was the
biggest single grouping of people in the
BDSI. The data shows that just over 1.1
million employees received a disposable
salary between R10 000 and R25 000
per month, which is just a touch more
than the 1.08 million who received between R4 000 and R10 000 per month.”
While the numbers can fluctuate the
major trend at present is that the number of people who take home over
R10 000 is still increasing at a rapid
rate. This trend is likely to continue in
the future as the percentage of those
getting more than R10 000 in their
bank account now accounts for 46.2%
of the total sample of the BDSI. This
is up from 38.9% of employees taking
home R10 000 or more in October
2013 (See Chart 2).
The number of people earning more
Page 21
than R10 000 increased by 15.9% while
the top category of those earning between R50 000 and R100 000 saw the
number of people increase by 25.7%.
The two lower categories saw a decline in number of earners. The fastest
decline – being an absolute decline of
16.2% – is for those earning less than
R4 000 in take home pay. Those taking
home between R4 000 and R10 000 declined by 3% over the last year. Certainly
gross salaries have gone up but we also
suspect that some people are getting rid
of garnishee orders on their employees
and so changes in the categories are
probably not only salary increase related. With the fall over the last few years
in civil debt judgments as recorded by
StatsSA it is clear that some progress is
being made on garnishee orders.
More South Africans are taking
over R10 000 home every month than
ever before and the median disposable
salary in the BDSI is now well over
R9 000 per month. One could say that
the number of employees taking home
R10 000 or more is a really good indication of the growing wealth of many
in the formal sector. This more than
anything else is the major driver of consumer spending and retail sales and is
probably what has been keeping retail
sales and consumer spending on things
like cars and cellular calls going. Retail
sales may just be better than expected
in the next month or two as the impact
of the strikes disappear from the economic horizon and the salary increases
take effect.
The percentage of people/payments
in two broad disposable income categories show how more account holders
now earn above between R10 000 –
R25 000 pm than between R4 000 and
R10 000.
Notes Mike Schüssler, “We may experience better than expected retail
sales this Christmas season if salary increases remain as they have been in the
last few months.
Notes
The Table shows the change in the percentage of accounts per category between October 2013 and October 2014,
adjusted for weekly payments. Source:
BankservAfrica and economists dot-
coza.
Take home or disposable salary is the
amount paid via the BankservAfrica
system that indicates it is a salary payment and would already have taxes,
UIF, Pension and medical insurance
deducted. Other deductions according
to payment firms and payment offices
are Garnishee orders, up-front payments and deductions by some lenders
such as the old Iscor Employee fund.
Other deductions are much smaller in
numbers but can from time to time be
big amounts such as SARS penalties.
We estimate weekly salaries to be about
9,5% of the total people or about 30%
of actual payments.
Taxation
How to survive
Insurance to cover the
cost of defending a
SARS audit
T
he majority of online personal income tax assessments are completed in less than four minutes.
“But as SARS comes under pressure to
improve its revenue collection the number of taxpayers selected for tax audits
is on the rise,” says Willem Lombaard,
MD of Tax Risk Underwriting Managers. This underwriting manager (UMA)
was established following the merger of
two of the country’s foremost tax risk
UMAs, Qdos and TaxRadar, and trades
under the Hollard Insurance banner.
SARS opened more than 1.8 million
audit cases and conducted nearly 20 000
high-risk, complex and high-impact audit cases. In order to maximise returns
from its audit activity the Receiver focuses on high net worth individuals,
where it recovered more than R100m
from just 80 audits last year.
Companies are subject to intense
scrutiny too. In its 2013/14 Annual
Report SARS provided feedback on a
crackdown on construction firms. SARS
completed 800 audits of firms in the
construction industry and raised R1.76
billion in assessments of which R192.6
million was collected. “Over the next
couple of years we expect SARS to take
tough action against non-compliant sectors of the economy, which means your
firm could be next,” says Lombaard.
There is also a noticeable trend of SARS
handing over cases of non-compliance
to the National Prosecuting Authority.
“Aside from the stress of being selected for a SARS audit there are costs
associated with complying with various
audit requests and – in the event the
taxpayer is unhappy with the audit outcome – the subsequent objection and
appeals processes,” he says. Taxpayers
who are unhappy with an audit outcome
can either dispute it by following a specific process (as documented by SARS)
or object to it. The taxpayer can also
take the outcome of this objection on
appeal.
South Africa’s tax laws and associated legislation are extremely complex
and require knowledge and skill to navigate. As a result the average taxpayer
cannot afford the professional fees
required to defend a case adequately
through the audit, dispute and appeal
stages. Tax risk insurance was developed out of a need to protect individuals from this risk.
Tax risk insurance pays for tax professionals, including accountants and
other tax specialists, to assist both individual and corporate taxpayers in defending a SARS tax audit from beginning to end. Additional cover can be
purchased to also retain the services of
a tax attorney. The insurance will perform for a wide range of tax disputes
including income tax audits, VAT disputes, employees’ tax disputes, capital
gains tax disputes and dispute resolution hearings. Premiums vary based on
the amount of cover required and are
calculated mainly based on the income
that an individual earns or the turnover
of a business.
“It is important to study the policy
wording when you purchase insurance,”
says Lombaard. He observes that there
are a number of exclusions that apply
to tax risk insurance policies – or in
layman’s terms – many events that the
policy will not pay out for.
Policies will, for example, not assist
with routine requests for supplementary information by SARS, such as its
IT14SD requests. Nor will they perform
Disposable salary Categories in Percentage of people in each Percentage of people in each
Rand per month
income category Oct 2013
income category Oct 2014
0-4 000
4 000-10 000
10 000-25 000
25000-50 000
50 000-100 000
Page 22
22.7
37.6
32.1
6.7
1.2
18.6
35.7
36.5
7.8
1.5
South Africa Insurance Times - February 2015
for claims notified outside of the claims
notification period; claims arising from
the late submission of tax returns
(unless an extension was granted by
SARS); or where the taxpayer did not
keep proper accounting or tax records.
Tax evasion, fraud, dishonesty or
any criminal conduct by the policyholder as well as material non-disclosure will
also be met by a claims rejection. “An
important observation is that tax insurance will not cover the individuals or
businesses for outstanding taxes, fines,
interest or penalties as determined by
SARS to be payable by the taxpayer,”
says Lombaard.
“A tax audit is a serious affair and it
can cost the taxpayer thousands of rand
to put their case forward, possibly even
in court,” he adds. “The best defence is
to take out comprehensive and professional tax risk insurance to cover the
costs of the specialist tax lawyers and
accountants representing them in a
SARS audit assessment dispute.”
Financial services
Expect the unexpected
Ranking customer satisfaction
I
n the light of insecure lending and
the fall of one of the newer financial
institutions, which increases consumer distrust, Capitec’s achievement
of coming third overall out of 155 companies in the 13th annual Ask Afrika
Orange Index® service delivery benchmark, is impressive. Capitec won the
Financial Institution industry award and
was the only company in the financial
sector to secure a position amongst the
top ten companies.
The Long- and Short Term insurance industry winners were ranked
amongst the top 20 companies overall,
Liberty Life Long Term Insurance winner was 16th overall, and Outsurance
Short Term Insurance Winner was 20th.
These winning companies were well
ahead of their competitors.
“Consumer expectations exceed the
transactional encounter, excellent service is about an overall positive experience and honouring commitments. Winning companies perform significantly
better on reputation and fairness. Service today is values-based and authentic,
differentiation requires innovation and
pro-activeness. Service in itself contributes only 11% to loyalty. Emotional satisfaction, meaningful engagement and
trust yield customer commitment. Con-
text matters. Customers expect to see
what companies do for them and for
South Africa,” says Sarina de Beer, MD
of Ask Afrika.
The Ask Afrika Orange Index® was
established in 2001, and thus has a track
history of service in South Africa for
the last 13 years based on robust sample sizes. It is the broadest and most
widely-referenced service excellence
benchmark in South Africa, comparing
service levels across 32 industries and
ranking 155 companies in 2014. It not
only measures service within industries,
but across industries, and it identifies
landscape changes to provide insights
into the mass consumer trends informing service improvement strategies.
Ask Afrika does not make use of client lists received from companies, since
there is the potential for these to be
manipulated, or place other brands at
a disadvantage, should they not have
access to the lists. The Ask Afrika Orange Index® is recognised as independent and reliable, because all brands are
measured consistently in the same way
and the results are audited.
In the Financial Institution industry,
Capitec (3rd overall), having won the industry category in 2013 and 2011, was
the best performer by a broad margin,
with competitors having done not too
badly overall, coming in close on each
other’s heels. Nedbank was second in
the industry and 21st overall (industry
winner in 2008 & 2007); ABSA was
a few steps behind in third place and
26th overall (industry winner in 2012
& 2004); with Standard Bank in hot
pursuit in fourth place and 27th overall
(industry winner in 2010 & 2009). FNB
won the new best service through Social
Media award, but perhaps in practice
needs to put some effort into “un-Steve-ing” themselves through improving
their service delivery strategies, having come fifth in the industry and 35th
overall.
Banks did well in the new Social Media award, a service dimension that is
becoming increasingly important in
today’s connected and technologically
savvy consumer landscape. ABSA came
in fifth for its Social Media service delivery, Standard Bank 11th, Capitec 17th
and Nedbank 20th.
Differentiating service experiences
are now about customers expecting the
unexpected. Customers want the same
innovation they experience on a product
and marketing front to filter through
to the service environment. However,
great service is not sufficient for loyalty
and commitment. Strong emotional satisfaction is imperative. Poor performing
companies are still missing the basics.
“Over the years, we see a change in
ordering of service drivers. However, on
South Africa Insurance Times - February 2015
the whole, the important service drivers
are far removed from processes and
output. It is really down to the one-onone interaction with the representative
of the company, and whether they are
investing in understanding and empathising with a customer on an individual
level,” says De Beer.
The Long Term Insurance industry‘s
clear winner Liberty Life (16th overall)
really upped its game. It was a strong
player in the sector having never won
the industry category before. The other
companies then came in a few batches
of close competitors, on the whole
behind the Financial Institutions, but
ahead of the Short Term Insurance industry. Old Mutual was second in the
Long Term Insurance industry and 47th
overall (industry winners in 2008, 2009,
2010 & 2011), Hollard 3rd in the industry and 50th, and 1Life Direct fourth
and 56th. Leading the next batch in
fifth place and 73rd overall was Sanlam
and Metropolitan sixth and 78th (industry winners in 2004). Companies who
would do well to up their service game
in this industry are seventh place Discovery Life in 90th position, and Clientele Life Assurance, last year’s industry
winner, was eighth and 112th overall.
Outsurance was a new leader in
terms of service delivery (20th overall)
and streets ahead of the pack, with second place winner in the Short Term Insurance category Santam who came in
99th overall (industry winners in 2013,
2012, 2009, 2008 & 2007), followed
closely by third place winner Budget
Insurance 103rd, fourth place Hollard
Short Term Insurance 109th, fifth place
Auto & General 110th, and sixth Dial
Direct 111th. Dial Direct did exceptionally well and won the special award
for Biggest Leap. Then came First for
Women in seventh place 114th, ABSA
Short Term Insurance eighth and 121st,
and Standard Bank Short Term Insurance ninth and 127th. Mutual & Federal came tenth and 143rd overall. Even
though it might be prudent to focus on
service delivery strategies, it was still
ranked.
The Ask Afrika Orange Index measures transactional performance, overall
service, effort, treat customers fairly
(TCF), first call resolution (FCR),
emotional satisfaction, reputation dimension, trust, and corporate social
responsibility (CSR). It also measures
emotional responses and not only rational experience, as emotions are typically more accurate and less ‘packaged’,
and these responses correlate better
with word-of-mouth, or a typical call
to action. Loyalty is measured through
the Net Promoter Score (NPS). Also included this year is a Call Centre Index
benchmark.
Page 23
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