1 RF Reform TCF Tax Disclosure Peter Stephan

2 Retirement Fund Reform Proposals

3 NT 2013 RF Reform  Harmonisation of RF Contributions o Employer contributions taxed as fringe benefits in employee’s hands o Employee’s deduction on employer & employee contributions to RA, pension & provident funds incl risk benefits = 27.5% of > remuneration/taxable income - R cap. ASISA comment: o Cap of R creates admin complexity and serves no purpose.  Preservation o Vested rights as at “P-day” plus growth will be protected o After P-day, on withdrawal, entire benefit must be transferred to default preservation fund/section within the occupational fund (Divorcee shares as well). o Default chosen by trustees – member can select an alternative o 100% Vested amount can be withdrawn from preservation fund, plus 10% post P-day savings, once per annum – minimum of SOAG (R1260 p.m.). Roll-over of any unused portion allowed. o RAs – members may be able to transfer to preservation funds and access therefore relaxed.

NT 2013 RF Reform ASISA comment: o Access rules too lenient, complex to administer and for members to understand. o Rather: A : Allow access by way of acceleration of 1/3 lump sum, or B: NT proposal without minimum of SOAG, and no annual rollover. o Restrictions on RA funds at P-Day should remain with any access only to post P-Day amounts.  Provident Funds o Provident funds to be treated as pension funds, except -  Balances plus growth as at P-day (vested rights)  Members aged 50 at P-day – provided they remain in same fund until retirement  De minimus for annuitisation to be increased to R ASISA comment: o Members over age 55 should retain vested rights whether or not they move funds.

5 NT 2013 RF Reform  Retirement income o On retirement, capital defaults to an annuity selected by trustees. Member can chose an alternative. o Where trustees make commission-free advice available to members, some legal protections re selection of default will be given. o Living annuities may be used as defaults if rules re charges, investment choice & drawdown rates complied with. o Living annuities to be “reformed”. o CISs can provide LAs ASISA comment: o Different defaults should be permitted for different sectors within funds o Regulatory playing fields should be consistent no matter which license offers the LA. o Deferred annuities should be permitted.

6 NT 2013 RF Reform  Non-retirement savings o Tax-preferred savings and investment accounts: CISs; bank accounts; RSA retail bonds; Property assets e.g. Real Estate Investment Trusts, Property Listed Stocks o Untaxed o R p.a.with R lifetime limit – to be adjusted for inflation o Current interest exemption has increase d to R for > 65 and R for < 65. Don’t expect future inflation increases ASISA comment: o Concerned about no incentive for non-taxpayers o LTIs should also be permitted to offer tax-preferred savings and investment accounts o Do away with R per lifetime limit.  Governance o PF130 to be made a Directive. o Trustees must meet “fit & proper” requirements o Minister to convene trustee conference ASISA comment: o Consider retail and umbrella funds’ specific requirements o Balance degree of governance and cost

7 Treating Customers Fairly (TCF)

8 TCF: WHAT HAS HAPPENED SO FAR?  FSB Discussion paper published for comment April  TCF “road map” published March  Pilot self-assessment tool developed for firms, testing their understanding of TCF requirements and their TCF culture. oFeedback Report published on FSB’s website December oFSB self-assessment tool finalised – published on FSB website August oDO read the Guidelines before commencing with the Tool – ensures correct understanding of terminology. oNot a “silver bullet” – no tool can ever be a “one-size-fits-all” – still need to develop own self-assessments that are specific to your business. When using the Tool – and answer n/a – need to have MI to say why. oIs being used to conduct a baseline study across a broader sample of industry participants – which includes intermediary firms – public feedback scheduled for Q

9 FSB TCF REGULATORY REVIEW  July 2011, FSB established TCF Regulatory Steercom.  Analysis of regulation against all 6 TCF outcomes completed.  “Coverage” analysis undertaken – looking at which Outcomes are dealt with comprehensively, slightly or not all across entire spectrum of current sector regulation.  FSB will publish recommendations re regulation.

FSB TCF REGULATORY REVIEW  Looking to what can be introduced now under current legislation – particularly once FSLGAB passed through Parliament.  TCF Regulatory reporting: Starting with a focus on complaints- reporting.  FSB appreciates the importance of definitions e.g. “complaint”; “resolved complaint”.  Step 1: Reports to FSB only. Step 2: Public reporting by FSB. 10

11  Outcome 3: “Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.”  NT concern about the difficulty that prospective customers have in comparing different products, both the main characteristics of the products and the costs.  Intention at this stage: Regulated, standard template Key Information Document (“KID”)to be provided to prospective customers before quote stage, key information about the product, and its fee structure. NT DISCLOSURE REVIEW

12 NT DISCLOSURE REVIEW  Regulation to prescribe the generic template to be used for retail savings, risk, annuities products, etc. - should facilitate comparisons across product types.  Will include LTI, CIS, Banking, JSE products (not listed shares).  Next step: Standardised “quotes” for all product-types? NB to enable cost comparisons.

13 Tax

14 ASISA Tax  How do the ASISA tax structures work?  What are our main tax issues currently?

15 Structure Tax Standing Committee (Umbrella Tax Committee) (Reports into the Regulatory Affairs Board Committee) Three Working Groups 1. Life Office & Corporate Tax 2. Product/Customer Tax 3. Compliance and Administration Sub Working Groups  Solvency 11 (SAM) Tax (WG 1)  Medical Aid Tax (WG2)  Hedge Funds WG (1&2)  DWT, VAT & PAYE (WG 3)

Who does what? Tax SC – (Chair : Justine Wyatt, Sygnia) (Peter Stephan-ASISA Life Office/Corporate Tax WG1- (Chair: Danie Claassen, Sanlam) (Peter S) Product/Customer Tax WG2- ( Chair: Harry Joffe, Discovery) (Peter S) Compliance /Admin Tax WG3 –( Chair: Angus McDonald, Old Mutual)(Peter Blohm-ASISA) Broader economic/savings policy tax issues, retirement fund reform, hedge fund taxation, Section 45,23K deals - (Stephen Smith-ASISA) Outside expertise on Committees and WGs e.g. ENS and Deloittes

17 Main Tax Issues Life Office tax review, current assessment disputes and Solvency II (SAM) tax implications CGT carve out for Cat 3 FSPs Moving of assets backing risk policies from policyholder’s fund to the corporate fund S11(w) and contingent liability policies S9(1)(i) and source rules for retirement fund benefits Medical aid tax credits Multiple sources of income

Main Tax Issues Retirement Fund Taxes Implementation of Dividend Withholding Tax BRS for PAYE/VAT/Insurance Emigration and Tax Reporting of zero interest loans Unlisted REITS 18

Main Tax Issues Issuing of tax certificates (IT3,IT88,IT14SD) Living annuity tax issues Tax deductible income protection policies Section 45 intra-group transactions and Section 23K funding arrangements Hedge and Income Funds/derivative taxation (Investment Management Tax) Foreign Account Tax Compliance Act (FATCA) 19

Disclosure

Good Disclosure  It should be timely  It should be relevant and complete  It should promote product understanding  It should promote product comparisons  It should highlight important information  It should have regard to consumer needs

Cost Disclosure  What Fees/Charges are payable on this product or fund?  To whom are these Fees/Charges paid and in return for doing what?  How much of my money is actually being invested for me net of Fees/Charges?  How often are these Fees/Charges paid?  What happens if I change my investment?

Cost Disclosure  Rand amount  No bulking  Clear upfront and ongoing  Disclosed in one place  Show impact of charges and fees on investment returns  Guarantees  Financial implications of future causal events  Need to simplify both products and their disclosures  Enable retail product cost comparisons to be done across product wrappers in a neutral way

Effective Annual Cost Proposal

Current Status TER used widely and internationally accepted – Backward looking – Doesn’t take into account other fees such as advice and initial fees RIY used widely by life companies – Forward looking – Relies on assumptions and is at best is an estimation of expected costs Both are good measures – But neither allow for comparison between product providers

Effective Annual Cost (EAC) o EAC uses both TER and RIY o Can be thought of as  TER plus or  Simplified RIY o EAC will comprise  Advice Fees: Annual plus initial (amortized over term)  Admin Fees: RIY (using an inflationary buildup)  Fund Fees: Weighted TER of portfolio

EAC Examples InvestmentEAC Direct UT= TER Direct UT with IFA annual= TER +IFA annual Direct UT with IFA annual and initial= TER + IFA annual plus IFA initial/n Wrapped investment= TER + RIY (admin) Wrapped investment with IFA annual= TER + RIY (admin) + IFA annual Wrapped investment with IFA annual and initial = TER + RIY (admin) + IFA annual + IFA initial/n

EAC Calculation o Ensure consistently applied o Accept that just like RIY the EAC is an approximation  Some concessions required  Keep it simple o Standardise term  5 year term compulsory for all products  In addition  20 year term compulsory for ILLA  Term to maturity if required

EAC Next Steps o Confirm calculation bases o Get buy in from industry participants o Ensure TER implemented across all products o Agree on disclosures o Give it NT/FSB as a suggested solution o Consumer test

30 Thanks