PENSION FUND AMENDMENT BILL 2007 LOA SUBMISSION TO PCOF PENSION FUND AMENDMENT BILL 2007 Zimele brand development

RA Transfers “8. Section 14 of the Act is amended - (d) by the addition of the following subsection: 7(a) Notwithstanding anything to the contrary in the rules of a fund, a retirement annuity fund shall not prohibit the transfer of business that relates to a member’s interest…at the request of such a member…from one retirement annuity fund to another.”

RA Transfers “(b) No fees or commission of any nature, other than fees payable by the transferring member personally …are payable by any party to the transfer in return for the facilitation, intermediation or recommendation of the transfer.”

LOA Concerns Amendment 8 (d) does not prevent trail fee as % of assets transferred Trail fees will create a huge risk of incentive-driven advice. LOA Proposal Trail fees should not be allowed on transferred RA assets (if it was not already payable in previous fund).

Trail Fees Only non-underwritten RA funds can pay trail fees: - Linked Investment Service Providers (LISP’s) - Collective Investment Schemes (CIS’s) Underwritten RA funds currently cannot pay trail fees. This creates huge “perverse incentive” for advice in favour of transfer to non-underwritten RA funds.

Potential size of trail fee incentive Estimated size of underwritten RA funds R200 billion Worst case scenario: - All RA assets are transferred and 1% p.a. trail fee is payable = R2 billion in trail fees per annum ( ! ) Reasonable assumption: - 30% of RA assets is transferred and 0,5% p.a. trail fee is payable = R300 million in trail fees per annum

Double commission ? 90% of underwritten RA assets built up from recurring premiums On this, full up-front commission was paid, on past and future premiums Do not create opportunity to start earning trail fees on existing accumulated retirement savings!

Individual example Consider RA policy of R1 000 pm for 25 year term Up front commission (1st + 2nd year) = 4% x premium x term = 4% x R12 000 x 25 = R480 x 25 = R12 000 Assume accumulated transfer value after 15 years is R400 000 - Trail fee of 1% = R4 000 per annum of 0,5% = R2 000 per annum The incentive for an intermediary to advise all his RA clients to transfer is huge

Real concerns Real concern of LOA not to protect existing RA book. Real concern is to protect clients against power of incentive-driven advice. There is a real risk of bad advice / badly timed advice: - offshore investments in 2001 - equity market risk in 2007 ?! - not the time to exit smoothed bonus funds ? Personal pension debacle in UK was result of incentive driven advice FIAS is very good, but not sufficient to prevent incentive- driven advice in this case.

Commission principle on fund business Commission on new contribution only. No commission on transfers of investments already in pension net. Should not now create unlimited pool of potential “new” business from existing retirement savings.

Other arguments Administratively non-underwritten funds will have to hold two accounts per member. - one with trail fees (for new money) - one without trail fees (for transferred money) Intermediaries are entitled to fair remuneration - fee for service should be sufficient Most underwritten funds now give full investment choice so that the real need to transfer is small LOA believes single premium commission should be uncapped, and trail fees should be allowed – but only on new single premiums

LOA fully agrees with compulsory transferability of RA assets. Conclusion LOA fully agrees with compulsory transferability of RA assets. We strongly propose that no new trail fees should be allowed on such transferred assets. THANK YOU FOR LISTENING!