Managing Change in Retirement Funds Presentation: 3 rd Annual Retirement Reforms Southern Africa 2011 Speaker: Jonathan Mort Company: Jonathan Mort Incorporated, Cape Town Date: 27 October 2011

Change “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”. (Attributed to Charles Darwin) “When we are no longer able to change a situation, we are challenged to change ourselves”. (Victor Frankl)

Change Cannot be Avoided Change is constant, and comes - From different sources Is either embraced or imposed The three dangers – Resisting change which is inevitable Having to cope with an avoidable change related risk Responding incorrectly (including an over-response) to change

The Best Solution To be open to change To maximise the opportunities which arise from change To manage the risks associated with change Change usually – Is painful Takes longer to manage than planned Has some measure of unintended consequences

What causes Change for Retirement Funds Change in the law affecting retirement funds Change in regulatory approach Change in the employment environment (for occupational funds) Change in the business environment affecting – Employers Service providers Change in the economic and political environment

Example of Change in SA Retirement Fund Environment Over the last 10 Years Surplus legislation - Minimum benefits Valuation methodology New types of retirement funds – Unclaimed benefit funds Beneficiary funds Changes in tax law

SA Retirement Funds Changes (cont) Changes in investment laws – FAIS Act Security Services Act Collective Investment Schemes Act Nominee company requirements Regulation 28 Consolidation of retirement funds: reducing number of single occupational funds and increase in multi-employer funds Closure of DB funds

Where do we find Change? (cont) Change in regulatory approach - Greater powers of intervention by Regulator Establishment of FSB Enforcement Committee Move to risk based supervision: compliance visits, forensic inspections Development of Twin Peaks model: separation of market conduct function from policy development and solvency supervision Greater supervision, stricter licensing, of administrators and investment managers Prospect of National Savings Plan Increase in informal sector (no planning for retirement savings in this sector)

Change in Laws Affecting Retirement Funds Trustees need to know Assurance of awareness and implications by service providers Changes to fund rules? Changes to fund policy documents? Changes to contracts? What consequential changes are necessary? Communication : With members? Employer? Tax Consequences?

Change in Regulatory Approach Ensure compliance with spirit of approach Ensure co-operation Engage with Regulator in respect of grey area / ambiguity / unintended consequences

Change in Employment Environment Will the employer’s business grow or decline? Will the fund membership in consequence increase or decrease? What changes will affect the fund’s membership profile? Will there be an increase in turnover of members? What changes to the employment arrangements will affect the fund (eg. Flexibility of retirement date / full time employment / amount that can be contributed to the fund)? Will the fund be able to accept non-resident members? Importance of open line of communication between fund and employer

Change in Economic Environment (e)2011 (p)2012 (p) Angola18,622,613,82,43,47,511,1 Botswana5,14,83,1-3,76,46,97,0 Kenya6,37,11,72,65,05,35,5 Mozambique8,77,36,86,48,17,77,9 Nigeria6,06,46,07,08,16,96,7 South Africa5,65,53,7-1.72,83,64,3 Tanzania6,77,17,46,06,86,97,3 Uganda7,18,110,45,35,15,66,9 Zambia6,2 5,76,46,66,56,7 Africa6,26,55,53,14,93,75,8

Change in Economic Environment (cont) Will there be a convergence of policy development in Africa? Will there be a common market in Africa, similar to Eurozone? Will this result in Pan African Pension Funds? Where will the new sources of capital for economic growth come from? Tax payers Bank loans (local and international) Foreign state loans (eg. China) Institutional funds? How will institutional funded growth be managed, and how will this affect the investment arrangements within the fund?

Change in Fund Business Change in the law / regulatory approach / economic and business environment usually results in a change in the fund business at different levels International emphasis on risk based supervision likely to result in greater emphasis on proper governance. Thus – will there be minimum fit and proper requirements for boards of trustees? will there be mandatory trustee training? will there be increased accountability? will there be higher trustees fees paid? What impact will this have on having trustees elected from membership? Focus on administration and investment risks – how will this develop, what will the implications be for fund costs?

Change in Fund Business (cont) Investment issues - Will pension funds be seen as alternate sources of capital for economic growth Prescribed investments? Direct investing New regulatory requirements (ESG, new product issues) Investment Costs

Change in Fund Business (cont) With increased costs, economies of scale become essential - growth of multi- employer funds, with associated challenges Benefit administration challenges - administrative platform issues skill challenges splintering / delegation of services

Risk Management in Change Important to assess risks with every change Use classic high/ medium /low assessment of – probability of identified risk impact of identified risk Important to manage medium and high impact risks, whether low probability or not Have plan in place for the risk which materialises and which was not foreseen or foreseeable Engage with the Regulator about risks which are apparent from any unavoidable change, whether as a result of any change in law, regulatory approach or otherwise

Change is Good Change is a part of life – there is an increasing rate of change in the world Change is an opportunity to discard what is unnecessary, unhelpful or a hindrance But: unnecessary change is not helpful Importantly - Values should not change, even though the environment does

Thank You.