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Default regulationsDanie van ZylMarch 2019
Demystifying updated smoothed bonus standards and living annuity criteria
How does it all fit together?
Pension Funds ActDefault regulationsReg. 37 - 40
Default investment portfolio Reg. 37
Can use smoothed bonus portfolio if comply with Standard
Default annuity strategy Reg. 39Can use living annuity if comply with criteria
Why the need for a standard/criteria?
⧁ Both are popular options, but…
Smoothed bonus portfolios
⧁ Perceived as complex and poorly understood
Living annuities
⧁ Member may deplete retirement capital
Smoothed Bonus Portfolios
0.90
1.40
1.90
2.40
2.90
3.40
3.90
4.40
4.90
5.40
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15M
ay-1
5Se
p-15
Jan-
16M
ay-1
6Se
p-16
Jan-
17M
ay-1
7Se
p-17
Jan-
18M
ay-1
8Se
p-18
Stable Bonus Portfolio Global LMW median
Why so popular…. Resilience!
Smoothed bonus portfolios
Some advisors love them
… others not
Theory
Over a 40 year time horizon – invest aggressively
Practice
Life happensvs.
Is your retirement plan resilient enough to cope?
What can happen to members
Not every member makes it to retirement
⧁ Family get guaranteed benefit – irrespective of market conditions
Retrenchment during economic slowdown
⧁ Members rely on guaranteed benefit to see them through
⧁ Important for blue collar members
Retirement during market crash
⧁ Member receives guaranteed benefit to purchase annuity / lump sum
⧁ Useful in the end stage of a lifestage solution
Standard
FSCA has released an updated draft in November 2018
⧁ Aims to provide additional security to members
⧁ Big improvement on first draft
⧁ Place onus on trustees – appropriateness for members
Sanlam is supportive of the aims of the standard
⧁ Implementation date uncertain
Standard – 2’nd draft
Will allow much less flexibility to insurers
⧁ Bonus formula fixed
⧁ Enhanced disclosure
• Non-vested bonuses
• Shareholder support
• Min & Max funding levels
• Smoothing periods
⧁ Cost disclosure
Standard – 2’nd draft
Will allow much less flexibility to insurers
⧁ Limits tactical asset allocation
⧁ Conditions for changing strategic asset allocation
Potential issue
⧁ During market crash
Commencement date
Past 1 March 2019
⧁ Standard not finalized
⧁ Insurer need to provide information to Trustees
⧁ Trustees need to apply their mind re eligibility
Next steps
⧁ Engaging with FSCA
Living annuities
ASISA Life Insurance statistics
Spot the trend
Living annuities
Most advisors love them
… most actuaries not so much
Theory
An inflation linked annuity is the safest option
Practice
Members want a living annuity
vs.
Despite the risks
Focus on risks
Path dependency / sequence of returns risk⧁ Poor returns upfront reduce likelihood of successful retirement⧁ To maintain real income drawing down many “cheap” units
Reckless conservatism⧁ Too conservatively invested⧁ Need appropriate CPI+ return over 20-30 year horizon⧁ Else income not keeping pace with inflation
Sequencing of returns
R0
R1
R2
R3
R4
R5
R6
R7
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Years
Sequence
Reverse sequence
C u m u l a t i v e r e t u r n s o v e r 2 0 ye a r s f o r e v e r y R 1 i n v e s t e d
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Sequence 20% 10% 18% 13% 10% 19% 26% 9% 5% 31% 7% 14% 22% -5% -8% -12% 10% 1% -9% -4%
Reversed -4% -9% 1% 10% -12% -8% -5% 22% 14% 7% 31% 5% 9% 26% 19% 10% 13% 18% 10% 20%
article by Glacier
Sequencing of returns
R 1 m l i v i n g a n n u i t y - 6 % i n f l a t i o n ; s t a r t 6 % d r a w d o w n ( i n f l a t i o n e s c a l a t i o n )
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Sequence 20% 10% 18% 13% 10% 19% 26% 9% 5% 31% 7% 14% 22% -5% -8% -12% 10% 1% -9% -4%
Reversed -4% -9% 1% 10% -12% -8% -5% 22% 14% 7% 31% 5% 9% 26% 19% 10% 13% 18% 10% 20%
article by Glacier
R0R200,000R400,000R600,000R800,000
R1,000,000R1,200,000R1,400,000R1,600,000R1,800,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Years
Sequence
Reverse sequence
Criteria
FSCA has released draft criteria in November 2018
⧁ Aims to provide additional security to members
⧁ Stringent drawdown criteria
⧁ Regular measurement of income sustainability
Sanlam is supportive of the aims of the standard
⧁ Concerns with unintended consequences
Stringent drawdown rates
Age Males Females55 4.5% 4.0%60 5.0% 4.5%65 5.5% 5.0%70 5.5% 5.0%75 6.0% 5.5%80 7.0% 6.0%85 8.0% 7.0%
Versus ASISA averages December 2017Average drawdown rate (unweighted) 9.08%Weighted by asset value 6.64%
Impact of maximum drawdown rate
Example retiree A (Male (single), aged 55, R1m retirement capital)
⧁ Max monthly living annuity drawdown R3 750 p.m.
⧁ Inflation linked annuity (guaranteed) R5 094 p.m.
Example retiree B (Male (single), aged 65, R2m retirement capital)
⧁ Max monthly living annuity drawdown R 9 167 p.m.
⧁ Inflation linked annuity (guaranteed) R13 089 p.m.
Impact of maximum drawdown rate
Example retiree C (Male (married), aged 55, R1m retirement capital)
⧁ Max monthly living annuity drawdown R3 750 p.m.
⧁ Inflation linked annuity (guaranteed) R4 241 p.m.
Example retiree D (Male (married), aged 65, R2m retirement capital)
⧁ Max monthly living annuity drawdown R 9 167 p.m.
⧁ Inflation linked annuity (guaranteed) R10 089 p.m.
Use 75% spouse’s pension
Would members rather buy a guaranteed annuity
Yes⧁ Better value for money
⧁ Less risk
No⧁ Bequest motive / poor health
⧁ Need higher starting pension Let’s focus on these members
Unintended consequences
Members with insufficient funds
⧁ Require higher drawdown (despite the risks)
⧁ Look towards retail living annuities. Pay retail fees!!!
Alternative
⧁ Sanlam institutional living annuity / SUF in-fund living annuity
⧁ Cheek-to-cheek with default living annuity
⧁ Same institutional pricing
Bringing it all together
Our experience
⧁ Trustees keen to mitigate risks for default living annuity
⧁ Include a smoothed bonus solution in the mix
⧁ Aim to make members retirement plan more resilient
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