Welcome and Announcements

1. Welcome and Announcements Master of Ceremonies: Julia Masike

2. Key Note Address Key Note Speaker: Olano Makhubela

3. Sustainable Investing Facilitator: Takalani Lukhaimane

4. Costs and their Implications on Retirement Savings Facilitator: Wilma Mokupo

5. Costs and their Implications on Retirement savings 12 September 2019

6. Wilma’s opening remarks

7. FSCA receives financial statements, statistics and quarterly reports from over 1,300 active funds (2019). What does this this tell us about what the cost-drivers are in relation to? - accumulated funds / asset based fees - contributions based fees - fees taken from benefit payments - fees for transfers - investment fees - MVR – market value adjusters - FVA – fair value adjustments - Administration expenses (admin fees, audit fees, actuarial fees, FSCA fees (levies, penalties, service fees), secretarial fees, consulting fees, training, trustee expenses & remuneration, principal officer expenses & remuneration, legal fees, other (specify: e.g. marketing, meeting allowances (stipends/ pendiums), travel expenses includes flights, accommodation, meals, car hire, etc.) Note fund’s Expense Policy and Directive 8 Should FSCA publish trends and average costs across different types of funds? What else?

9. Mabatho’s opening remarks

10. The higher the costs the less you have for retirement Impact of High Costs on Retirement Funds Ad hoc Costs Investment Fees Administration Costs Retail Institutional Unplanned for costs on the rise Money market fee from 0.16% to 0.24%. Retail fee up to 0.50% • Risk Premiums • Administration fees • Trustee expenses • Legal fees • Enforcement • Consulting fees • Auditing fees • Actuarial • Auditing • FSCA Levies etc • Legal Fees a big concern • Litigious environment Value in pooling fund Cost s more to be a small/ retail investor • Asset Management Fees • Type of investment matters e.g. passive, active, smooth bonus funds • Product Structuring Fee • Investment platform fee

11. Fund Costs: Things to think about?

12. Fund Costs: What Can We do? • Pension Funds • Benchmark fees and costs • Perform audit to understand true costs • Implement cost effective solutions • Negotiate better fees • Seek independent input where there is conflict • e.g. Trustee remuneration • Service Providers • Transparency • Manage conflicts better i.e. shareholder value creation versus customer value creation • Performance • Regulator • Governance accountability across all players • E.g. Implications for umbrella funds versus stand alone funds? • Develop frameworks that help the industry on costs management?

13. Steven’s opening remarks

14. Why costs matter • Investment returns are finite, around CPI+ 6%1 • High costs can erode 50% of members’ final pension pot • The greatest predicator of future investment performance2 • Member costs = industry revenues ”Don’t ask a barber if you need a hair cut.” Warren Buffett 1 Data from 1900 to 2018, investment periods ranging from 5 to 40 years, Regulation 28 Balanced Fund with up to 75% in equities. Source: Dimson, Marsh, Staunton, 10X Investments 2 Morningstar research, 2010 and 2016

15. Where do industry costs reside? What fees do members pay? Investment management Administration Consulting Standalone Fund case study: • R1bn in assets, 4 000 members • Fees % assets 1.4% 10X Investments estimate • Two problems • Total fees are too high • Fee allocation mis-aligned to member value

16. Kirshni’s opening remarks

17. Value for Money… Measuring value for money • Clarity of outcome required • Costs are critical • Quality and scope of services • Consistency in comparison • Ability of retirement funds to understand their options Fees have a significant impact on retirement outcomes and should be considered across the value-chain and over the full-life of savings Member outcomes are best served by an open, competitive, transparent and well-regulated market with low barriers to entry

18. Impact of net alpha on return Note:Values shown assuming nominal growth of 10% p.a. excluding alpha.

19. More about costs… Costs have come down materially over the past 10 years • Regulation has helped reduce number of funds significantly The major retirement funds in South Africa are professional and well-run • Institutional advice market has operated professionally over time • Skills to assist Boards of Trustees in analyzing, quantifying and comparing offerings • Operates on a transparent basis according to client preferences Costs vary depending on: • Asset allocation and use of alternate asset classes • Type of investment strategy chosen – fundamental or rules-based • Prevalence and structure of performance-based fees Industry continuing to improve disclosure and understanding • Retirement Fund EAC standard good example

20. The industry has allocated well

21. Nerina’s opening remarks

22. Cost Efficiency in Index-Tracking Investments Why are they cheaper? • Management fee for active vs. so-called passive • Activity costs money • Frictional cost of transacting • Frequency of transacting • In low return environment it is increasingly difficult to add more alpha than the cost of generating such alpha

23. Cost Efficiency in ETFs vs. CISs or segregated portfolios • Primary market vs. Secondary market • Transaction costs • Securities Transfer Tax (STT) • Other statutory charges (JSE, STRATE, IPL) • Cost of implementing frequent cash flows erode value

24. How big is impact of cash flows? What does it cost to invest R100m in the All Share Index at 5bps brokerage? * STT: Securities Transfer Tax = 0.25% non-negotiable

25. How big is impact of periodic cash flows? R100m lump sum vs. 4 flows of R25m each vs. 20 flows of R5m each (31.1 bps) (33.6 bps) (100.8 bps) Source: JSE / Strate data; etfSA calculations

26. All Investing is Active… Low-churn Bottom-up Top-down Traditional‘Passive’- Market capweighted indices(eg S&P500, FTSE100,Top40, etc.) Rules-basedActive SkillDiv+, RAFI, Low volatility, etc. • TraditionalActive Skill- Value Investing • Growth/Momentum- etc. ‘InnovationCreep’ through ‘smart’ indices & ETFs …but the level of activity varies ‘Active’ Dynamic Active Passive Lowest activity level Lowest trading cost Highest activity level Highest trading cost Buy & Hold

27. Evolution of “passive” investment strategies • Exposure to broad-based equity market indices • Traditional “passive” investing • Efficient exposure to (market) beta • Benefit: low cost, transparency, operational and tax efficiency • Expansion of “passive” to other asset classes • Application of indexation beyond equities • ETFs with non-equity underlyings allow for multi-asset class exposure via stock exchange • Benefit : ease of transaction; security of custody, clearing, settlement • Rise of “smart beta” and alternative investment strategies • Rules-based investment decisions, commoditisation of active decision making • Index construction evolves from “performance benchmarks” to “allocation guidelines” • Benefit : multi-factor performance drivers; exposure consistency & style purity

28. Classification of “smart” beta • Factor / Strategy / Style • Proven alpha-generating capabilities • Designed to outperform traditional beta over time • Caution: factors also go through cycles – don’t try to “time” it • Thematic • Targeted exposure to a particular theme, e.g. ESG, Shari’ah • Not designed to produce alpha • Caution : do not measure performance relative to traditional beta

29. Rowan’s opening remarks

30. Putting Costs in Context • Inherent trade offs in any system • Costs are important but must be understood in context • Non negotiables: • Regulation • Disclosure • Knowledge Communication Portability

31. Strategic View on Costs • Ours is a voluntary, tax incentivised retirement system • Consequences on market outcomes & behaviours • There is a balance we need to strike between the level of regulation & reporting and the associated costs • Is our challenge adequacy, coverage or efficiency?

32. Analysing Contributions Contribution Analysis Only have 4.7m contributors vs 16.5m employed Coverage is a problem! Not getting anywhere near the level of contributions to deliver adequate benefits Analysis from SARS 2018 data

33. Fixing the Problem • Improving disclosure and value to members • Engagement vs reporting problem • Have we achieved the regulatory target of reducing fund numbers? • Improving access and adequacy • Greater mandation will drive down costs but reduce choice • The introduction of the new default regulations will improve retirement outcomes

34. On the Costs Journey • Has the level of competition in the market resulted in a better deal for members? • New entrants • Reduction in complexity • Policy uncertainty • Better disclosure • Commoditised group insurance market • At what point do you just need time?

35. More engagement There are many trade offs we need to decide on: Standardisation Customisation Solidarity Individualisation Paternalism Autonomy Rules Principles

36. Questions from Everyone… Madame Programme Director: We will now take questions from the audience?

37. THANK YOU

38. Transformation in the Retirement Funds Industry Facilitator: Fatima Vawda

39. Evolution of the Regulator: A journey from FSB to FSCA Speaker: Dube Tshidi

40. Q & A with the FSCA Facilitator: Fiona Rollason

41. Retirement Funds Prudential Supervision department (RFPS) 12 September 2019

42. Head of Department: Prudential Supervision- Ms Wilma MokupoManagers:Ms Mamiki Motale: Transfers & Terminations TeamMs Portia Matle: Special Projects TeamMr Charles Pretorius: Investment Performance TeamMr Kgame (Danny) Kgaka: Financial Statements Team

43. Prudential Supervision department (FSCA)

44. Prudential Supervision • Team 1: Transfers & Terminations • Team 2: Financial statements • Team 3: Investment performance • Team 4: Special Projects

45. Prudential Supervision • Team 1: Transfers & Terminations: • This team is accountable for the oversight of retirement fund conversions, amalgamations, transfers and liquidations. The team works closely with the applicable Units in the Licensing Division to ensure that the licensing / approval status of the funds concerned are correctly reflected on FSCA records

46. Prudential Supervision • Team 2: Financial statements: • This team is accountable for analyzing and monitoring annual financial returns submitted by retirement funds, with a view to overseeing the ongoing financial soundness of retirement funds • South African retirement fund assets R4.4 trillion (2018 figures) includes GEPF, Transnet (3), Telkom Pension Fund, Post Office Pension Fund, AIPF, TEPF, etc.

47. Prudential Supervision • Team 3: Investment performance: • This team is accountable for the oversight of the conduct and performance of funds in relation to their investment policies and processes. This will include a focus on monitoring funds’ compliance with the investment allocation requirements of Regulation 28 to the Pension Funds Act, through analysis of quarterly Regulation 28 asset allocation reports. The team analyses and benchmark fund investment performance. The team engages with the SARB’s Financial Surveillance (FinSurv) and Financial Stability Units to develop processes to support them in their functions of monitoring trends in the retirement funds sector from a foreign exchange, asset allocation and potential systemic risk perspective

48. Prudential Supervision • Team 4: Special Projects This team is accountable for various special projects relating to the prudential supervision of retirement funds. Projects will be identified through collaboration with applicable Units in the Regulatory Policy and Specialist Support Divisions in relation to relevant trends and emerging risks identified by them through their research and analysis work.  The team works with the Regulatory Framework and Regulatory Liaison Units in the Regulatory Policy Division to ensure effective implementation of regulatory framework changes and international standards in relation to retirement funds.  The team analyses and benchmarks fund costs and charging structures, this will include the analysis and monitoring of cashflow statements of funds.

49. Prudential Supervision activities & specialisations • Team 1: Transfers & Terminations: • Analysis of applications for amalgamations & transfers between funds • Analysis of applications for Partial & Full Liquidation of funds • Team 2: Financial statements • Analysis of annual financial statements, statistics and reports: • Trustee reports • Accounting policies • Statement of Nest Assets & Funds • Statement of Changes in Nest Assets & Funds • Notes to AFS • Audit reports • AUP report (agreed upon procedures performed by an auditor) • Regulation 28 assets spreading report • Risks • Ratio analysis

50. Prudential Supervision • Team 3: Investment performance: • Quarterly Regulation 28 reports on asset spreading limit breaches • Investment fees (including performance fees analysis) • Mandates & Benchmarks • Team 4: Special Projects: • Cashflow statements • Early Warning System • Cost structures & disclosures • Basic research