RF Reform TCF Tax Disclosure

1. RF Reform TCF Tax Disclosure Peter Stephan

2. Retirement Fund Reform Proposals

3. NT 2013 RF Reform • Harmonisation of RF Contributions • Employer contributions taxed as fringe benefits in employee’s hands • Employee’s deduction on employer & employee contributions to RA, pension & provident funds incl risk benefits = 27.5% of > remuneration/taxable income - R350 000 cap. ASISA comment: • Cap of R350 000 creates admin complexity and serves no purpose. • Preservation • Vested rights as at “P-day” plus growth will be protected • After P-day, on withdrawal, entire benefit must be transferred to default preservation fund/section within the occupational fund (Divorcee shares as well). • Default chosen by trustees – member can select an alternative • 100% Vested amount can be withdrawn from preservation fund, plus 10% post P-day savings, once per annum – minimum of SOAG (R1260 p.m.).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. • RAs – members may be able to transfer to preservation funds and access therefore relaxed.

4. NT 2013 RF Reform ASISA comment: • Access rules too lenient, complex to administer and for members to understand. • 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. • Restrictions on RA funds at P-Day should remain with any access only to post P-Day amounts. • Provident Funds • 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 R150 000 ASISA comment: • Members over age 55 should retain vested rights whether or not they move funds.

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

6. NT 2013 RF Reform • Non-retirement savings • Tax-preferred savings and investment accounts: CISs; bank accounts; RSA retail bonds; Property assets e.g. Real Estate Investment Trusts, Property Listed Stocks • Untaxed • R30 000 p.a.with R500 000 lifetime limit – to be adjusted for inflation • Current interest exemption has increase d to R34 500 for > 65 and R23 800 for < 65. Don’t expect future inflation increases ASISA comment: • Concerned about no incentive for non-taxpayers • LTIs should also be permitted to offer tax-preferred savings and investment accounts • Do away with R500 000 per lifetime limit. • Governance • PF130 to be made a Directive. • Trustees must meet “fit & proper” requirements • Minister to convene trustee conference ASISA comment: • Consider retail and umbrella funds’ specific requirements • 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 2010. • TCF “road map” published March 2011. • Pilot self-assessment tool developed for firms, testing their understanding of TCF requirements and their TCF culture. • Feedback Report published on FSB’s website December 2011. • FSB self-assessment tool finalised – published on FSB website August 2012. • DO read the Guidelines before commencing with the Tool – ensures correct understanding of terminology. • Not 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. • Is being used to conduct a baseline study across a broader sample of industry participants – which includes intermediary firms – public feedback scheduled for Q3 2013.

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.

10. 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.

11. NT DISCLOSURE REVIEW • 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.

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)

16. 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

18. 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

19. 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)

20. Disclosure

21. 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

22. 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?

23. 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

24. Effective Annual Cost Proposal

25. 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

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

27. EAC Examples

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

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

30. Thanks