Issue: July/Sept 2010
Editorials

CURRENTS

Health warning

An ill wind of illegality blows through a Cosatu affiliate

Even the Chemical, Energy, Paper, Printing, Wood & Allied Workers’ Union (Ceppwawu) isn’t above the law. It should stop behaving as if it is.

Surely, since the law has been so frequently reported, Ceppwawu cannot claim not to know it. In a nutshell, it’s hat assets of a retirement fund belong only to the fund (not a union); that these assets are controlled only by the fund’s trustees (not a union), and that the fund’s trusteesare responsible only to the fund (not a union).

And yet Ceppwawu persists in blatant disregard. It does know better because it had contested a High Court case on precisely this subject. Having considered an appeal against the judgment which went against its claim for union control of the Paper, Printing, Wood & Allied Workers’ Union (Ppwawu) national provident fund, it dropped the appeal. More recently, despite the judgment, it’s been pressuring trustees of the Ppwawu fund to do its bidding (TT April-June ’10).

All regions have been told by the Ceppwawu head office that all Ceppwawu members, irrespective of the sector to which they belong, “will now belong to one National Provident Fund which is the CINPF”.

The acronym isn’t spelled out but is presumably something like Chemical Industries National Provident Fund. CINPF, says the letter, will be the “one national provident fund for Ceppwawu members”.

The letter continues: “With mmediate effect, any newly recruited company must now belong to the CINPF, and any company who wishes to have their funds transferred to CINPF can do so now. Further note that all these funds will be managed and controlled by Ceppwawu Union.”

Ceppwawu organisers have apparently been visiting plants where they’ve been advising members of the Ppwawu fund to leave it and join the CINPF. In response, it’s understood that a new union – called something like the Chemical, Wood & Allied Workers’ Union – has been registered to rival Ceppwawu.

Should many Ceppwawu members of the Ppwawu fund resign from Ceppwawu to join the new union, it will weaken Ceppwawu as a union. In the process, it will also diminish the attempts of Ceppwawu to make life difficult for trustees of the Ppwawu fund.

Whatever the union politics, Cosatu (of which Ceppwawu is an affiliate) should step in to prevent embarrassment to itself. The matter should interest the Registrar of Pension Funds too.

Simply untold

Judge Brian Galgut

Galgut...identify the costs

SA life offices can be their own worst enemies. They tell everything that is to be told, but not in ways that can be easily understood. It leads to mistrust that must be a contributor to the low savings rate.

In his latest annual report as ombudsman for long-term insurance, Judge Brian Galgut puts it succinctly: “Insurers invariably provide for policy terms, and summaries accompanying the issue of the policy, which are legally sufficient but which unfortunately are nevertheless not necessarily helpful to the policyholder....I would urge them to go the extra mile in at least one respect – by spelling out with greater clarity, in the marketing and wording of their policies, the exact implications of the terms of their policies”.

Where his office receives complaints that arise from policies not being properly understood, he’s unable to help. Of the 9 088 complaints received – a 10% increase over the previous year – more than half were finalised. Of these, 41% were resolved wholly or partially in favour of the complainants. A total of R102,4m (an average of R19 000 per complainant) was recovered for them.

Most of the resolved complaints arose from poor communications, documents or information not supplied, or from poor service. There was also a significant proportion arising from claims declined (for such reasons as policy terms not being met and non-disclosure), dissatisfaction with policy surrender of paid-up values, and misselling.

Identifying commission and distribution costs as “the real culprit” incases he offered as illustrations, Galgut cautions: “Prospective investors need to have a real understanding of the charges on their investments, and the impact this will have on their eventual return, before making any investment decision. This is not an easy task and may require the assistance of the insurer. The reduction-in-yield (formula), which is now used by insurers, may be of assistance but the rand value of charges can still not be ascertained.”

Unless policyholders understand the impact of the charges, he adds, “they may well fell aggrieved when the policy eventually matures”.

FSB initiative

Echoing the message of deputy finance minister Nhlanhla Nene that “too little of our discourse is about the set of values that underpin our systems”,Galgut noted that “consumers who face massive organisationsare generally powerless”. He urged that insurers heed the general call for fairness in the outcomes-based Treating Customers Fairly (TCF) framework proposed by the Financial Services Board for institutions it supervises.

Amongst the undesirable practices that the TCF is designed to address are:

  • High and layered fee structures on investment policies that make a positive return improbable;
  • Restrictive wording on risk policies that shift the risk to the insured;
  • Marketing material which makes unrealistic promises;
  • Commission structures that lead to policy churning.

The TCF is intended to bring about behavioural change. It’s a regulatory tool that can be applied with traditional rule-based regulation, notes FSB specialist analyst Marinus Mans, that can be supported by proactive supervision, appropriate incentive structures and visible enforcement.

Talker becomes doer

Rob Rusconi

Rusconi...life at Lombard

Few people have done more single-handedly, to research and highlight the impact of costs on investment policies, than independent consulting actuary Rob Rusconi. He’s no longer to be independent nor consulting, for he’s accepted an offer he couldn’t refuse. It’s to begin practising what he’s been preaching.

Rusconi is to head Lombard Life, the newly-formed long-term insurance operation of Lombard Insurance which is majority-owned by Hollard. Last year Lombard Insurance, a specialist in various areas of corporate risk, bought PinnAfrica whose life licence it reregistered in the name of Lombard Life.

The life operation plans to follow a model of building its business through partnerships, enabling smaller entities to realise their objectives of meeting long-term insurance needs in specialist market areas. Rusconi says that essentially he’s been invited to put his money where his mouth is: “I look forward to the challenge of meeting customer needs in a way that is unambiguously fair to them.”

The job will require all his attention so he’ll be phasing out of consultancy. This will be necessary to avoid interest conflicts, although on the product side the company intends to remain in niche insurance markets rather than seek involvement in pensions or areas affected by retirement reform.

He expects to be fulltime with Lombard Life by December. His excitement, he admits, is “ever so slightly tinged with regret” at consultancy work not yet complete.

Top jobs

Desmond Smith

Smith...African first

It’s all happening for popular Desmond Smith. In rapid-fire succession, he’s become chairman of Sanlam and elected president for 2012 of the International Actuarial Association.

The former has been on the cards for this erstwhile Sanlam managing director, the fitting culmination to an interrupted career in its head office. As great an acknowledgment of his industry service is the IAA presidency, for which he alone was nominated.

This is only the second time in its 115-year history that the top IAA post has gone to a candidate from a developing country, and the first from Africa. The IAA comprises 63 full-member associations (four African) and 22 associate members (four African) from 75 countries.

Peter Doyle, president of the local actuarial society, believes that Smith’s appointment “sends a strong message to the rest of theworld that SA actuaries have a valuable contribution to make on global issues”.

Why did he take the position? Smith explains that his constant inspiration, since he came across it in 1973 when he began working for Sanlam, is a quote from poet Francis Bacon: “I hold every man a debtor to his profession.”

Government need

While on the subject of actuaries – hard to get off, they seem so full of ideas – there’s a proposal under discussion at the Actuarial Society of SA that’s worth serious consideration. It’s for creation of a government actuaries’ department.

The underlying rationale is that short and long term projections of the probable or possible impacts of government policy on SA are required. These projections are fantastically complex. They need to be translated out of numbers and technical jargon into succinct comment on their impact, so that risks can be mitigated and improvements enhanced.

Many countries have developed sets of modelling and projection expertise to help in the formulation and testing of government policy. It’s most constructive with cooperation between government and industry, but relies on the professional integrity of the actuary. They’re rigorously trained in the art and science of demographics, economics, health and insurance; all the skills most important for short and long-term projections.

Many governments have set up departments staffed by experienced actuaries to provide this service within government. The extent of services includes projections of population numbers with their impacts on school-learner numbers and health facilities, costs and benefits of social security programmes and the effects of retirement-industry changes on the elderly.

So convincing are the arguments for such a department that it’s hard to see how SA does without one. Or perhaps it’s the fact that, having done without one, different policies shoot off in different directions with consequences not always intended.

Excellent handbook

Gawie Kolbe

Kolbe...big help

Financial services firm KPMG has produced an updated edition of its Toolkit for the Retirement Fund Trustee. Clearly presented and easily read, this 184-page publication should be kept close at hand by conscientious trustees constantly in need of quick reference and information refreshment.

The second edition follows the first in 2004, taking in the numerous regulatory changes since introduced. From governance to risk management, it’s all there in jargon-free language. The “onerous” dutiesof trustees become a lot less onerous once they’re understood.

Gawie Kolbe, director of financial services at KPMG, says that the second edition was produced because of the increasing complexity of trustees’ responsibilities. Rather than feel intimidated by them, pick up a copy and get on top of them.

Little for comfort

The latest Old Mutual survey of retirement funds, for 2009, puts numbers to a dismal scene. Respondents’ responses are laid bare, illustrating the uphill climb in getting them changed. A few examples:

  • Pensions preservation is a good idea, for other people but not for me;
  • People want to get their hands on cash. They don’t understand the consequences of not preserving. Many simply aren’t aware of preservation options;
  • There persists a defined-benefits mindset that the employer will provide, not a sense that it’s your savings that must accumulate over time;
  • 43% of fund representatives believe that their funds’ members think they have enough money to retire. But what’s meant by enough? Enough to survive? There’s a discrepancy members’ perception of benefits and the reality. There’s also little thought about post-retirement protection from inflation
  • The level of communication between funds and members is low. Not clear of however, is whether members aren’t receiving printed material or whether they aren’t reading and understanding it;
  • Amongst the LSM 6-10 groups, which don’t qualify for government support, there are many who still believe that the state will provide. Others reckon they can rely on their children;
  • More evidence of member apathy, as if more were needed, is that only 30% of fund members know by name the trustees of their fund and only 15% of members voted in their most recent trustee elections. Yet members overwhelming trust the trustees to look after their best interests.
Seelan Gobalsamy

Gobalsamy...preservation, preservation

Preservation is certain, one way or the other, to be included in the proposed retirement-fund reforms. Seelan Gobalsamy, managing director of Old Mutual Corporate, points out that 36% of survey respondents were strongly in favour of compulsory preservation. Another 48% were also strongly in favour on condition that they could choose their service provider.

Strange behaviour

It’s a treat to hear John Anderson and Trevor Abromowitz, of Alexander Forbes, do their presentation on behavioural finance. A few summarised points doesn’t do it justice, but here are some anyway:

  • Investors incorrectly see trends where there are none;
  • Investors who’re overconfident tend to over-optimistic in their ability to pick be appropriate investments. They trade more often, resulting in higher transaction costs, and experience average or below-average returns;
  • Retirement-fund members tend to elect the lowest possible contribution that they can in order to get the maximum possible take-home pay;
  • People are highly aware of then sequences of their actions, but far less sensitive to the consequences of their inactions. Active decisions, like firing an underperforming asset manager, become harder to make. They’re also inclined to weigh losses more heavily than gains, and to concentrate on short-term losses or gains.

The presentation is spiced with anecdotes that illustrate hard lessons. Uncoincidentally, they say much the same as the Old Mutual survey. The industry knows the ingrained patterns; if only surveys and presentations could change them.

Sustaining sustainability

The Africa Sustainable Investment Forum (AfriSIF) was launched in June at the JSE.

It’s an independent pan-African not-for profit network, knowledge base and advocate for promoting sustainable investment across the continent. Aim is to attract investment – of the variety that integrates social, environmental and governance factors -- in the public, private and philanthropy sectors across asset classes, countries and stakeholders.

Further launch functions have been planned for Cape Town, Lagos, Nairobi, Cairo/Tunis, Geneva, London, Paris, New York and Boston. The first annual AfriSIF conference, in partnership with Responsible Investment journal, is scheduled for December.