MOMENTUM CORPORATE: Expert Opinions: Edition July / September 2019

Funds geared for Millennials?

Characteristics that will shape the retirement funds of

the future are outlined by Nomha Kumalo, public sector

executive at Momentum Corporate.

Kumalo . . . necessary adjustments

Workplace representation of Millennials (25- to 34-year olds) is growing rapidly. This group is expected to make up almost a quarter of the global workforce by 2020.

Based on data analytics, Momentum Corporate is already seeing the generational shift in the profile of retirement-fund membership. Some 52% of members are Millennials, an increase from 39% in 2013.

To keep up with the changing world of work, the retirement-fund industry needs to reconsider its offering and adapt. The shift in our member profile has given us unique insight into this important demographic which is set to shape the workplace for many years to come.

It is critical that employers, consultants, principal officers and trustees understand the psychographics of this generation. There are certain broad characteristics:

# 1 Health, wellness and technology

Millennials prefer to pursue their dream careers with employers whose missions match their values. They also place high premiums on their health and wellness, and on having a healthy work-life balance.

Millennials embrace technology in every sphere of their lives. They expect highly personalised customer experiences from the brands with which they interact.

#2 Job-hopping impacts retirement outcomes

Millennials are inclined change jobs every two to three years. Job-hopping is their norm, unlike Baby Boomers and other previous generations.

Millennials seek immediate gratification and view retirement as a transition phase, not necessarily a set end-date of their formal working careers. This means that they access their retirement savings more than once during their working careers to pay off debt or to pursue international travel. Such behavior severely compromises the likelihood of Millennials maintaining their standards of living during retirement.

Only 2% of Millennials save enough for retirement. The majority may only be able to replace 31% of their last pre-retirement salary. However, Millennials have a better potential of reaching their retirement outcomes because they have a longer period to save. They can change the outcomes by making sure that they start saving when they are young, ensuring their retirement contribution is appropriate and that they keep their retirement savings invested when they change jobs instead of taking cash.

#3 Low levels of financial literacy and savings drive high financial vulnerability

The Momentum/Unisa Consumer Financial Vulnerability Index reveals that, for the last two years, SA consumers’ finances have been under severe pressure. While Millennials are the most financially vulnerable age group, a lack of financial literacy is a key driver of continued financial vulnerability in addition to low savings (see #2) and high debt levels. These factors are exacerbated by a weak local economic environment.

The lack of financial literacy is of particular concern. Momentum Corporate’s employee-benefits terminology research reveals that only 16% of Millennials understand the concept of a retirement replacement ratio. Fewer than 44% are aware of investment-related terminology such as investment allocation, future contributions and fund credit.

Funds must be geared for Millennials

This growing demographic will require flexible and innovative product solutions from retirement funds to address Millennials’ specific needs. In addition, service experiences and engagement must create tangible value in the eyes of the Millennial in the present.

Vital for reducing Millennials’ financial vulnerability is financial education. Retirement funds should offer financial education and benefit counseling through a multi-channel approach. These include digital platforms such as access to live webcasts or video content.

Also, it is not only about what you provide but how you engage. It’s imperative that retirement funds offer smart, intuitive and personalised digital services across a range of touch points, from medical underwriting to assistance to members when they change employers.

It is particularly important that these smart digital platforms facilitate more informed decision-making at the time of resignation. This increases the probability that Millennials will preserve their savings, ultimately helping them to be financially independent when they retire.

Retirement funds that offer Millennials a programme which rewards healthy lifestyles, creates platforms for meaningful engagement and ultimately demonstrates value, will be successful in attracting Millennial members.

Our new buzz word at Momentum Corporate is #YORO – You Only Retire Once. We cannot sufficiently stress the importance of planning for retirement and want Millennials to understand why it is never too soon to start.

Retirement funds must ensure that the solutions available to Millennial employees are appropriate. Communication about the value of retirement savings must be engaging and meaningful. One size has never fitted all, and it definitely is not going to fit in the future.

Momentum is a part of MMI Group, an authorised financial services and registered credit provider. MMI Holdings is a Level 1 B-BBEE insurer.

MOTOR INDUSTRY RETIREMENT FUNDS: Expert Opinions: Edition July / September 2019

Galvanised by the Department of Trade and Industry’s recently launched South African Automotive Masterplan (SAAM), which followed an extensive stakeholder engagement process and resulted in the tabling of clear objectives through to 2035, South Africa’s automotive industry is poised for positive growth in the medium to long-term.

Andrew Kirby, chairman of the National Association of Automobile Manufacturers of South Africa, commenting at the NAAMSA automotive conference late last year, endorsed the DTI’s efforts by saying: “Despite the many challenges we face, there is an air of optimism amongst all members of the South African motor industry regarding the aspirational vision of the upcoming Automotive Masterplan as the path to the future.”

This positive prognosis, however, is coupled with the challenge of rapid technological developments in vehicles, and an apparent need for the SA industry to focus on the rest of Africa as the only ready market for the significant increase required in production output for the industry to sustain itself. And this, combined with the growth of web-based ride-sharing and car-hailing apps, means the industry has to adapt to an era of unprecedented change.

These positive and challenging developments have not gone unnoticed by the forward thinking board of the Motor Industry Retirement Funds (MIRF). Realising that their retirement products and service offering — aimed exclusively at the specific needs of automotive industry employees — need to keep pace with the changes forecast, the board has embarked on a brand reengineering drive they believe will further enhance their relationship with their 250 000 members.

“In order to avoid confusion with similar sounding acronyms in our industry, the board has also decided to rebrand the funds to Motor Industry Retirement Funds (MIRF),” says Radesh Maharaj, recently appointed Principal Officer of the fund. Maharaj says he is acutely aware that the funds’ current culture needs to move with the times and its board needs to ensure it makes sound and transparent decisions in keeping with market changes and members’ expectations.

“Because of the need to up our game before announcing our intentions to our members and the automotive industry at large, we are embarking on a comprehensive staff education and motivation programme to ensure we can deliver what we promise,”recently appointed COO and CFO of the Motor Industry Funds Administrator Pty (Ltd) (MIFA) Ettie Claassen concludes.

As part of their determination to keep up with the times and better communicate with their members, MIRF will also soon launch a significantly more user-friendly website as well as an app aimed at better assisting their members with product information and queries.

Although MIRF already boasts assets in excess of R36 billion and has a board loaded with automotive industry leaders, the funds are clearly not content to rest on their laurels. The board believes the positive growth forecast for SA’s automotive industry could make for a significant increase in their member base and the size of the portfolio they administer; but only if they evolve and actively engage with the fast-changing landscape.

Asked for their opinions on ways to best improve MIRF’s growth over the next 5-10 years, Board members, Kutlwano Mokhele and Jakkie Olivier, said MIRF could best capitalise on the predicted industry growth if they can stave off market share challenges from competing umbrella funds by continuing to provide consistently good returns and even better value for money to their members through cost reductions.

OLD MUTUAL INVESTMENT GROUP: Expert Opinions: Edition July / September 2019

FUTUREGROWTH: Expert Opinions: Edition July / September 2019

ESG: What to ask your manager

Angelique Kalam, manager for sustainable investment practices

at Futuregrowth, offers the essential pointers.

As a fiduciary asset manager, Futuregrowth believes that environmental, social and governance (ESG) criteria are important sustainability issues that should be considered as part of a holistic investment and decision-making process.

With an increased prevalence of corporate-governance failures, environmental non-compliance, corruption and fraud, it has become apparent that non-financial issues — which include ESG – are significantly affecting companies’ long-term sustainable performance. Here are some useful questions and requirements we have collated from a combination of client interactions and the UNPRI investor toolkit.

These questions and requirements aim to assist pension funds when assessing the integration of ESG into the investment decision-making process and in fulfilling their reporting requirements as outlined in the Guidance Notice 1 of 2019 (PFA): Sustainability Reporting for Pension Funds.

1. Responsible Investment Policies

Do you have a policy or set of policies that make specific reference to Responsible Investment (RI) practices and, in particular, ESG issues? If yes, provide an outline of the policy objective;

Do you have a corporate governance and voting policy? If yes, provide an outline of the policy objective;

Do you have an exclusion list or policy that references specific exclusions, e.g. controversial weapons, human rights violations etc.? If yes, list the exclusions and rationale.

2. Integration of ESG and decision-making

Have there been any changes to your ESG integration process over the reporting period (e.g. additional resources, information sources)? If so, why?

What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making process? Outline which ESG factors were relevant to the investment company/sector and why;

Provide some specific examples of major ESG risks that you identified in the portfolio over the reporting period. What you have done to mitigate these risks?

Do you assess the investments’ exposure to climate risk in your portfolios? If yes, then provide a recent example.

3. Active ownership & Voting

What public disclosures are available on your voting policies and voting outcomes?

How frequently are these voting decisions reported and disclosed?

4. Bond holder & Equity engagement

Do you have an engagement policy or other document that outlines direct engagement with listed fixed income or listed equity issuers on ESG issues? If yes, then describe your approach to ESG engagement:

How is the engagement defined?

What is the objective?

How is the engagement measured?

With how many fixed income or listed equity issuers have you engaged in total on ESG issues during the past year? Outline the issues of engagement.

5. Reporting

What type of ESG reporting is available to clients?

Are any of these reports available on your website? (If so, please provide a link.)

Futuregrowth is a signatory to the UN Principles for Responsible Investment (PRI). We also endorse the Code for Responsible Investment in South Africa (CRISA).

Source: UNPRI; Futuregrowth

Futuregrowth is a licensed Financial Services Provider.

LIBERTY CORPORATE: Expert Opinions: Edition July / September 2019

Next level for employee benefits

Companies that take better care of employees also perform better in

business. Linda Schroeder, divisional director for corporate sales and

servicing at Liberty Corporate, explains what her group is doing.

Schroeder . . . extended services

People magazine, partnering with research and consulting firm Great Place to Work, has found companies that scored highest in being attentive to their employees made four times the revenue than those that were neglectful of their workers.

The highest scorers in leadership effectiveness made five times the revenue than those that didn’t, according to People. Companies that sought employee opinions and prioritised worker opportunities to innovate made 5,5 times more.

Liberty has conducted research of its own and arrives at the same conclusion. Based on our research, we found that smaller and medium-sized companies (SMEs) struggle to attract good talent and then retain them when it is competing against bigger companies with deeper pockets. We’ve used our research to re-orient our employee benefits for addressing this need.

Our research shows companies that take better care of employees suffer less absenteeism, improved productivity and greater company loyalty. Taking better care of employees does not necessarily mean paying them more.

SMEs battle to compete with larger companies in the area of employee benefits due to lack of resources. Their human-resource divisions are generally small and under-resourced. Also, they lack the scale to compete in terms of staff facilities such as canteens and gyms.

One of the biggest issues facing SMEs is the call from employees for company loans because their wages are insufficient to cover their expenses. Rather than being a sign that employees are not being paid enough, the demand for month-end loans suggests bad financial planning.

Employee benefits have become a highly-commoditized offering built around investments, umbrella funds, consulting services and risk protection such as death, disability and dread disease cover. This is the standard employee benefits package.

Though employees are the beneficiaries, the purchasers of these packages are employers. Sales teams from benefits providers tailor their sales pitches to the language of those who make the companies’ financial decisions.

Measured by the number of participating employers, Liberty operates South Africa’s largest umbrella fund for SMEs. An umbrella fund is established to accommodate individual companies who are not related to one another. Their assets are held in sub-funds of the umbrella fund.

Liberty decided to differentiate itself by looking at employee benefits as a life journey. One of the key elements missing from traditional employee benefits offerings is education. Liberty launched the “Mind my Money” programme to fill this gap.

It involves educating employees on the basics of financial planning, such as how to understand their pay slips, how to file tax returns, monthly budgeting and the importance of drafting a will.

Experience shows that employees properly educated in financial basics are more likely to live within their means, pay down debt and accumulate savings.

We help employees understand their credit ratings, and how to improve them. This may seem like an obvious thing that everyone should understand. But in truth it is poorly understood, potentially creating huge problems for employees and their families.

We have also identified the need to provide assistance to members during life events and have teamed up with an external professional service provider to provide our members, their spouses and their dependents under age 21 with much-needed telephonic assistance. These services are available 24 hours a day, 365 days a year in the member’s language of choice.

The professional counsellors are trained in a range of disciplines such as legal advice, emergency medical information and trauma assistance. Included are body repatriation and emergency ambulance services. When responsible for the overall wellbeing of employees, it’s essential to offer guidance and advice through a wide range of different areas.

Liberty would like to partner with employers to ensure that they look after the wellbeing of their employees. This will not only enrich the lives of employees in their organizations but will improve their bottom lines.

MOMENTUM: Expert Opinions: Edition July / September 2019

Meaningful employee financial literacy

requires going beyond default regulations.


So argues Ronelle Kind, the Momentum Corporate GM for member engagement solutions.

Kind . . . breakthroughs

The default retirement-fund regulations introduced in March are aimed at supporting members of retirement funds to make better decisions at various points during their working lives. An important enabler is the introduction of compulsory benefit counselling services which need to be offered to members by their fund. 

While it’s still early days, simply ticking regulatory blocks is not enough. For example:

Nearly 25% of members don’t know they  can preserve their retirement-fund benefit when changing employers;

Two out of every five people surveyed  are unfamiliar with investment terms.

A key driver of continued vulnerability is lack of financial literacy. The longer consumers’ personal finances remain under pressure, the harder it will be to recover. Momentum Corporate launched a first of its kind in South Africa, face-to-face member conference.

Our industry must go beyond the legislative requirements meaningfully to address the illiteracy issues. To do this, benefit counselling needs to take the form of a multi-channel approach that caters for a changing workforce.

We’ve developed a multi-channel strategy to maximise benefit counselling for our FundsAtWork Umbrella Fund members. Our objective is effectively to partner with members, their employers and financial advisers on the members’ journey to financial success.

A core component of the omni-channel strategy, and one which supports members’ need for face-to-face engagement, is the FundsAtWork Umbrella Funds Member Conference. Six face-to-face conferences were held in Durban, Johannesburg and Cape Town. Members unable to attend could tune into the live webcast.

Topics included dying without a valid will and how this impacts your family, choosing the best annuity for your needs and how to start planning for retirement, even if you start later than expected. The highly interactive forum gave members an opportunity to ask questions and engage with various presenters throughout the sessions.

Going beyond what is required legislatively has clearly been well received. We’ve been overwhelmed by our members’ response. The conference content is available for anyone through the links

A core component of the omni-channel strategy, and one which supports members’ need for face-to-face engagement, is the FundsAtWork Umbrella Funds Member Conference. Six face-to-face conferences were held in Durban, Johannesburg and Cape Town. Members unable to attend could tune into the live webcast.

Topics included dying without a valid will and how this impacts your family, choosing the best annuity for your needs and how to start planning for retirement, even if you start later than expected. The highly interactive forum gave members an opportunity to ask questions and engage with various presenters throughout the sessions.

Going beyond what is required legislatively has clearly been well received. We’ve been overwhelmed by our members’ response. The conference content is available for anyone through the links &

A key component of our strategy is the role of the benefit counsellor in relation to the scheme’s financial adviser. The role of a benefit counsellor should be to help members better understand their financial situations including their FundsAtWork benefits. This will ensure improved outcomes for members over the long term.

Once members are well-informed and need to make financial decisions, they should then speak to their financial adviser. This will ensure that the scheme’s financial adviser focuses on providing best-advice solutions at group level while having the peace of mind that members are being supported to make smart financial choices during key phases of their working lives.

A multi-channel benefit counselling approach further improves employee engagement and financial literacy. It also ensures that employees understand and appreciate the benefits available. Over time this will reduce employee apathy. We want members to have the right information at the right time to make the right decision.

Getting our model right has meant really understanding who we’re talking to. This has resulted in our multi-faceted communication approach – digital, face-to-face and telephonic. When looking at employee benefits, we have to apply a generational filter to understand the different dynamics and how each generation wants to consume the information we want to share.

We’ve spent a lot of time understanding the changing workforce and the issues at play. This journey has begun. It’s rewarding to see the impact we’ve already had since the default retirement fund regulations were introduced.

Momentum is a part of MMI Group, an authorised financial services and registered credit provider. MMI Holdings is a Level 1 B-BBEE insurer.

SANLAM CORPORATE: Expert Opinions: Edition July / September 2019

Vital pointers

Sanlam executive Viresh Maharaj discusses key findings for

fund members’ financial resilience.

In the megatrend of consolidation from standalone funds into umbrella arrangements, shown in our benchmark survey, we must caution that one structure is not necessarily better than the other. Trustees and employers must apply themselves to considering various dimensions such as governance, member engagement and cyber security. The ultimate question is how best to enable financial resilience for fund members. For some, this means enhancing existing frameworks within standalone funds; for others it means transitioning from standalones to high-quality umbrella funds, and increasingly it also means switching from one umbrella to another. This speaks to our findings among the umbrella respondents. It indicates that employers are now beginning to review their existing providers and are engaging on potential switches between providers. A maturing and competitive market is reflected. Our survey of professional independent employee-benefits (EB) consultants suggests that they see great potential in newer umbrella funds. They should actively be comparing these to the large incumbents. With greater competition there’s greater attention to reviewing the choice of umbrella providers that can enhance financial resilience for more members.

Group Risk

On group risk, we asked the EB consultants to provide the top advice themes. Uppermost for their clients were increases in funeral cover, increases in insurance rates and introduction of severe illness benefits. Half of the consultants have experienced large rate increases and more claims being declined by insurers. This indicates extreme pressure across the group-risk industry that requires collective attention. Average contributions into funds are broadly similar between umbrellas and stands alone at about 16% annually. Taking this a bit further, we’ve estimated an average net contribution of 13% based on the average risk premiums, administration fees and estimated consulting fees. So what does 13% actually mean to the average member? On this basis a new employee with a 40-year investment horizon would anticipate a net replacement ratio of 56%. An older employee with 10 years to retirement and no other savings would

expect a ratio of 9%. The average on its own does not provide significant insight as it means different things to different individuals, and average net contribution levels are too low irrespective of age. Individuals have many levers to affect their replacement ratios. These include starting to save earlier, delaying retirement or contributing more. A popular lever applied in our industry is to reduce costs. So let’s consider it. If we reduce the average administration and consulting costs to zero, will this have a material effect on member outcomes? In short, no.

Waiving fees

The impact of waiving average admin and consulting fees over a 40-year period is just a 5% uplift on a 20-year old person’s replacement ratio. The impact on a 50- year-old is just 1% more. Then, assuming a total investment cost of 1%, the complete removal of investment fees adds another 13% for the 20-year-old and 1% for the 50-year-old. So there’d be a total uplift ranging from 2% to 18% over a period of 10 to 40 years if average investment costs are completely waived. This is hardly realistic and frames the limited potential for reduced costs to improve outcomes. Once costs are in the zone of reasonability and competitiveness, marginal differences in fees do not meaningfully affect retirement outcomes. Yet they occupy a disproportionate amount of attention. The fixation on costs can distract from more impactful issues such as healthcare which is seen by the EB consultants as slightly more important to members than retirement funding. This arises from the increased drawdown on salaries due to the ever-higher costs of healthcare, the impact of medical debt as well as paying for parents’ healthcare. It was significantly indicated that integrated employee benefits, not retirement funding alone, would have a large impact on the financial resilience of members. We see this as a sign for the future.

For more information on Sanlam Benchmark, visit:

LIMAMBEU: Expert Opinions: Edition July / September 2019

Active management’s changing face

Ndina Rabali, chief investment officer of Lima Mbeu Investment

Managers, discusses advantages of the ‘quant-amental’ approach.

As far back as 1974 Keith Ambachtsheer – currently a professor of finance at the University of Toronto – observed: “Active management is under serious attack because, as evidence knows, it has produced not overperformance but underperformance.” This statement still rings true.

Active management finds itself under significant pressure from passive funds because most active managers have produced long-run underperformance of their benchmarks. Competition from passive funds is forcing active managers to justify not only their fees but also their existence. In this context, it’s vital that active managers evolve and capitalise on advances in technology for delivery of better client outcomes.

Active management is the process of building an investment portfolio where the weights of individual securities differ from the market. In the long run, investors expect a reward for taking on more market risk. Because of the higher risk that comes with investing in equities, they expect a higher return for investing in equities as opposed to cash.

Unfortunately, the same relationship does not necessarily hold when applied to active management. Investors will not always receive a higher return for building a portfolio that looks very different from the market.

Why have active managers performed so poorly?

Active management is about one thing – information. Active managers believe that they can access and process information better than others to build investment portfolios that add value.

However, critics believe the failure of most asset managers to outperform their benchmarks is evidence that active management is a futile exercise. This view has led to the increased popularity of passive funds.

Of course, traditional approaches to active management have weaknesses that may often lead to poor outcomes for clients. The two main approaches used in the selection of investments in actively managed portfolios are fundamental and quantitative.

Fundamental approach has flaws

For many years, analysts and portfolio managers have conducted fundamental research. They make buy or sell recommendations based on their knowledge of companies. This is a highly subjective approach that often leads to errors. For example, analysts are generally overconfident and believe their forecasts to be more accurate than what they actually are.

Eric Sorensen, chief executive of Boston-based PanAgora Asset Management (over $46bn assets under management) argues that fundamental active managers cannot analyse a vast number of opportunities. Their analytical framework is also susceptible to emotional errors such as falling in love with a stock. Unless fundamental portfolio managers find ways to reduce such errors, the trend of disappointing client outcomes may continue.

Quantitative investing also imperfect

Quantitative portfolio managers try to predict future prices of securities by looking at historically recurring patterns, based on analyses of various datasets. This approach is not susceptible to the emotional errors of the fundamental analyst. Unfortunately, it does not have the human insight required to adapt to changing trends.

For example, most quantitative funds were slow to react to the spike in volatility during the 2008 global financial crisis. The funds were still making decisions based on the data observed during prior years and were unable to realise that the environment had instantly changed. Quantitative investors must explore ways to incorporate human foresight into their strategy if they are to enhance their chances of delivering outperformance.

Quant-amental investing the solution?

It’s possible for active managers to develop an approach that does not have the weaknesses of either the fundamental or quantitative methods. Globally, a new breed of active managers has emerged. They have taken advantage of the rapid advances in technology to develop an investment approach that harnesses the best elements from the two traditional methods.

Quant-amental investing is an approach that combines quantitative and fundamental techniques to make superior investment decisions. It leverages the power of data without abandoning the positive aspects of fundamental analysis.

For example, a quant-amental investor might use a statistical model to generate investment ideas but use fundamental analysis to decide which of these ideas to include in a portfolio. It reduces the level of bias that affects the generation of investment ideas while retaining the human foresight that is necessary to capture new trends.

Today, with the advances in technology, analysts can use sophisticated models to tap into multiple data sources. Access to unique data gives them an information advantage over those who remain rooted in traditional methods.

It is therefore possible to construct an approach that has numerous strengths relative to conventional approaches. This is the quant-amental approach that combines the best of both worlds.

In conclusion

Active management faces numerous challenges due to the delivery of disappointing outcomes for clients. In response, investors are beginning to favour the use of passive funds.

But before sounding a death knell for the active-management industry, investors should consider improvements that can be made to traditional approaches. Quant-amental investing harnesses the benefits of traditional investment approaches without their baggage.

Active managers who use the same tools and techniques from the past will limit their ability to deliver investment outperformance. As Sorensen puts it: “New approaches with depth, breadth and focus will be the hallmark of tomorrow’s successful active managers.”

Rabali . . . fresh views

ASHBURTON INVESTMENTS: Expert Opinions: Edition July / September 2019

COFI to include
alternative investments

There are far-reaching implications.
Certain clarities are urged by Rowaine Naidoo,
legal advisor at Ashburton Investments.

The Conduct of Financial Institutions Bill (‘COFI’), likely to be tabled in Parliament this year, is said to represent the next phase of legislation aimed at remodelling the financial-sector framework toward a Twin Peaks model.

It is expected to replace and improve the conduct requirements in existing financial-sector laws by addressing aspects of the current multi-pronged policy approach through building a market conduct legislative framework for all institutions performing financial activities.


The Financial Sector Regulation Act of 2017 was the first step in implementation of the long-awaited Twin Peaks model. This model, based on the Australian regulatory system, seeks to strengthen and address the gaps in the regulation of South African financial markets by polarising the financial market into two ‘peaks’ and regulating for them accordingly. 

The emphasis will move away from a regulator being responsible for a type of entity but rather a type of activity. The two ‘peaks’ are system stability and market conduct. COFI will be the legislation that enables the conduct pillar.

What does it mean for us?

COFI seeks to regulate all market conduct dynamics, including treatment of customers.

Treatment of customers had previously been codified in certain pieces of legislation such as FAIS, the Consumer Protection Act of 2008 and the National Credit Act of 2005.

However, all these acts had taken different approaches as to how this objective is to be achieved. They’ve failed to keep up with the ever-changing landscape and realities of South African financial markets.

The result of this disparate regulatory system was an uneven playing field across the various financial institutions, with some financial institutions having a much higher standard with which they needed to comply in comparison to others. Yet the risk or prejudice faced by all of them was equivalent.

The Financial Sector Conduct Authority tried to address this by issuing papers and guidance notes on standards/considerations relating to treating customers fairly (TCF) and retail distribution. But as these were not codified into law, the application and acceptance of what these papers and guidance notes sought to achieve continued to be an afterthought for many financial institutions.

It is important to note that the outcomes of COFI are broader than the TCF outcomes. The TCF outcomes are aimed mainly at retail customers, whereas COFI is intended to have scope of jurisdiction across the financial sector and is not limited to the retail environment.

Aligned with the spirit of the Twin Peaks model, COFI has been drafted on the premise of four interdependent approaches. These are principle-based, outcomes-based, activity-based and risk-based and proportionate.

A principle-based approach seeks to set principles that specify the intention of regulation, rather than set rules for financial institutions. An outcomes-based approach enables the regulator to focus on the outcomes that they require institutions to achieve, rather than setting overly prescriptive process requirements.

An activity-based approach seeks to regulate an activity notwithstanding the financial institution performing such activity. Lastly, a risk-based and proportionate approach requires the regulator to assess risks (now and in the future) and apply/enforce appropriate measures.

To achieve these principles, COFI has been drafted on the basis that it will contain minimum principles and expected outcomes. Also where they’re required, conduct standards, interpretation rulings and guidance notices will be used to address the nuances in each sector.

This approach is also seen as supporting sector diversification and competition by recognising that, while uniformity is crucial, a one-size-fits-all approach would be catastrophic to the South African financial market system.

Inclusion of alternatives

The current market dynamics have seen a shift towards alternative assets classes. These have to date been regulated very differently to traditional financial products.

Consistent with the theme of uniformity, COFI seeks to include alternative investment funds. While this approach is applauded, the current definition in COFI has perhaps taken it a step too far by defining an alternative investments fund as including one or more investors whereas a collective investment scheme is defined as including two or more investors.

It is unclear if it was the intention of the regulator to catch bilateral contracts such as investment management agreements, or if the intention was to only catch alternative investments funds used for pooling such as a private equity fund.

We don’t believe it is the intention of the regulator to catch all relationships under this definition, especially those between two financial institutions. But until the next draft of COFI is circulated, we can only hope that clarity will prevail.

Naidoo . . . market dynamics

RisCura: Expert Opinions: Edition July / September 2019



David Potgieter, Head of Operations, RisCura

Smaller pension funds are finding it difficult to comply with ever stricter

regulatory and governance requirements, particularly since the ‘default’

regulations came into effect in September 2017.

As a result of this and other factors, many trustees are considering

shutting down their standalone funds and moving their members into

pooled solutions like umbrella funds. While this is certainly one option,

it might not be suited to every fund nor to specific needs of members.

Trustees of standalone funds can determine their own benefit

regime and investment strategy, tailored specifically to their members’

needs. In a large pooled structure with a wide cross-section of members,

members tend to get exposure to a more generic, off-the-shelf offering.

It may look cheaper in the short-term, however, what is the cost to

members in the long-term? Will they end up with the pensions they

need for a decent lifestyle later in life?

Additionally trustees of smaller, standalone funds generally feel

more responsible towards members as often they know many of them

personally, and are frequently, members themselves. This makes it

easier to fulfil the fiduciary goal of looking after the fund “as if it were

your own”.

So, are there other ways a standalone fund not wanting to join

an umbrella scheme can retain its independence while reducing

compliance complications, governance burden, and costs?

Delegated Investment services

One way is through a delegated investment solution, which allows

funds to remain standalone and retain the benefits that brings, whilst

reducing the burden of governance and compliance and lowering

costs to members.

In this solution, trustees retain full control of their fund’s strategic

direction, assisted by the delegated investment service provider, who

carries out member and fund risk profiling, asset-liability modelling,

and provides an Investment Policy Statement (IPS) and relevant trustee

training, as required.

The fund’s assets are invested into a managed portfolio of investment

manager funds, including cash and derivatives, as appropriate.

Trustees can also delegate the often difficult and time-consuming

task of choosing, managing and monitoring their asset managers.

In addition, tactical asset allocation decisions (within the bounds of the

strategically agreed IPS) could be made by the delegated investment

service provider on a discretionary basis and executed timeously to

optimise performance and manage risk more effectively. This ensures

that market valuation dislocations are responded to swiftly. Accounting

and other investment administrative functions are also handled by

the delegated investment services provider, ensuring full investment

regulatory compliance and satisfying audit requirements.

What about fees?

With delegated investment services, several economies of scale apply,

such as being able to negotiate better manager fees with investment

managers, common processes and controls across funds. This enables

the service provider to charge for services, inclusive of asset manager

fees, with a single flat fee, at a highly competitive rate, that ultimately

saves funds money.