March 31, 2010
By Bruce Cameron and Laura du Preez
7. Collective Investment Schemes Control Act
In March 2003, the Collective Investment Schemes Control Act (Cisca) replaced the Unit Trusts Control Act, which had been in place since 1980.
Cisca aims to provide for a greater variety of collective investment schemes, allow greater flexibility within the new regulatory environment and entrench investor protection.
Cisca provides for self-regulation by the collective investment schemes industry. The industry may, among other things, classify unit trust funds into different categories and ensure that funds adhere to their investment mandates.
The Act has done away with a number of practices and has brought into the protective net products, other than unit trusts, that pool investors’ savings, such as mortgage participation bonds, JSE-listed property unit trusts and exchange traded funds.
The features of Cisca include:
Proper disclosure of costs. The Act did away with buy and sell prices. Unit trust management companies must provide a single price for their units – the net asset value (NAV) – and disclose separately their maximum initial fees. All ongoing fees must be included in the total expense ratio (TER).
Investment restrictions. These restrictions include a limit on:
* The percentage of the shares of one company a collective investment scheme may own; and
* The percentage of a collective investment that may be invested in a particular asset class.
The aim of these restrictions is to reduce risk.
Investor protection. This includes the requirement that your money is held in a trust controlled by independent trustees, whose fiduciary duties include liability for losses or damages sustained as a result of their negligence.
Placing your money in a trust means that neither the asset manager nor the unit trust management company has access to it.
The trustees must report to the FSB on, for instance, whether the asset manager is adhering to the fund’s investment mandate.
Proper disclosure and fair advertising. Before you invest in a fund, you must be told:
* The fund’s investment objective and mandate;
* How the fund’s NAV is calculated and the dealing prices of making the investment;
* All the charges, including asset management and advice fees;
* The risks of investing in the fund;
* When and how income that accrues to you from the fund is distributed; and
* Any other information that is considered necessary for you to make an informed decision.
After you have invested in a fund, you must be provided with:
* Information about the value of various portfolios. This requires the calculation of values on a daily basis so that you can find out what your investments are worth at any stage.
* Details of the underlying assets in a pooled portfolio at least on a quarterly basis.
Protection of small investors. To protect smaller investors, large withdrawals (R50 000 or more) from funds must be ring-fenced.
A large sell-off of assets by the fund could affect the price of the fund’s assets negatively if buyers cannot be found easily. A large investor can be made to wait so that the fund can sell the assets in stages. Although the sale will still affect the price of the assets, smaller investors may, if they choose, disinvest from the fund first and at a price that is relatively unaffected by the large withdrawal.
8. Medical Schemes Act
A significant development that affects the healthcare cover you enjoy when you join a medical scheme was the promulgation of the Medical Schemes Act in 1999. Regulations under the Act were introduced later, with the Act becoming fully effective only from 2000.
The Act introduced three important principles:
1. Open access or open enrolment. The Act ended risk rating, where medical schemes could and often did refuse you membership, particularly if you were over the age of 55.
The Act forces all open medical schemes to admit anyone who applies for membership. Open schemes cannot exclude you from being a member on the basis of your state of health or the medical conditions from which you suffer.
Restricted medical schemes are entitled to refuse admission to people who do not fall within the specified category of people that the scheme serves – for example, the employees of a particular employer. But they cannot refuse membership to a person who does fall within the specified category.
To protect schemes against people who would join a scheme only when they need to claim for healthcare services, schemes can impose waiting periods and late-joiner penalties.
The longest waiting period, a 12-month condition-specific waiting period, applies if you allow more than 90 days to lapse between leaving one scheme and joining another.
In the 1990s, before the Act was introduced, schemes were imposing lifetime exclusions for pre-existing conditions.
Late-joiner penalties, which are added to all your contributions for as long as you are a member of a scheme, can be applied if you wait until you are over the age of 35 to join a scheme.
2. Community rating. Community rating means all the members who join a particular medical scheme option pay the same contributions. You cannot be made to pay more than other members on the same option because of your age or state of health or on any other ground. The only criteria that can be used to determine contributions are a member’s income or number of dependants, or both.
Community rating prevents schemes from risk rating and ensures that as long as medical scheme options have young (and generally healthier) members, they can subsidise the medical expenses of the older (relatively less healthy) beneficiaries.
Before the Medical Schemes Act became effective, members were made to pay contributions based on their age, the area in which they lived, their claims history, the period for which they had been a member, and the size of any group to which they belonged (for example, a group of employees).
Now schemes cannot load or discount your contributions in any way, except to apply late-joiner penalties if you join a scheme later in life.
3. Minimum benefits. The Medical Schemes Act stipulates that medical schemes must provide certain benefits to all members. These benefits are known as the prescribed minimum benefits (PMBs).
Currently, there are about 300 PMBs, which cover emergency medical conditions, certain other conditions and their treatments and, since the beginning of 2004, the diagnosis and treatment of 25 common chronic conditions.
The inclusion of the common chronic conditions in the PMBs is an attempt to prevent schemes from essentially risk rating members with chronic illnesses by offering cover for these conditions in the more expensive options only.
Treatment protocols that outline minimum treatment standards for each chronic condition have been published in the regulations.
Although the Act prohibits schemes from limiting the cover you enjoy for treatment in public hospitals, the regulations provide for instances in which schemes must pay for PMBs in private facilities.
The regulations also contain certain measures that schemes can implement to contain claims related to the PMBs. For example, schemes can state in their rules that costs related to the diagnosis, treatment and care of a PMB condition will be paid in full by the scheme only if those services are obtained from a particular provider or providers, known as designated service providers (DSPs).
Furthermore, regulations state that in certain circumstances you can use a provider other than the one designated by your scheme – this is in an emergency, when the provider can’t see you within a reasonable period and when the provider is not within reasonable proximity to your home or place of work.
Schemes are also able to insist that you obtain pre-authorisation for treatment such as that which requires hospital admission or that your treatment follows a particular protocol that is not less than what you would enjoy in the public health sector.
You may also be required to make use of medicines that are listed on a formulary.
Schemes are not allowed to pay your claims for the PMBs from your medical savings account, and they cannot make you pay a co-payment on a PMB, unless you used a provider other than the DSP and none of the three exceptions applies.
The co-payment in this case cannot be 100 percent of the claim, and the co-payment that will apply must be specified in a scheme’s rules.
The PMBs are currently being reviewed to keep up with changes and to ensure that they are fair.
Corporate governance
The Medical Schemes Act, together with the oversight and training provided by the Council for Medical Schemes, has steadily improved corporate governance in the medical schemes industry since 2000.
Before the Act was introduced, all medical schemes’ boards of trustees were appointed by a scheme’s administrator. The Act stipulates that half the trustees must be elected by the scheme members.
Medical scheme trustees have had to gain insight into how schemes are run, and important issues can no longer be left to the scheme’s administrator.
Amendments to the Act have also introduced requirements in terms of which the scheme’s principal officer has to be independent of the administrator of the scheme and not be a broker to the scheme.
Corporate governance may be strengthened further if draft legislation amending the Medical Schemes Act is passed.
The Registrar of Medical Schemes keeps a watch on the governance of schemes. Since the introduction of the Medical Schemes Act, the registrar has gone as far as to remove some schemes’ boards of trustees and apply to a court for a curator to be appointed to run the scheme.
Financial stability
The Medical Schemes Act has brought about greater financial stability for medical schemes.
The Act requires schemes to set aside 25 percent of their contribution income as reserves that can be used to keep a scheme afloat during times of high claims.
Over the years, these reserves have grown and now provide investment income that cushions schemes in years when claims exceed contributions.
The registrar’s office also monitors schemes’ finances on a quarterly basis and is empowered to order a scheme to take measures to ensure that it is sustainable. Nevertheless, a few schemes have gone into liquidation: Renaissance and Humanity went under last year and Solvita early this year.
Membership
The lack of growth in the number of people covered by medical schemes is the one area in which the new legislative regime has seemingly failed. Since the Act was introduced, the number of lives covered has remained fairly stagnant at around seven million.
A number of initiatives have been mooted to address the issue of increasing healthcare cover to more South Africans. They include a new class of scheme that caters for low-income earners and that is exempt from providing all of the PMBs, social health insurance and, lately, national health insurance.
9. Tax changes
Against a background of improved efficiency in the tax collection system, over the past 10 years taxpayers have been granted significant tax relief, in particular to counter the effects of inflation. On the downside, capital gains tax was introduced on October 1, 2001. The changes include:
The levels at which the marginal rates of income tax click in have been reduced steadily, with the top marginal rate of 40 percent now effective at a taxable income of R525 001. In 1999, the top marginal rate was 45 percent, which clicked in on taxable earnings of R120 001.
In 1999, the threshold before people under the age of 65 started paying income tax was R19 526. It is now R54 200. In 1999, the tax threshold for people over 65 was R33 717; it is now R84 200.
In 1999, the primary rebate on tax was R3 710; it is now R9 756. The total rebate, including the primary rebate for people aged 65 and older, was R6 485. It is now R15 156.
The exemption on interest-earnings for taxpayers under the age of 65 has gone from R3 000 in 1999 to R21 000; and from R4 000 to R30 000 for taxpayers over the age of 65.
The tax-free portion of a donation has been increased from R30 000 in 1999 to R100 000.
In 1999, there was no transfer duty on buildings that cost less than R70 000 or on vacant plots that cost less than R30 000. For properties or plots with a greater value, transfer duty was: one percent on the first R70 000; five percent on the amount between R70 000 and R250 000; and eight percent on the balance over R250 000.
Now the first R500 000 of the value of a building or land is exempt from duty. Duty at a rate of five percent is payable on property valued between R500 001 and R1 million; on property valued above R1 million it is R25 000 plus eight percent of the value exceeding R1 million.
A simplified and more advantageous – in most cases – taxation of lump sum withdrawals from a retirement fund, both before and at retirement.
* Taxation of lump sums before retirement. For many years, the first R1 800 was tax-free, with the balance taxed at your average rate of tax. From this year, the first R22 500 is tax-free; any amount between R22 500 and R600 000 is taxed at 18 percent; the next R300 000 is taxed at 27 percent; and any amount above R900 000 is taxed at 36 percent. The amounts are cumulative from all sources and years.
* Taxation of lump sums at retirement. Until the 2008/9 tax year, in most cases the first R120 000 was tax-free, with the balance taxed at your average rate of tax. Now the first R300 000, plus any non-deductible contributions, plus any tax-free amounts accrued by civil servants, is tax-free. The second R300 000 you withdraw is taxed at 18 percent; the third R300 000 is taxed at 27 percent; and any amount above R900 000 is taxed at 36 percent. The amounts are cumulative from all sources and years.
Group life risk assurance benefits attached to an approved retirement fund payable after January 1, 2009 are exempt from estate duty.
The abatement on estate duty was R1 million in 1999. It is now R3.5 million.
10. Important industry changes
The past 10 years have seen more competition for your savings, with the introduction of new and more innovative products and the withdrawal of unacceptable practices and products.
Some of the milestones include:
September 2000
Discovery Life was launched as a sister company to Discovery Health, shaking up the way risk life assurance is packaged and sold to consumers.
One of the significant changes introduced by Discovery Life was to make risk assurance against death and disability a stand-alone product without an investment element; the second change was the introduction of impairment insurance as an alternative to traditional occupational disability assurance.
Risk assurance against death and disability. Before the launch of Discovery Life, risk assurance was seldom sold as a stand-alone product. It was nearly always wrapped up with investments in what were called universal products.
Universal products were designed to provide the floggers of financial products with excessive, perverse commissions and to protect the life assurance companies from any risk.
People who sold universal life assurance products were paid according to a formula based on the size of the premium multiplied by the term of the policy. So the greater the premium (the investment amount plus the life assurance amount) and the longer the term, the better it was for them. In fact, commissions could be as high as 85 percent of the first year’s premiums (paid upfront) plus 28 percent of the second year’s premiums.
As risk assurance was involved, it made sense to sell long-term policies in case you could not buy a new policy because your health had deteriorated.
But your savings and investment needs seldom match your risk assurance needs. In fact, as you grow older and, hopefully, richer and have fewer dependants (because your children leave home), your risk assurance needs decrease.
If you stopped or reduced the premiums on your universal policy, you could be slapped with surrender penalties that could wipe out your accumulated savings. The penalties applied even if you could do nothing about the situation – for example, if you had lost your job and could not afford the premiums.
The penalties ensured that the life assurance company did not suffer any financial loss, which it would otherwise have incurred by, among other things, paying the commissions upfront on premiums you yet had to pay. The excessive commissions encouraged the mis-selling of universal policies, which resulted in South Africans losing billions of rands.
The advantage of separating risk assurance and investments is that if your financial circumstances take a knock, you may at least be able to maintain your all-important risk premiums. You can halt the investment plan without placing yourself and your dependants at risk.
Impairment assurance. Traditional disability assurance pays out based on your ability to work or not, whereas the payment of an impairment benefit is based only on the nature of the impairment.
The assessment of whether a policyholder is able to work has over the years led to many disputes; rejected claims are the single-biggest source of complaints to the Ombudsman for Long-term Insurance. This system has also been a major area of fraud perpetrated by policyholders.
Discovery Life said this was the wrong approach to insuring disability. With impairment assurance, it is an event that is assessed, not your ability to do your job. The event is based on a list of medically defined impairments (such as the loss of a limb) and/or whether you have a functional impairment (for example, the ability to perform daily tasks, such as feeding yourself).
All sorts of conditions and degrees of impairment are defined, with the benefit or the degree of the benefit based on the medical condition. For example, if you lose a foot, your capacity to earn an income will be partially affected and you will be paid out a 50-percent benefit. If you have a stroke of such severity that your income-earning capacity is totally impaired, you can be paid out 100 percent of the benefit.
Initially, impairment assurance was vigorously criticised by the traditional assurance providers.
Depending on the extent and nature of your disability, you may receive a benefit if you have a traditional disability policy but not if you have a policy based on a level of functional impairment, and vice versa. For example, if you lose your left arm but are still able to work, you could be paid a benefit for a functional disability but not for traditional occupational disability.
Because different criteria determine whether or not traditional and impairment policies will pay out, most responsible financial advisers suggest you have disability cover based on your occupation, as well as a level of functional impairment cover.
November 2000
The first exchange traded funds (ETFs) were listed on the JSE under the Satrix brand. There are now 23 ETFs on the JSE that track local and foreign equity indices and local bond indices. In most cases, ETFs are both collective investment schemes and listed securities.
The main elements of ETFs are:
They are passive investments. In other words, ETFs track various indices, such as the FTSE/JSE Top 40 index. An index is based on a collection of similar investments that can reflect a geographic region, a market, an asset class or a sector of a market. So if an ETF tracks the FTSE/JSE Top 40, it buys shares in the top 40 companies on the exchange in the same proportion as they make up the index.
They obviate the need for you to try to predict which active asset manager will or will not perform in future. You, in effect, receive the average performance of the market.
They have low costs, as they do not have the expenses of actively managed investment portfolios.
They can be traded daily, giving you immediate access to your money.
May 2004
The government launched RSA Retail Bonds with competitive interest rates for investors willing to invest as little as R1 000 for two, three or five years.
The range of RSA Retail Bonds was increased in 2008, when the government introduced inflation-linked bonds that pay a fixed return above the inflation rate. For example, in May this year, you received three percentage points above the inflation rate on a 10-year inflation-linked bond.
2008
The Benefit Illustration Agreement (BIA) was laid to rest. The BIA was the backbone of the massive mis-selling of expensive, opaque, inflexible and often poorly performing life assurance investment (endowment) policies and RAs.
The BIA was introduced in the mists of time in an attempt to encourage consumers to invest in life assurance investment products.
Initially, investors were shown telephone number-size figures of what their policies would pay out in 20 to 30 years’ time after investing fairly nominal amounts that escalated in line with inflation.
The problem was that the BIA figures were not adjusted for the time value of money. In other words, no account was taken of the effect of inflation on the buying value of money. And to make matters worse, the life assurance companies, by common agreement, used fictitious costs that were, all too often, below the actual costs – which have since been shown to be among the most expensive in the world. The costs, in turn, had a dramatic effect on the final pay-out.
Unlike the BIA, unit trust funds provide a history of their actual performance.
Originally, in a high-inflation environment, the projections were based on growth rates as high as 16 percent a year on average. In the 1990s, inflation rates started to drop, and, by the end of the millennium, when the long-term investments started to mature, policyholders were bitterly disappointed with their returns, even when they were positive.
The reason was that the amounts they were receiving did not match what many policyholders thought they would receive. Many policyholders saw the BIA amounts as a promise, not an illustration.
The life assurance industry was severely embarrassed and relaunched the BIA as the Code on Policy Quotations, which had illustrations linked to a lower range of inflation and returns that included real costs. But the life companies finally decided in 2008 to consign the BIA in all its guises to death row.
This article was first published in Personal Finance magazine, 3rd Quarter 2009.See what’s in our latest issue
  
 
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