What are the 3 things that pensions can be
Be a fixed rand amount for life
Give a fixed level of increase each year
Be a with-profit annuity
What are Spouses annuities
A contingent annuity that can be purchased at retirement for the spouse of an employee
What is a flexible (Or living) annuity
It allows members to choose the level of the pension they receive each year
Can be regarded as unit-linked savings policy with the member deciding how many units to surrender each year
Discuss a Defined Contribution (DC) Retirement fund
Work like a savings account for each member
Contributions paid into fund at a fixed percentage of the member’s salary
What are the 3 aims of the default regulations of DC funds
Standardise and simplify the default investment portfolios members are enrolled into during the accumulation phase, to promote transparency and reduce costs
Protect members at retirement or in the de-accumulation phase, by providing cost-effective and suitable annuities
Encourage preservation when members change jobs, which is critical in assisting members to retire with reasonable retirement savings
What are retirement funds required to provide members with (4)
A default investment option that complies with various provisions
A default preservation option for members exiting the fund
Retirement benefit counselling
A trustee endorsed annuity strategy
What are Defined Benefit (DB) Retirement funds
Benefits that a member receives are based on a formula that is defined in advance
What is the Pension (After commutation) formula for a DB fund
(100% - 33.5%) x Pension before commutation
What is the cash sum at retirement formula for a DB fund
33.5% x Pension before commutation x Annuity
What is the key difference between DB and DC funds
Who takes the investment risk
Compare a DB fund and a DC fund in terms of pension at retirement
DB - Formula based on final salary and years of service
DC - Fund value (Accumulated contr.) used to purchase an annuity
Compare a DB fund and a DC fund in terms of cash sum at retirement
DB - Up to 33.5% of the member pension can be commuted or if fund < R247 500 -> Whole fund can be withdrawn
DC - Up to 33.5% of the member pension can be commuted or if fund < R247 500 -> Whole fund can be withdrawn
Compare a DB fund and a DC fund in terms of Spouses death after retirement pension
DB - Defined in rules
DC - Optional; depending on conditions of annuity purchased
Compare a DB fund and a DC fund in terms of Early retirement
DB - Defined in rules but with reduction factor applied
DC - Fund value (Accumulated contributions) used to purchase annuity
Compare a DB fund and a DC fund in terms of ill health retirement
DB - Special terms may exist e.g. No reduction factor
DC - Fund value (Accumulated contributions) used to purchase annuity
Compare a DB fund and a DC fund in terms of withdrawal
DB - Minimum of benefit prescribed by fund rules and legislation
DC - Compulsory preservation of two-thirds of account required. One third may be withdrawn as cash at any time during service or at withdrawal
Compare a DB fund and a DC fund in terms of retrenchment
DB - Special terms may exist
DC - Compulsory preservation of two-thirds of account required. One third may be withdrawn as cash at any time during service or at withdrawal
Compare a DB fund and a DC fund in terms of lump sum death benefit
DB - Multiple of salary
DC - Compulsory preservation of two-thirds of account required. One third may be withdrawn as cash at any time during service or at withdrawal; plus possibly a multiple of salary as an insured benefit
Compare a DB fund and a DC fund in terms of spouses death in service pension
DB - Formula e.g. 30% of member salary at death
DC - A percentage of members’ salary - this is an insured benefit outside of the fund
What is the reduction factor
4% per year between actual retirement age and normal retirement age is common and regarded as “actuarially neutral”
Why is the reduction factor required for early retirements (3)
Contributions have been paid for a shorter period
There has been less time for contributions to roll up
The pension will be paid for longer on average
What is a disability income benefit
The company may have a disability insurance scheme for partial or total inability to work due to illness or injury
What are combined schemes
Most medium/large companies have their own retirement fund, however some employers prefer to join a centralised scheme operated by a life office for any company to join. May be known as Umbrella Schemes
They are DC in nature
What happened under the two-component system
DC funds contributions allocated towards retirement benefits are split into 2 accounts
One third is allocated to an account which is accessible to members to withdraw from at any time
The remaining two-thirds is allocated to an account which may only be accessed at retirement
