Further to our newsletter "Too much trumpeting" regarding the Old Mutual Domestic Workers Plan, FAnews Online has received the following response from Old Mutual.
Investment Vehicle Comparison and Retirement Products and Fees
(1) Investment Vehicle Comparison
When developing the Domestic Workers Plan, Old Mutual compared the perceived advantages and disadvantages of RAs, pure investments and provident funds. (Please see the Comparison of legal entities for Retirement for this detailed assessment - Click here to read - PDF File 10KB)
To summarise, RAs were selected as they came out trumps in several aspects:
* An RA forces preservation for the member. There is no restriction on withdrawals from a unit trust fund, whereas RA savings may be accessed only from the age of 55, or prior to that in the case of disability.
* Unit trusts do not qualify as retirement vehicles in a regulatory sense. Part of the discussions by the PWGW with Treasury have been to eliminate the means test being applied to accumulated retirement savings. Treasury and Social Security seem to be aligned to this principle. They are not necessarily aligned to removing the means test for voluntary savings (such as unit trusts).
* Unit trusts expose vulnerable employees to the influence of employers that may terminate the services of the domestic worker and then force them to withdraw the unit trusts as a severance package. RAs limit this possibility. There are clear benefit payment criteria managed by trustees.
* An RA has the advantage of protection from creditors.
* An RA need not cost more than a unit trust (See the yield reduction figures below.)
* This product has very low entry levels. Unit trusts generally have higher entry levels. Most monthly minimums are R500, although a few are available for R150.
* The RA will be invested into a smoothed bonus portfolio, which protects members from volatility. Similar results can be achieved with unit trusts, however, in an RA the investments are reviewed from time to time by trustees to make sure that they match the needs of members.
* Tax considerations: Since the abolition of retirement funds tax earlier this year, RAs have the advantage that growth is not taxed - which results in approximately 1% extra return on the RA (compared to an endowment). The benefits, after the one-third tax-free lump sum, are taxed as income. Under the new tax rules, the first R300 000 of the one-third lump sum is tax-free.
If we assume a domestic worker has saved over 30 years at the maximum of R150 per month, and we increase these contributions annually with inflation, then our illustrative values from the high inflation scenario (8%-10% inflation assumption) show accumulated savings of R555 000. If the domestic worker takes a third as a tax-free lump sum, then the remaining R370 000 will purchase a level guaranteed annuity of the order of R3 000/month. This is below the current tax threshold.
Of course, with a high level of accumulated savings and no lump sum at retirement, it is possible that the domestic worker may pay tax. However, this is unlikely.
Considering all these advantages, Old Mutual selected the RA option as most closely matching the retirement needs of this particular group.
(2) Retirement Products and Fees
Reduction in Yield Statistics 
With the Domestic Workers Plan, an initial fee of R7 is deducted from retirement savings contributions to cover distribution. Investments are charged a total fee of 1.65% p.a. calculated monthly. The maximum RA premium component of the Domestic Workers Plan is R150/month.
The R7 fee is very low and the product therefore offers exceptional value. It is questionable whether lower reductions in yield can be achieved at these low entry levels in any other type of investment, including bank accounts, whilst simultaneously targeting better than CPI returns. A unit trust, for example, has a lower investment charge but starting contributions are typically R500/month. Some unit trusts offer low entry levels and charges but then may have other conditions, for example the investor may need to bank with the institution.
The 1.65% fee includes the fees for management of the assets as well as the smoothing of returns which is a very valuable feature for people who have limited diversification in their investments.
Our offering provides phenomenal value to clients: low costs, very low entry levels and growth targets in excess of CPI.
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