Legislation is putting us at a crossroads

In 1970, futurist Alvin Toffler wrote “Future Shock” and spoke about the “shattering stress and disorientation” of the future. He introduced the term “information overload”, which is something we are all experiencing. To understand this in the retirement fund space, specialists addressed some issues including taxation law amendments, the impact of COVID-19 on death and disability benefits and insurance rates and policy conditions at the FQ Financial Skills conference, sponsored by Camargue.

Taxation law amendments and fund governance

In terms of the Taxation Laws Amendment Act No. 20 of 2021 (the Amendment Act), which was promulgated in Government Gazette No. 45787 on 19 January 2022, Hettie Joubert, Head: Wealth & Retirement Fund Legal at Momentum Investments, outlined the following changes that are relevant for the retirement fund industry: 

1. Combination of types of annuities and payment methods on retirement - The Amendment Act amends the definitions of “pension fund”, “pension preservation fund”, “provident fund”, “provident preservation fund” and “retirement annuity fund” in section 1(1) of the Income Tax Act to allow for a combination of annuities (including a combination of methods of paying the annuity) or a combination of types of annuities, on condition that the amount utilised to provide or purchase each annuity must be more than R165 000. There is no limit on the number of annuities that can be purchased. A member can therefore, for example choose a life annuity provided by the retirement fund and a living annuity purchased in his name from a registered insurer. The amendments came into operation on 1 March 2022.
2. Transfers of preservation fund members after normal retirement age - The Amendment Act amends the definitions of “pension preservation fund” and “provident preservation fund” in section 1(1) of the Income Tax Act, and paragraph 6A of the Second Schedule to the Income Tax Act, to allow a member of a preservation fund to transfer his post-retirement benefit to another preservation fund or a retirement annuity fund, without triggering any tax. The amendments came into operation on 1 March 2022. Transfers of post-retirement benefits between retirement annuity funds or from a preservation fund to a pension or provident fund will however be taxed.
3. Fringe benefits on employer contributions relating to risk benefits - The Amendment Act amends paragraph (b) of the definition of “defined contribution component” in paragraph 12D(1) of the Seventh Schedule to the Income Tax Act to include risk benefits provided by means other than a policy of insurance. This will ensure that the contributions to a defined contribution fund will be classified as a “defined contribution component” irrespective of whether the risk benefits are reinsured or self-insured. The value of the fringe benefit will then be equal to the employer contribution. The amendment came into operation on 1 March 2022.
4. Taxation of annuities where annuitant receives more than one remuneration - Instead of referring to the fund or insurer having to disregard the section 6 tax rebates if SARS issued a tax directive to that effect, as was proposed in a previous amendment, the Amendment Act now states that the retirement fund or insurer that pays an annuity to an annuitant who receives remuneration from more than one employer must apply the fixed tax rate that SARS directs must be used. From 1 March 2022, SARS will use the latest data available to them, which will be based on the annuitant’s tax assessment of the previous tax year, to determine a more accurate PAYE deduction during the year. SARS will provide the PAYE deduction percentage to the fund administrator or insurer, who must then use that rate to deduct PAYE from the annuity. The fund administrator or insurer can go back to applying the normal PAYE deduction rate with effect from the month in which it becomes aware of a change in an annuitant’s circumstances that influences the annuitant’s year-end tax liability. An annuitant may still ask the fund administrator or insurer to deduct tax at a rate higher than the rate provided by SARS. 

“Most of these changes were requested by the retirement fund industry and should not require extensive system changes. The ability to now use a combination of annuities on retirement will change the landscape of post-retirement planning going forward. As much as choice is something that we all want, we should also appreciate that the more choice we have, the more important it is to make the right one, especially if it affects an individual’s income for the rest of his or her life,” concluded Joubert.

Death and disability claims

Looking at what the impact of COVID-19 has been on death and disability benefits, insurance rates and policy conditions, Michele Jennings, Chief Executive Officer at Sanlam Group Risk said that within Sanlam Group Risk, they have seen a drastic increase in the number and value of mortality claims since the start of the Covid pandemic. 

“Initially we noted much lower than normal disability claims, especially lump sum disability but also Permanent Health Insurance (PHI). This was quite different from the trajectory that we appeared to be on, which was constantly worsening, in our view largely attributed to the declining economy. The improvement was drastic in those “lockdown” months, when many people were working from home or not working at all- which probably indicated that employers were being more accommodating with their employees, or that working home from provided a more stable and comfortable environment for employees with physical impairments. Another contributing factor was the unavailability of medical specialists that support and assess members for disabilities, as almost all non-emergency doctor visits were discouraged for a period. We will probably see the knock-on impact of this for some time to come,” she said. 

“During 2021, as the economy opened up again, we started to see the levels of disability claims increasing again - back to pre-Covid levels. The economy is open but has not bounced back as we would have hoped. The economic outlook indicates that there might be a further deterioration in disability claims experience. In all likelihood- this would be followed by increasing premiums for these benefits,” she added. 

“The impact of Covid on mortality experience is a lot more obvious. Our mortality experience has been very similar to the experience of South Africa as a whole, with the SGR waves peaks and troughs almost identical in shape to those reported by the South African Medical Research Council (SAMRC). Given that there is a lag of a few weeks between incident date and claim submission, we can use the SAMRC mortality results as a prediction of what to expect in our business shortly thereafter. SAMRC reported excess deaths relative to historical averages, and since reported Covid deaths are an understatement of the mortality experience, (the death certificates tend to report the cause of death as “natural”), our assumption is that 85% to 90% of the excess deaths are Covid related. In between Covid waves, we have seen an increase in mortality of about 15% above the pre-Covid levels,” she continued. 

Insurance rates and policy conditions

“Since group insurance is a short-term policy for one year, our pricing tries to use past experience, together with future projections to set the appropriate level of premiums for the risks insured. This has been extremely challenging in the last two years, and to date, we have been wrong in four out of four waves. We are prevented by regulations from recouping past losses, so any premiums set are done so to prevent future losses as far as possible. We are currently experiencing large premium increases, as the Covid experience has not only seen an increase in incidents, but also an increase in the average age and salary of claimants,” emphasised Jennings. 

“Our experience and premium projections are based on recent Covid experience, adjusted for projections on future Covid waves, vaccine penetration and anything else that is relevant. We have numerous requests for differentiated pricing between vaccinated an unvaccinated employees, however, this has many challenges including that ‘fully vaccinated’ is a moving target, and the data just doesn’t seem to be readily available. We realise that increasing rates is not sustainable for many employers and employees, and in addition to benefit restructuring, we are also exploring various underwriting changes,” she said. 

“I think the sustainability of group insurance is largely dependent on engagement and flexibility between insurers and clients during these unprecedented times,” concluded Jennings. 

Writer’s thoughts
With all the concerns raised by COVID and with changes occurring in our industry, the speakers shared some interesting insights that are relevant for the retirement fund industry, including the number and value of mortality claims since the start of the Covid pandemic, and premium projections. If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za