|
WHAT
IS PERMANENT HEALTH INSURANCE ("PHI")?
It
is the generic term for long-term disability income
insurance, also known in the market place as Income
Security Plan ("ISP") and Non-Cancellable
Disability Income Insurance ("Non-Can"). Liberty
Life's corporate product is the Income Plus Plan
("IPP"). Whatever the name, the concept is to
provide an income for a temporarily or permanently
disabled person during the period of disablement.
back
to top
WHAT
ARE
THE TERRITORIAL LIMITS OD DISABILITY COVER?
Cover
will, in principle, only be provided for members who are
ordinarily resident in the Republic of South Africa.
Residents in other countries will only be included if
specifically agreed by Liberty Life.
If
the member becomes temporarily resident outside the
Republic, he can remain covered provided that the employer
notifies Liberty Life within 30 days of the change of
residence. If the period of residence outside the Republic
is more than 24 months, membership will cease.
Any
IPP benefit
will be paid to a resident outside the Republic for a
maximum of six months after leaving the country, provided
that the member is able to supply the required medical
evidence. After six months, it is at Liberty Life's
discretion to continue payments whilst the claimant is
outside South Africa.
back
to top
WILL
IPP DISABILITY BENEFIT PAYMENTS KEEP UP WITH INFLATION?
IPP
benefits will not keep up with inflation unless there is a
built-in escalator included in the IPP.
back
to top
IS
A MEMBER IN RECEIPT OF IPP MONTHLY DISABILITY BENEFITS
LIABLE FOR TAX OR SUCH PAYMENTS?
Monthly
IPP payments,
being a replacement of income, are fully taxable as gross
income.
back
to top
WHAT
ARE "PRE-EXISTING CONDITIONS" WHICH APPLY TO
DISABILITY COVER AND HOW CAN THEY AFFECT MEMBERS OF FUNDS?
These
are medical conditions, which a member is or was suffering
from, prior to membership of the fund. Most funds have
clauses indemnifying them against new members who are
already suffering from some or other illness. In
the event of a claim within the first 12 months of
membership arising from a pre-existing medical condition for
which the member received, sought or should have sought
treatment during the 12 months before cover commenced or
increased, the member's benefits will
be restricted as described below unless we have received
satisfactory medical evidence and notified acceptance of the
benefits in writing. The employer must notify each new
member of this pre-existing condition and its implications.
Failure by the employer to do so will not invalidate the
operation of the pre-existing condition restrictions.
Where
death or disability arises directly or indirectly from a
pre-existing condition, the following restrictions will
apply
-
On
death or disability (where the benefit is a capital
amount) the benefit will be restricted to the lesser of
the member's accepted cover and the Medical Free Limit
(if any);
-
Where
this quotation is for Corporate Insured Series or
Corporate Retirement Annuity, the amount calculated in
the above will be restricted further to a maximum of
R100 000;
-
On
disability where the benefit is provided by an Income
Plus Plan, no benefit will be payable.
Should
a claim be made against the fund for death or disability
benefits as a result of any such pre-existing medical
conditions, the claim will usually be disallowed or the
benefit will be restricted.
back
to top
IS
WHAT HAPPENS IF THE MEMBER IS ABSENT FROM WORK WHEN COVER IS
DUE TO COMMENCE?
WILL THIS IMPACT ON THE MEMBERS BENEFITS?
If
on the day that cover is due to commence, or at any time
during the 20 working days prior to that date, a member is
unable to perform all normal full-time duties as a result of
illness or injury, the member will not be entitled to
benefit from the Medical Free Limit. Entitlement to cover
will only apply after the member has performed all normal
full-time duties for 20 consecutive working days, unless the
underwriter has received satisfactory medical evidence and
notified acceptance of the benefits in writing.
back
to top
WHAT
DOES WHOLE PERSON IMPAIRMENT (WPI) MEAN?
Whole
person impairment (WPI) means the percentages of impairment
in respect of the various body systems specifically referred
to, on which the payment of impairment benefits will be
based.
back
to top
WHAT
IS THE PREMIUM WAIVER ON IPP?
The
first premium waiver is where the employer does not pay any
premium for the IPP benefit
attributable to a member whilst the member is in receipt of IPP
benefits.
The
second waiver is that of the employer contribution waiver. In
terms of this contribution waiver, the employer
insures his monthly contributions to the retirement fund for
those members who are in receipt of IPP
benefits.
Membership
of the retirement fund continues and there is no loss of
pensionable service on recovery from disability. Death and
retirement benefits will still be paid.
|
Benefit
Type |
Benefit
Structure |
|
Initial
Period |
75%
of monthly salary with an overall maximum benefit of
R100,000 per month |
|
Extended
Period |
75%
of monthly salary with an overall maximum benefit of
R100,000 per month |
back
to top
ADDITIONAL
BENEFITS?
-
Employee
Waiver
-
Employer
Waiver
-
Escalation
-
Conversion
Option
back
to top
SELECTED
POLICY CONDITIONS
back
to top
WHAT
IS THE WAITING PERIOD IN AN IPP?
Normally
there is a choice offers a choice of a 3, 6, 12 or 24 months
waiting period before benefit payments begin. Clearly, the
longer the waiting period, the cheaper the premium. Some
insurers are prepared to offer a one month waiting period
for certain professional occupations. In
such cases, the premium rates are extremely high,
because one enters the area of trivial complaints and
short-term payments.
back
to top
WHAT
HOW DOES AN EMPLOYEE SURVIVE DURING THE WAITING PERIOD?
Usually
the employer will pick up the cost during the waiting period
by paying the full salary or a portion thereof.
back
to top
WHAT
IS A LUMP SUM DISABILITY BENEFIT?
A
lump sum disability benefit is an alternative, cheaper form
of providing for disability, but only in the case of total
and permanent disability. In
essence, part of the group life assurance benefit
is advanced on disability. For a pension fund, 1/3rd is paid
in cash and the balance is paid in the form of a monthly
income. In terms
of a provident fund, the whole payment is made in cash.
The
disadvantage of a lump sum disability benefit, as opposed to
an IPP payment,
is that all the benefits are paid out as accelerated death
benefits and little or nothing is left to pay on subsequent
death. When receiving an IPP
benefit, the member remains on the fund and on death,
the death benefit is still payable - which is the preferable
situation.
What
are the different categories of disability?
Occupational
Capital Disability
This
benefit covers the member against the risk of becoming
permanently occupationally disabled, resulting in the
inability to perform the duties of the member's "Own or
Reasonable" occupation or "Any occupation". A
100% benefit is payable as a lump sum.
Progressive
Capital Disability
A
comprehensive capital disability benefit, which covers the
member against the risk of becoming either permanently
occupationally disabled, impaired or both, by paying a lump
sum benefit. Where the member is permanently impaired, the
lump sum payment could be tiered, with multiple claims being
possible up to a 100% benefit. Partial claim payments do not
reduce group life cover.
What
are the definitions of disability?
For
purposes of IPP, disability shall mean that, during the
first twelve months following the date of disability, the
inability of a member to fulfil the duties of his or her
normal occupation as a result of accident, disease, illness
or injury. After the first twelve months, it shall mean the
inability of a member to fulfil the duties of his or her
normal occupation, any similar occupation, or any other
suitable occupation for which he or she has, or can
reasonably be trained to have the necessary knowledge,
skills or ability.
For
purposes of capital disability, own or similar disability
means that the member is continuously and wholly prevented
from engaging in his or her normal occupation, any similar
occupation, or any other suitable occupation for which the
person is or could reasonably be expected to become suited,
taking into account his or her knowledge, education,
training, abilities or experience.
Total
disability means that a member is continuously and wholly
prevented from engaging in any occupation for remuneration
or profit.
back
to top
WHY
DOES A RETIREMENT FUND INVEST?
The
primary purpose of a retirement fund is to provide the
members of the fund with the best retirement benefits
possible given the circumstances of the fund. In order to do
this the trustees need to optimise the structure of the fund
and then make a prudent investment decision in order to grow
the assets of the fund in real terms (in excess of
inflation).
Retirement
funds have many choices but in general terms these
investments take the form of
These
investments can be in South Africa and denominated in Rand
terms, or they can be offshore and denominated in a host of
foreign currencies (usually by way of asset swap).
back
to top
WHAT
IS A POOLED PORTFOLIO?
A
pooled portfolio is an investment portfolio in which many
different investors participate. The fund manager
"pools" the investments of all the participating
investors into one fund and manages them as such.
-
The
daily unit price of a pooled portfolio is not quoted in
the press
-
The
costs of a pooled portfolio is contained in an annual
investment management fee
-
Pooled
portfolios are traditionally the offering of life
insurers
-
Pooled
portfolios are generally cheaper to invest in,
particularly where larger funds are concerned.
back
to top
WHAT
IS A UNIT TRUST?
A
unit trust is a collective investment scheme whereby the
unit trust administrator collectively invests funds for a
range of investors. The value of the underlying assets are
disclosed to the unit holders in the form of a unit price.
Unit
trusts are regulated by the Collective Investment Schemes
Control Act.
back
to top
WHAT
ARE MULTI-MANAGER FUNDS?
A
multi-manager fund is a fund where the multi-manager focuses
on the use of other underlying asset managers. The
multi-manager concentrates on the choice of a host of
underlying asset managers to make up a portfolio. The
multi-manager will undertake an intensive study of the
process employed by other asset managers and make a
selection based on the skill, ability, process, people,
performance consistency and complimentary nature of the
underlying asset managers.
A
portfolio will then be constructed using the services of
these chosen asset managers who are carefully selected to
provide investment synergy. Each underlying manager is given
a specific investment mandate, usually in the form of a
segregated fund. The multi-manager will also ensure that the
underlying asset managers constantly meet the required
standards and conform to the mandate they are given.
back
to top
IS
INDIVIDUAL MEMBER CHOICE A BETTER OPTION?
There
is no concise answer to this question. It
is really a question of what is appropriate. It
is, however, important that members be aware that
this option is available to them. Individual member choice
inherently requires a high level of advice at member level
and will go hand in hand with a personalised risk profile
analysis and financial needs analysis, taking cognisance of
the individual members' circumstances. It will also require
regular review to ensure that it remains appropriate.
Where
individual member choice is offered, the trustees will need
to ensure that the members are either competent to make the
investment choices themselves, or that they are provided
with the necessary resources in a comprehensive format, to
enable them to make an informed and appropriate decision.
Some
of the benefits of individual member choice
-
enables
the members to tailor-make an individualised investment
decision;
-
incorporates
retirement funding into the overall financial plan of
the member;
-
enables
the member to take ownership and control of the
retirement fund investment.
back
to top
WHAT
ABOUT INVESTMENT GUARANTEES?
The
fact that an investment portfolio offers a guarantee is a
very important consideration. This is often not granted the
level of consideration it deserves in the investment
decision-making process.
Given
the nature of retirement funds and the volatility we see in
today's markets, it is often essential that categories of
members (particularly those unskilled in financial matters
and members close to retirement) enjoy investment
guarantees.
back
to top
WHAT
ARE THE PRUDENT INVESTMENT REGULATIONS AND PRESCRIBED
ASSETS?
Regulation
28 to the Pension Funds Act imposes limits on the
investments of retirement funds. These are intended to
protect funds against making imprudent investments, once the
requirement to invest in prescribed assets had fallen away.
Over
the past few years, the investment avenues available to
retirement funds have become significantly more complicated
with the incorporation of derivatives, structured products
and foreign investments over which the trustees may have no
control in terms of the sectors in which the foreign
investment manager invests. Many of these new types of
investment are not included in Regulation 28 as it stands
today.
It
therefore became necessary to review Regulation 28. The
financial Services Board withdrew its draft review document
of Regulation 28 during the first quarter of 2004. The
industry is therefore awaiting a further review document
from the Financial Services Board.
Broadly
speaking, Regulation 28 imposes a limitation of investment
in various asset classes to the following:
The
fair value of any single investment at the date of purchase
of the investment, shall not exceed the following
percentages of the total fair value of the total assets of
the fund, as determined with, in one month of the date of
purchase of the investment.
The
table below shows the different proportions that any fund
may hold in the different classes of assets. Each fund is
free to choose within these constraints.
|
Security |
Maximum
Proportion |
|
Cash
deposits, or bills, bonds and securities issued by
Government, quasi-government or local authority – per
bank or per local authority |
100%
20% |
|
Kruger
Rands |
10% |
|
Fixed
property, property trusts, property companies and
mortgage bonds (limited to 5% in any one property or
development) |
25% |
|
Shares
(limited to 10% in any one company listed on the JSE,
with a market capitalisation of R2 000 million or less
and 15% in any one company listed on the JSE, with a
market capitalisation greater than R2 000 million) |
75% |
|
Offshore
investments |
15% |
|
Other
investments |
2.5% |
The
following limitations apply: 3 + 4 are subject to a maximum
of 90%, 3 + 4 + 5 + 6 are subject to a maximum of 95%.
The
fair value of foreign investments shall not exceed 30% of
the value of the South African liabilities of the fund, plus
100% of the value of any foreign liabilities of the fund.
The
Registrar may, on prior written application by a fund, grant
such fund exemption from any of the provisions of this
sub-regulation upon such conditions as he may impose.
back
to top
HOW
DO YOU MEASURE INVESTMENT PERFORMANCE?
Traditionally
investment surveys concentrated on nominal returns, i.e.
actual returns achieved by participants. There is, however,
increasing recognition that it is just as important to
measure the risk or volatility inherent in achieving the
returns.
Investment
return is in itself quite meaningless. One needs to judge an
investment return, given the level of risk taken to achieve
that return
back
to top
HOW
DO YOU MEASURE RISK?
The
measure commonly used for risk is the standard deviation of
the monthly returns. This measures the extent to which the
returns over a number of years vary. A high standard
deviation reflects high volatility or risk and conversely a
low standard deviation would reflect low risk. There are
other measures of risk and reward, like return per unit of
risk. This unitises the risk and attaches a return to it. In
this case the higher the return per un it of risk, the
better.
back
to top
WHAT IS THE
DIFFERENCE BETWEEN A GUARANTEED AND MARKET VALUE INVESTMENT?
Guaranteed
investments
Guaranteed
contracts are generally only offered by life insurers and
relieve the trustees of some of the investment risks.
The
guarantee provided under these types of contracts, means
that regardless of the market values of the underlying
assets, the insurer guarantees that the fund will be paid a
certain nominal value, although this nominal value is
usually payable over a period of time.
The
essential advantages of guaranteed contracts to the
investing fund are:
Under
the guaranteed (stable bonus) system, the actuary declares a
bonus rate which is expected to be maintained for a
reasonable period in the future. In
other words, there is an attempt to even out the
peaks and troughs of investment returns and also retain a
margin to allow for future uncertainties. As such, these
contracts are particularly suitable for new funds with
erratic cash flows and for funds where the trustees, and/or
members, would understand the movement in market values.
Market
value investments
With
a market value investment (managed/direct investment), there
can be no question of hidden reserves, as the unit price
fluctuates immediately with the value of the portfolios
assets. Each pension
fund
receives its true return. The insurer usually provides no
guarantees and the fund experiences the full volatility of
the market.
In
a managed portfolio, the trustees could decide how to split
investment cash flow between the various portfolios or even
concentrate investment in one area. Subject to suitable
notice periods, new cash flow can be diverted into other
areas when opportunities arise. Further, a suitable portion
of the investment must comprise of cash and gilts, in order
to satisfy the statutory investment limits.
The
essential advantage of the managed fund contract is, that it
provides the fund with full participation in investment
returns - concomitantly however, there is the corresponding
volatility.
The
disadvantages, in comparison to the guaranteed contract, are
that there are no guarantees of investment values and hence,
if the trustees or members do not fully understand the
fluctuation of market values, they may distrust the fund
manager when (not if) investment values fall.
A
fair number of large retirement and other funds, do not use
the services of insurers to manage their investments but do
so themselves. An asset manager appointed by the trustees of
such a fund usually makes all the investments.
The
investment manager will also supply regular valuations of
the portfolio and will hold meetings to report back to the
trustees on the portfolio. The investment plan may be
modified to suit changing conditions. Often the assets are
split between two or more asset managers.
back
to top
|
