November 8, 2008
 By Bruce Cameron
Sanlam has launched a structured life assurance product aimed at taking on traditional life assurance with-profit annuities, providing pensioners with total transparency on how their pension increases are achieved.
Karen de Kock, the head of annuity business at Sanlam Structured Solutions, says that in back-testing the new product out-performed the traditional with-profit annuities of Sanlam and its competitors.
When you buy a with-profit annuity your initial pension is calculated on what is called the purchase discount rate. The higher the rate, the higher your initial pension but the lower the future increases. Your pension increases are based on the profits made by the life assurance company on the underlying investments - less costs and the purchase discount rate.
Index-based
The new Sanlam product, called the Complete Picture Pension, also uses a purchase discount rate but the increases are based on the average returns of two indices over the past five years less an all-in product fee of 2.5 percent and the purchase discount rate.
A purchase discount rate of 3.5 percent applies for the new pro-duct. So that is the percentage amount that will be deducted from the investment returns every year along with the fee. This reduces your returns, or in this case your pension increases, by a total of six percent.
The two indices are the FTSE/JSE ALSI40 Total Return Index and the All Bond Total Return Index. The pension increase calculations are based on each index making up 50 percent of your annuity.
A total return index measures any improvement in the price of the shares of the 40 companies or the bonds making up the index plus dividends or interest paid.
Commissions paid to advisers are standard but negotiable up to 1.5 percent upfront.
As is the case with a with-profit annuity, your pension and past increases are guaranteed. This means that your pension can never be reduced, even under adverse market conditions.
Until a five-year history is built up, an average of 13 percent will be used for each year's return. So at the end of the first year you will receive 13 percent a year for four years and the actual return of the fifth year.
Higher returns
De Kock says that if you had bought the Complete Picture Pension paying R1 000 a month in 1993 you would have received an annual average increase of 10.4 percent a year, against 7.2 percent average a year for the Sanlam traditional with-profit annuity and 9.5 percent of a competing company.
In other words, with the new product you would now receive a pension of R4 411 as against R2 837 from the Sanlam with-profit annuity and R3 901 from the competing company.
De Kock says the traditional with-profit products are black boxes in that you have no idea how the returns are calculated. With the new product you can calculate the returns yourself.
  
 
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