Progress on tax free savings vehicles, but scathing words for life insurers

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Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. Government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.

 

Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.

KPMG Networking and Career Session

5 June 2014, Wanooka Partners Boardroom
Calling all university students who are studying actuarial science and graduating this year. Come and meet and greet and get to know the KPMG Actuarial Team, ask questions about the different career paths open to you.We look forward to hosting you

 

Date: Thursday 5th June
Time: 17:30 to 20:00 PM
Venue: WanookaPartners BoardroomKPMG Wanooka Building ,

Entrance on St Andrews Street

Parktown

 Contact Stefan Strydom for more details and to register

KPMG Financial Risk Management

Mobile:  +27 (0)82 712 7768

Stefan.strydom@kpmg.co.za

Paris bans half all of all cars

Ok, only temporarily and the (almost) half that are banned change from day to day. A temporary increase in pollution levels has sparked the emergency measure.

I’m fortunate enough to live close to where I work with the wonderful MyCiti bus available as a genuine alternative to get to work. Imagine a world where I was paid (subsidised) not to use my car on particular days. Perhaps a combination of local government and employer-sponsored initiatives, with a scorecard and recognition or prizes or tiers of benefits for better green behaviour.

There’s so much more than can be done in this space and so much more that must be done in the coming years and decades. What would it take you to not drive your car to work?

Chinese debt a serious worry?

I’m not really that close to developments in the Chinese economy. It is a large, complicated beast that is quite different from our own. Over the last year or so I’ve heard more and more from people who generally speak sense that the debt levels in China and the awful investment projects used to show the appearance of a strongly growing economy form a worrying pair of forces.

House of Debt (a newish blog, seems interesting) has a post covering some of these risks to the Chinese and therefore global economy, with charts! I may post on these issues from time to time as it’s beginning to feel more and more relevant.

Binary vs “vanilla” bets and hedging

Nassim Taleb, an author who usually inspires (except in his second book, Black Swans) has co-authored a paper with a long-tailed title “On the Difference between Binary Prediction and True Exposure with Implications for Forecasting Tournaments and Decision Making Research”.

The paper isn’t paygated so check it out – it’s only 6 pages so definitely accessible. Don’t worry about the couple of typos in the paper, bizarre as it may be to find them in a paper that presumably was reviewed, the ideas are still good.

The key idea is that prediction markets usually focus on binary events. Will Person Y win the election? Will China invade Taiwan? These outcomes are relatively easy to predict and circumvent important challenges of extreme outcomes and Taleb’s Black Swans.

A quote from the paper, itself quoting Taleb’s book, Fooled By Randomness, sums up the problem of trying to live in. Binary world when the real world has a wide range of outcomes.

In Fooled by Randomness, the narrator is asked “do you predict that the market is going up or down?” “Up”, he said, with confidence. Then the questioner got angry when he discovered that the narrator was short the market, i.e., would benefit from the market going down. The trader had a difficulty conveying the idea that someone could hold the belief that the market had a higher probability of going up, but that, should it go down, it would go down a lot. So the rational response was to be short.

Drones, inequality and the end of the Age of the Gun

Here’s a mind-tickling quasi science fiction story about a future world of plenty derived from cheap autonomous robots. Well, plenty for some and medieval peasanthood for most.

I was having a discussion with a bright young colleague about the Venus Project, whether as a planet we have sufficient resources, capital and technology to meet all our needs. The conversation quickly flowed to income inequality, the increased value of scarce goods and the remaining challenges to lowering costs of production.

The linked article takes a different view – with the potential for massive military power controlled only through capital and technology without a need for tens of thousands of gun-toting supporters, the 1% could potentially achieve complete hegemony and control. With robots making more, better robots, guarding and controlling the other factors of production, what role is left for poor, especially robot-poor peasants?

It has probably been said before, but if feels to me that our generation may live through fundamental societal changes from autonomous robots, cars and drones.

Education, CAs and how long is long to study

A recent Moneyweb article poses the question of whether Chartered Accountants in South Africa should study longer.

The problem is that high schools are failing learners and many accounting students start out with significant literacy and numerical weaknesses in their learning.

Now, as it turns out, I’m not a supporter of increasing the required length of study because some students (even, perhaps, a majority) need more time to complete the work.  I see no reason to enforce an arbitrarily longer study period on students who are perfectly capable of making it in the current and long-standing term of the programme just because some students are entering with inadequate preparation.

I’m not oblivious to the challenges of education in South Africa. I’ve blogged regularly on how education shortcomings are the number one cause of economic challenges and unemployment in South Africa. I’m also not saying that we should simply raise entry requirements as that would exclude many students with the potential to be successful CAs because of imperfect high school level preparation.

What I suggest is an optional (at the choice of students or the university) post matrix, pre-CA year to cement the basics.

The nature of this course would be that the majority of candidates electing or being required to attend this extra year would be previously disadvantaged. I also see it as a perfect opportunity to make tuition cost for this pre-CA year count fully towards cost in the first year of the BComm or BBusSci course should the student meet the requirements. Thus, there is no free year of university grade education for all and sundry, but rather for those who benefit from the programme and successfully enter the mainstream CA stream studies their will be limited financial penalties.

In some ways, this subsidy could potentially save the universities and National Treasury some money – better pass rates in later years should shorten the amount of time to graduate, reducing other university and government subsidy costs.  I haven’t worked the numbers, but it is an offsetting impact to consider.

I understand that UCT, certainly for actuarial students, has a very successful programme of tweaking the education route for this with poorer preparation. I don’t have the numbers at hand, but the results apparently have been quite staggering.

Of course, SAICA has a somewhat silly response:

Saica’s senior executive for professional development, transformation and growth Chantyl Mulder said the duration to qualify as a chartered accountant (CA) is already seven years and thus lengthening university studies is not viable.

Stating that it isn’t viable doesn’t actually say anything. The same could be said against a seven year study period of the current were six years. The same could be said against the seven to twenty (and beyond for an unlucky few) years of study for actuarial students and medical specialists. As it is, my understanding is that UCT students pursuing their CA career via B.Bus.Sci have a four year undergrad degree (and what a magnificent degree it is too) and then a final year of GDA study before starting a three year articles period.

The recognition that some CAs take longer than seven years could be taken as evidence that some students need longer. Surely it’s better to prepare a robust eight year programme for those very likely to take longer than seven years rather than leave them to the wolves and an eight or nine year struggle with inadequate preparation? Or even if a parallel rather than serial solution to improving the basic skills is the answer, this has nothing to do with seven years being the magical “right” number.

The final worry itching at the back of my head is that we have all accepted the pernicious degradation of matric quality and have therefore already become used to lower entrance requirements at universities, adding pressure to admissions and possible decreasing the average level of learning. This route as only one destination – lower skilled employees, less international competitiveness, lower economic growth and higher unemployment.