Frequently Asked Questions Document

10 JULY 2013

FREQUENTLY ASKED QUESTIONS DOCUMENT: MURRAY & ROBERTS RETIREMENT FUND PENSIONER OUTSOURCING

There were a number of questions that were asked at the pensioner roadshows held in May 2013 relating to the proposed outsourcing of pensioners of the Murray & Roberts Retirement Fund. This document provides a summary of these and other relevant questions to provide pensioners with as much information as possible relating to the outsourcing and the option of transferring to an alternative insurer.

Current position of the Murray & Roberts Retirement Fund

1) Have all the pensioner assets, including the Solvency Reserve, already been transferred to Old Mutual?

Assets sufficient to cover the purchase of an Inflation linked Annuity policy with Old Mutual that will fund 100% of current pension payments, as well as pension increases equal to 100% of CPI going forward, have been transferred to Old Mutual. This included a portion of the Solvency Reserve required to guarantee 100% CPI increases instead of 75% CPI increases as targeted by the Fund’s pension increase policy.

The full Solvency Reserve (assets held to protect the Fund against adverse experience) has not yet been transferred to Old Mutual. This will be transferred and allocated to pensioners, as an additional pension increase, once the outsourcing has been finalised.

2) Has the actual cost of the annuity from various insurers been taken into account in arriving at the decision to purchase an Inflation Linked Annuity Policy?

Yes. Old Mutual was one of four insurers that participated in a rigorous tender process with the Fund. The actual cost of the annuity was one of the key factors in the decision making process. The Trustees are satisfied that they have secured a favourable price for the benefits.

The valuation of the liability as at 31 December 2012 showed excess assets of approximately 5.5% of liabilities. The purchase of the Old Mutual policy has resulted in excess assets of approximately 7.0%. Therefore the price paid to Old Mutual to fund the pensions was lower than the cost that would have been needed to be held within the Fund.

1 The decision to outsource the pensioner liabilities to Old Mutual

3) Why is the Fund considering outsourcing?

In the past few years the Fund has requested quotes from the insurance market for taking over the pensioner liability whilst providing benefits that are the same as those available in the Fund.

At the end of 2012 the quotes received looked favourable relative to the valuation results. Initial indications were that it would be possible to provide pensioners with pension increases at 100% of CPI whilst retaining all existing benefits. There would also be remaining assets that could be distributed to pensioners as the Fund would no longer be required to hold reserves to protect against adverse mortality and investment experience.

4) With the Fund having invested assets with Old Mutual, thereby protecting against investment risk and mortality risk as well as providing 100% CPI annual pension increases, why outsource?

The Fund will still incur ongoing pensioner expenses whilst the Fund carries the liability. These expenses include auditors, actuaries, consultants, FSB levies etc. The Fund will therefore not be able to distribute the Solvency Reserve unless the Fund fully outsources to Old Mutual.

Outsourcing will mean that the Fund will no longer incur ongoing expenses for pensioners and the excess assets can all be distributed to pensioners.

5) Under what circumstances would the annual pension increase from Old Mutual be less than 100% of CPI?

The Fund has purchased a policy that guarantees future increases equal to 100% of CPI. The increase will be granted in March every year and will be based on the year-on-year change in CPI as at the December of the previous year. This is not subject to affordability and will not be higher or lower than CPI in any given year, unless there are specific legislative changes. The contract with Old Mutual notes the following:

“ The guarantee of increasing/decreasing pensions may be amended by Old Mutual exercising its reasonable discretion in the event of:

(a) a legislative change imposed on Old Mutual, or

(b) a default in respect of Government-issued CPI bonds or if the Government materially changes the terms thereof or the applicable index and, as a result, Old Mutual cannot reasonably meet its guarantee based on its investments in the bonds concerned,

if and to the extent necessitated by the legislative change or default, as the case may be.” The Trustees are comfortable that the mitigation strategies proposed by Old Mutual in the event of the above changes would attempt to protect the interests of the pensioner. It is important to note that the Fund would face the same difficulties if Government defaulted on its bond repayments.

6) Were all the Trustees in favour of the decision to outsource?

Yes. There was unanimous agreement from all the Trustees that this is in the best interests of the pensioners in the long term.

7) Are there any benefits to the pensioners of having an individual policy?

The policies were quoted on a group basis even though each pensioner will end up with an individual contract. This has resulted in a quote that will be more favourable than an individual member approaching an insurer to purchase an annuity. The policies are also provided free of any commission and ongoing advisor fees.

8) What will happen to the Board of Trustees and Murray & Roberts Group Benefits?

The current Board of Trustees (with the assistance of Murray & Roberts Group Benefits) will continue to ensure the smooth running of the Fund until the liability has been outsourced.

Following the outsourcing, the current pensioner elected members of the Board of Trustees will not have any further involvement with the Murray & Roberts Retirement Fund. Murray & Roberts Group Benefits will continue to operate within Murray & Roberts and will continue to focus on the post-retirement medical scheme subsidy and a number of staff-related benefits. This includes continuing to manage the benefits for the employee members who will remain in the Fund.

9) Do pensioners have the right to look at the policy of insurance with Old Mutual?

The Trustees of the Fund and its advisors have gone to great lengths to scrutinise the contract with Old Mutual to ensure that the benefits will be transferred across on the best possible terms.

Pensioners will each receive an individual policy that will be issued in the name of the pensioner. You can request a sample policy from the Fund should you wish to review its contents before the individual policies are issued. Outsourcing the pensioner liability – Benefit related questions

10) What is the difference between an “annuity” and a “pension”

There is no fundamental difference between an annuity and a pension. An annuity payment is typically made to an individual by an insurer and a pension is paid to an individual by a retirement fund. Both are payable for life and are subject to the same tax treatment.

11) What is an “Inflation Linked Annuity”

An Inflation Linked annuity provides an annuitant (pensioner) an income that aims to increase in line with inflation (CPI) for the duration of the pensioner’s life.

12) Are there any Solvency Reserves remaining and what is the approximate level of these reserves?

Yes. There is a Solvency Reserve that is currently held by the Murray & Roberts Retirement Fund. These reserves will be distributed to pensioners through an increase in monthly pensions following the transfer across to Old Mutual.

Current estimates are that the monthly pensions for all members will be increased by approximately 7%. This increase will be granted on 1 March 2014. This will be over and above the CPI increase that will be granted in March 2014.

13) Will the Fund allow Pensioners to receive the Solvency Reserves in cash and leave the current annuity payment with Old Mutual?

14) Will the Employer get any part of the Solvency Reserve?

15) Are there any costs involved for the pensioners in purchasing the annuity policy?

The assets that have been transferred to Old Mutual will cover all future expenses in terms of administration costs and policy related costs. The pensioner will still receive his/her full pension payment. There are no costs being levied on pensioners in order to purchase the annuity policy.

16) The Fund has historically provided increases that are greater than CPI over the long-term? Why would the Fund enter into a policy that only pays 100% of CPI?

The Fund has historically been able to invest a large portion of assets in equities that have delivered returns in excess of the assumptions made by the Fund actuary. Going forward, the Fund will need to invest progressively more conservatively as the term for the payment of pensions decreases. This will result in the Fund investing in less equities and the Fund will move towards investing in bonds to provide security for pension payments. This process had already started in the Fund when the decision to pursue outsourcing was made. This will result in a lower expected long-term return than that achieved historically providing less opportunity to offer increases above CPI.

17) Will pensioners share in the profits when Old Mutual does well?

The policy purchased has no link to the performance of Old Mutual as a corporate. Therefore any profits/losses made by Old Mutual will have no impact on the CPI increases being granted.

18) Will Old Mutual have adequate reserves to allow for the longevity of the pensioners?

Old Mutual currently has the highest solvency ratio of all insurers in South Africa. Based on the current future mortality estimates that have been calculated by the Actuaries at Old Mutual there are enough reserves to allow for the longevity of the pensioners. All pensions are guaranteed for life in terms of the policy contract.

19) What happens if Old Mutual runs out of money?

From a regulatory perspective, South Africa has strict reporting requirements to the Financial Services Board and there are a number of measures that are monitored with regards to insurer’s solvency levels. There will therefore be a number of intervention stages by the regulator should the reserves within Old Mutual decrease over time.

20) What happens if Government gets involved and takes over the pensioner assets?

We do not expect it to be a likely scenario that Government effectively takes insurer (and therefore policyholder) assets.

21) Will the capital guarantee upon death stay in place?

Yes. All benefits that you are currently entitled to with the Murray & Roberts Retirement Fund have been allowed for in the outsourcing to Old Mutual.

22) Will the current death benefits remain after the outsourcing to Old Mutual? Will Old Mutual handle the claim and be responsible for payment on death?

Yes. The death benefits will be assumed by Old Mutual as they existed in the Fund. Old Mutual will be responsible for handling and payment of death claims. An eligible spouses pension will become payable on the same basis as currently exists in the Fund. 23) Will future mortality profits/losses impact on the pensioners?

No. Any future profits/losses will be allocated to Old Mutual and will not impact on the pensioners. The Fund is comfortable that the mortality basis that was used to price the annuity is reasonable. Based on current mortality experience we do not expect significant profits/losses into the future.

Outsourcing the pensioner liability – Administration related questions

24) Will Pensioners still be able to address complaints to the Pension Funds Adjudicator?

No. The Long-term Insurance Ombudsman will be responsible for addressing any complaints going forward.

25) Will there still be an annual pensioner roadshow?

Currently there are no plans to hold ongoing pensioner roadshows. There may be a final roadshow held during 2014 to ensure that the transition to Old Mutual has been successful.

26) Will pensioners continue to receive pensioner communication?

Yes. However, this will be received from Old Mutual and will not have any input from the Murray & Roberts Retirement Fund or Murray & Roberts Group Benefits.

27) When my pension is paid by Old Mutual will there be any changes in the date of payment?

No. The date of payment will be the same as the current payment. The payment will be made into the same bank account as your current monthly pension.

28) Will the deductions that come off my monthly pension such as Gap cover and Medical Aid remain?

Yes. All current deductions paid on your behalf will continue.

Outsourcing the pensioner liability – Possible risks to pensioner members

29) If SA experiences Zimbabwe type hyperinflation, is there a cap on the annual pension increases?

In terms of the Long-term Insurance Act (Act No 52 of 1998), the maximum increase that may be granted during the initial 5 year period of payment for a pensioner owned policy is 20% per annum. The wording in the Old Mutual contract confirms that all increases that could not be granted should this legislation become applicable will be caught up in year 6. Outsourcing the pensioner liability – Transferring to an alternative insurer

30) Will there be an opportunity to elect an insurer of my own choice before the outsourcing takes place?

Yes. The letter included with this document details the process to follow should you wish to transfer your Actuarial Reserve Value to an alternative insurer.

31) Will there be any costs involved in transferring to an alternative insurer?

The transfer will not have an impact on your Actuarial Reserve Value. However, your financial advisor may charge you an upfront and/or ongoing fees for the new product.

32) Will the Fund allow Pensioners to transfer a portion of the actuarial reserve value to another insurer?

No. The full Actuarial Reserve Value must be transferred.

33) When must the applications to move your money to another insurer take place?

The deadline for submission is 30 September 2013.

34) Will Pensioners be able to transfer from Old Mutual to another insurer at some future date after the outsourcing has taken place?

35) When will the Actuarial Reserve Value be available for transfer to another insurer?

Provided that the Fund is able to keep to its targeted timeframes, transfer is expected in January 2014.

36) Is the pensioner at risk of the Actuarial Reserve Value changing if he elects to transfer?

The Actuarial Reserve Value will be recalculated, by Old Mutual, at the date of transfer allowing for changes in the bonds yields, positive or negative investment returns and any pension payments that have been made up until the date of transfer.

37) In the event of a married pensioner passing away after having accepted the Fund’s offer to transfer his pension to an alternative insurer, how would this be handled?

Under the current Fund Rules the benefit that is payable to the spouse will reduce upon death of the main member. The lump sum quoted will reduce in the same way the benefits payable from the Fund will reduce if the Fund has not yet approved the transfer to an alternative insurer. If the Fund has approved the transfer but the money has not yet been transferred, the Actuarial Reserve Value as quoted in the letter adjusted for returns and pension payments provided will be transferred.

For a single pensioner, should the death occur before approval of the transfer by the Fund then no future benefits would be payable. Should the death take place after approval by the Trustees, the Actuarial Reserve Value will be paid to the estate.

Outsourcing the pensioner liability – Objections

38) Am I allowed to object to the outsourcing?

Yes. Any objections should be provided in writing to the Murray & Roberts Retirement Fund before 30 September 2013.

39) What is a Section 14 transfer?

This is the transfer of the assets and liabilities from one Fund to another Fund. It is governed by Section 14 of the Pensions Funds Act and ensures that the assets are protected when transferring between Funds.

The assets may only be transferred after approval by the Financial Services Board.

40) What is the timeline for the Section 14 process?

The Section 14 is expected to be submitted to the Financial Services Board by January 2014. The table below provides the expected timeline.

Date Action Early July 2013 Distribution of letters to pensioners 30 September 2013 Deadline for any objections to the Section 14 process Old Mutual takes over administration of the benefits and 1 November 2013 payments to pensioners 1 November 2013 – Old Mutual issues policies in individual pensioners’ names 1 January 2014 January 2014 Transfer of assets to alternative insurer (if applicable) March 2014 Distribution of pension enhancement