For many of us baby boomers, unit trusts were not our first investments. Instead, we invested in 10-year and, later, five-year endowment policies or universal life policies.
Universal life was in many ways the worst of all worlds — it was an expensive way to get life cover and an inefficient way to save.
But Old Mutual and Sanlam (which in the 1980s controlled two-thirds of the market between them), and smaller competitors such as Liberty Life and the now defunct Southern Life, had armies of tied salesmen selling these recurring premium products for high upfront commissions.
The argument in their favour was that because there were high surrender penalties in the early years, there was a disincentive to cash them in.
Unit trusts, in comparison, were a tiny sector in 1990. The regulator — the predecessor to the Financial Sector Conduct Authority — made it hard for companies to register unit trusts, limiting eligibility to life offices or banks. Independent fund managers such as Allan Gray and Foord & Meintjes (now Foord Asset Management) tried and failed to get licences.
However, the biggest stumbling block was that unit trusts did not pay upfront commissions. The industry has never been a significant player in the recurring premium or debit order market, and it focuses almost entirely on lump sum investments. Collective investment schemes are an affluent product, with a predominantly white salesforce and client base.
The industry is in good health, even after paying claims and benefit payments worth R639bn in 2024, the highest paid yet in a year
In the US, they say “insure for term and invest the rest”, meaning life insurance is rarely used as a savings vehicle. In contrast, South Africa’s long-term insurance industry plays a large role in both risk — covering life and disability — and savings.
The life offices, as at December 31 2024, had assets under management of R4.5-trillion, against the R3.8-trillion in the unit trust sector. Life insurance has its own complexity as it must keep reserves in line with double the Prudential Authority’s solvency capital requirement.
The industry is in good health, even after paying claims and benefit payments worth R639bn in 2024, the highest paid yet in a year. This includes payments for retirement annuities (RAs) and endowment policy benefits, which directly compete in the savings pool with unit trusts.
RAs cannot be accessed before the policyholder turns 55 — with rare cases such as permanent disability. They are tax-deductible up to R350,000 a year. Endowment policies can be attractive as they can invest in asset classes that unit trusts aren’t permitted to own, such as private equity and private debt. Additionally, they are taxed at 30%, whatever the tax rate of the policyholder.
There is no longer a Life Offices Association — once one of the most powerful lobby groups in South Africa. The specific interests of the life industry are now taken care of by the much more low-key life and risk board committee of the Association for Savings and Investment South Africa, a body now dominated by unit trust managers.
Committee chair Gareth Friedlander, whose day job is at Discovery Life, argues that life offices, despite R3-trillion in payouts over five years, remain well capitalised and in a strong position to honour long-term contractual promises to policyholders and their beneficiaries.
“The fact that this is on the back of a major catastrophe, namely the pandemic, shows just how resilient our industry is,” Friedlander says.
Life companies exist to provide help in a crisis, but savings remain important to them. In Discovery’s case, however, there is a clear distinction between Discovery Life, which focuses on risk, and Discovery Invest, which focuses on unit trusts and balance sheet investments such as structured products.
The industry is made up of 44.4-million risk and savings policies, which are usually paid out without too much fuss. The number of policies on the books increased from 43.8-million in the year.
The demand for recurring premium savings remains robust, with 568,000 new savings policies bought — an increase of 6% from 536,000 in 2023.
But as unit trusts increase their stranglehold on lump sum savings, there was a decline of almost 4% in new single premium savings policies in 2024.
There were some signs of economic recovery as policyholders surrendered fewer recurring premium policies before they matured. The number fell from 563,000 in 2023 and 585,000 in 2022 to 522,000.
These are also indications of an improvement in savings behaviour. Friedlander says it’s encouraging that consumers recognise the importance of disciplined savings, even under difficult circumstances.
Intermediaries still dominate the savings market, in spite of the success of self-service platforms such as EasyEquities. Friedlander encourages policyholders to consult with a financial adviser before letting go of a policy, to find solutions that are not driven by emotions — not that advisers are robots; they have emotions too.
This is particularly important for policies that include risk cover. “Once you lapse a risk policy, you not only lose valuable cover for you and your family, but you may also not be able to get the same cover for the same price later because you are older and may have developed health issues,” Friedlander says.
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