Slow rise in SA’S financial wellness Retail bond proceeds to be paid into deceased estates

The financial position of the country’s households has improved steadily since 2011, according to the latest Momentum/ Unisa Financial Wellness Index. Martin Hesse reports

FINANCIAL wellness in South African households increased only marginally between 2016 and 2017, according to the Momentum/ Unisa Financial Wellness Index

2017 report, which was released this week. However, the overall situation has slowly but steadily improved since 2011, the year the index was introduced.

The index measures households’ finances and assets on a number of factors (see below), with the overall score out of 100. This overall score increased from 64.1 in 2011 to 67.7 in 2017. It was 67.3 in 2016.

The seventh round of the annual Momentum/unisa financial wellness research was conducted early this year and involved a nationally representative study of 2 746 households.

It found that 26.5% of households fell into the “financially well” category, 41.3% were “financially exposed”, 30.5% were “financially unstable”, and 1.7% “financially distressed” (see “Categories of financial wellness”). The last two categories represent households battling or failing to cope with financial pressures, and these combined have declined since 2011, from over 40% of households, to 32.2%.

The report says the small overall improvement of 0.4 points between 2016 and 2017 “can be attributed to a mixed bag of factors at the national economic (macro), community (meso) and household and consumer (micro) levels”. These include:

● “Low but improved economic growth rate compared with 2016, low employment growth, high unemployment, low consumer and business confidence, lower consumer price inflation, lower growth in gross income per worker, stagnating real Gdp-percapita growth and low private consumption growth.”

● “Low growth in early-stage entrepreneurship, high levels of inequality within and between communities, high levels of poverty in many communities, and widely differing levels of service provision in communities.”

● “Low levels of subjective well-being, low household balance sheet growth, low levels of financial literacy, strong growth in the number of secondary school finishers (although there are many concerns about the quality of school education) and high levels of financial vulnerability among the low- and lower-middle income groups.”

Macro-level: Meso-level: Micro-level: HOW HOUSEHOLDS ARE MEASURED

Households are measured on five forms of capital. Two of these (environmental and social) are “inputs”, determined by external factors, and three of them (physical, asset and human) are “outputs”, or how the household has fared in managing their finances and creating wealth. Each is measured out of 10.

1. Environmental capital:

The quality of the environment as determined by the quality of the dwelling (2016: 6.6; 2017: 7.4).

The household members’ personal empowerment as determined by factors affecting their control over their financial situation and trust in financial and other institutions (2016: 4.9; 2017: 5.1).

2. Social capital:

The household’s income and expenditure (2016: 5.6; 2017: 5.1).

The household’s assets, liabilities and net wealth (2016: 5.0: 2017: 4.7).

The household’s education status as determined by their qualification and skill levels (2016: 6.4; 2017: 6.7).

Two of these, physical capital and asset capital, which record households’ finances in purely monetary terms, declined between 2016 and 2017. There are a number of reasons for these declines, the report says. “The FNB House Price Index suggests that house prices declined by 1.1% in real terms between 2016 and 2017 … Households invested in shares via, among others, their retirement funds reaped the fruits during the latter part of 2017, when share prices increased. However, these improvements, as well as a

3. Physical capital: 4. Asset capital: 5. Human capital:

decline in the debt-to-disposable income ratio from 74.1% in 2016 to 72.0% in 2017, were not sufficient to prevent the net wealth to disposable income ratio declining to 372.7% in 2017 from 376% in 2016.”

Looking at these factors over the seven years of the index (see graph), some trends become apparent.

The report says: “Human capital scores increased due to a growth in the pool of household members with completed secondary and tertiary qualifications, while environmental capital grew because of the improved housing conditions of people. While these two forms of capital generally saw positive growth over the period 2011 to 2017, the growth patterns in physical and asset capital were fickle due to volatility in the levels of real household income and net wealth growth. Social capital levels remained low due to feelings of disempowerment, low levels of subjective well-being, financial vulnerability and low consumer confidence in the economy.”

The writers of the report suggest that a “disconnect” between the human capital index and the physical capital index can largely be explained “by the low production elasticity of employment, which stems from a skills mismatch in the economy. The skills provided by the South African labour supply are to a large extent out of kilter with the skills demanded by current and prospective employers.

“This phenomenon also explains a considerable part of the high levels of unemployment, poverty and income inequality – the so-called ‘triple challenge’ – found in South Africa.”

martin.hesse@inl.co.za INVESTORS in RSA Retail Savings Bonds have been informed by National Treasury that, with effect from October 1, the savings bonds will no longer offer the option to nominate beneficiaries to receive the proceeds on the investor’s death.

In a report in the Alexander Forbes Lighthouse newsletter, Jenny Gordon, the head of legal retail at Alexander Forbes, says that, in future, the savings bonds will, on the death of a bondholder, pay directly into the deceased estate.

The intention is to align the savings bonds with the Administration of Estates Act, which states: “Any person who at or immediately after the death of a person has the possession or custody of any property book or document which belongs to or was in the possession or custody of such deceased person at the time of his or her death… shall upon written demand by the… executor … surrender any such property

… to the executor… provided that it shall not affect the right of that person to remain in possession of such property under any contract or right of possession or attachment.”

‘INCONSISTENT’

Gordon says: “The right of an investor in an RSA Retail Savings Bond to nominate a beneficiary for proceeds or ownership of the bond was a feature which was inconsistent with the law of succession, which requires property of the deceased to pass on death in terms of a will.

“An RSA Retail Savings Bond is property that exists in the estate at date of death. All property and assets that exist in an estate should be bequeathed via a will and should be dealt with in the estate of the deceased.”

Gordon says the exception to this rule is the proceeds of a life insurance policy.

“The proceeds of a life insurance policy are payable on death.

The proceeds do not exist in the estate before death. A beneficiary nomination on a life insurance policy is a special contract called a ‘stipulation alteri’, or a contract for the benefit of a third party.

The policyholder contracts for the insurer to pay the proceeds to the beneficiary on the death of the policyholder and not to the estate.

“The death benefit did not exist in the estate of the policyholder during his or her lifetime, so it need not be bequeathed via a will. Current practice extends this to beneficiary nominations for ownership on endowment policies and sinking funds, although this is not clear-cut in law,” she says.

Treasury introduced the retail bonds in 2004, and they have proved a popular means of saving. There are fixed-rate bonds with terms of two, three and five years, and inflation-linked bonds, with terms of three, five and 10 years.