The Trustees of the Eskom Pension and Provident Fund (EPPF), Eskom and other participating employers, have looked at the options available to members of the EPPF. They needed to be certain that employees are provided with retirement benefits that are more appropriate for their individual circumstances and are in line with latest market practices.

For Eskom employees, the cost-to-company salary structure has introduced a way to structure every empoyee’s package to better suit every individual’s personal needs.

Wouldn’t it be great to be able to choose a retirement savings option that best suits your retirement needs too? Up until now, members have been offered only one type of fund option called the defined benefit fund, also known as the DB fund. Having considered alternative fund options, the Fund Trustees and Eskom as the principal employer have embarked on a consultation process with all stakeholders, including non-bargaining and bargaining employee groups, on the proposal to create a DC retirement structure in addition to the current DB structure as an option to members of the Fund.

Editor’s NotE

Welcome to this special edition of Power Talk. Most of us spend a lifetime saving for the day when we can retire from active employment and spend some quality time savouring those leisure years without financial worry – that’s the goal and we should never take our eyes off it.

Now, being a member of the EPPF is not just about contributing to the Fund every month, but also about the Fund providing you with insight and information to assist you to keep your personal retirement goals in sight.

In the September edition of Power Talk, the Fund’s Chief Executive mentioned that the Fund was looking at introducing a defined contribution option for in-service members of the EPPF. In this special edition of Power Talk, we focus on what the Defined Contribution Options Project proposes and we give you the background to the various issues around retirement fund structures.

Other articles in this edition consider how much is needed to retire comfortably and give a comparison between defined contribution and defined benefit funds.

So read on, learn more and give your goal of a great retirement the thought and care it deserves.

Take care and enjoy!

A Brief Background

PowerTalk | January 2009 1

Continued on page 2

PowerTalkD e f i n e d C o n t r i b u t i o n O p t i o n E d i t i o n JANUARY 2009

THIS ISSUEProject information 2

Enlightening you • Planning your Retirement

- How much is enough? 3• DB vs DC 4• Why offer DC? 5

Keeping you updated - Where to find DC information 5

important fact - DB or DC both can be pension funds 5

2 PowerTalk | January 2009

After looking at various other retirement structures in the employment market and also taking into consideration the needs of many employees

(see more in the article “Why offer a DC fund option?”), the EPPF took a strategic decision to consult with all stakeholders towards providing

a new retirement fund dispensation where every member of the Fund could be offered a choice to either stay with the DB Fund structure or to

move their retirement benefits into a new DC pension fund structure.

Ultimately, the Trustees’ vision is that this initiative would provide you with an opportunity to consider your retirement plan and give you an option

to choose the structure that best meets your retirement needs!

When will the new dC fund start?

It is proposed that, if employees indicate that they are satisfied with the DC Options Project, then the new DC structure could be ready for member take-on by 1st July 2009. However, this date is not fixed and may change.

Project information flow …

The ultimate goal of the DC Options Project is to empower you to make a once-off choice to either transfer to a DC pension fund structure, or to remain in the DB structure. This is an important decision for you to make which will be based on your personal retirement needs and your own circumstances.

Once agreement about the project has been reached, the EPPF and Eskom will do their utmost to ensure that we provide you with enough information to enable you to be fully informed about the choice you have to make. However, it is also very important that you discuss your retirement plan with your personal financial advisor, who can look at all the information and advise you appropriately.

It will be important to carefully consider the options – you would have the choice of remaining on the current DB structure, or to change to the DC structure. To make sure that you better understand the options available to you, the Fund and the employer will be “layering” the information and communication items will be sent out in smaller chunks on a regular basis.

important dates …

The anticipated timelines in the coming months are as follows:

January 09 to March 09 March 09

April/ May 09

May/ June 09

Jul 09 to dec 09

Cautionary letter from the Fund

Newsletters, posters & flyers focussing on the DC option

Road shows: Member Awareness & Education campaign

Benefit Statement

Road shows: Explaining the choice

Deadline for receipt of Option Forms

Targetted Implementation date for the DC pension fund structure

Read & understand

Attend

Read & study Attend Send in your Option Form before the deadline

Details of the available options and the implications of these options will be communicated to you in future newsletters and member education sessions.

What you have to do:

Continued from page 1

retirement – How much is enough?

Asking how much money a person needs to save to have enough income for a comfortable life through their retirement years is a bit like asking how long is a piece of string.

The real answer is … “it depends”… There is no magic figure that everyone should be aiming for in order to make sure of a reasonable lifestyle when they stop working.

Financial planners estimate that after retirement, people need somewhere between 65% and 75% of their pre-retirement salary. This number (65% to 75%) is the so-called “net replacement ratio” and is simply the pension you will receive at retirement expressed as a percentage of your salary at that date.

The reason you may require less than your full working salary is that it is expected that some of your expenses would stop once you retire, (for example, you will no longer need to travel to work and your housing bond should be paid up by then).

... But not everyone thinks about retirement as a quiet time at home. Some people may want to buy a holiday home, or choose this time to travel. Private health care costs are also somewhat of

an unknown and ever escalating cost factor after retirement.

So basically, the amount of money you would require at retirement will depend on your individual needs and the type of life you wish to lead in retirement.

Let’s look at “early retirement”; can you really afford to retire early? Remember that the earlier you choose to retire, the more you reduce the time you have to build up retirement savings. Also, the earlier you choose to retire the greater your savings have to be since you will need to receive a pension for a longer time. The fact of the matter is this … it’s your retirement – and you can act to make sure that you have enough money to stop working when you want to.

The key to financial planning for retirement is to ask a certified Financial

Planner to assist you to estimate how much money you would need to accumulate to generate the long-term income stream that you will require in retirement. They will usually use a process that helps you take a ‘big picture’ look at where you are and where you want to be financially. The process generally involves:

• Gathering your financial data, such as details on your income, retirement savings, debts and other financial commitments.

• Identifying your retirement goals and assessing any shortfalls between where you are now financially and where you want to be.

• Preparing your financial plan, which may identify recommended investments or additional savings (such as additional voluntary contributions to your retirement fund or a retirement annuity).

• Implementing and then regularly reviewing your financial plan.

Most people do not really think about their financial needs in retirement in detail and therefore make the mistake of underestimating the amount that they will require at retirement.

Recent studies have shown that out of every 100 South Africans who are retiring:

• 45 will need family support,• 30 will be forced to

continue working,• 15 will be dependent on the state,• Only 10 will be financially

independent.

This is a pretty gloomy picture … but the good news for you is that you have already started the process of funding for your retirement - you belong to the EPPF and regular contributions are being made to the Fund. For most members, this forms the foundation for their retirement planning. Your retirement fund is one of the most efficient ways for you to save for your future – so be sure to make the most of it.

PowerTalk | January 2009 3

Enlightening you …

Before we look at the difference between DB and DC funds, let’s first look at how much is needed when you reach retirement age …

Financial planners estimate that after retirement, people need somewhere between 65% and 75% of their pre-retirement salary.

The EPPF is currently a DB fund and the new option will be proposed to be a DC fund.

so what is the difference betweendC and dB funds?

In a dC fund, the contribution rate is “defined”. It means that both you and your employer contribute a fixed percentage of your pensionable salary to the fund each month.

A dC fund operates very similarly to a savings account - every month contributions (less costs) are paid into your “retirement savings account”. This money in your account is invested for you and your retirement account then increases or decreases (based on investment market conditions) with investment returns. When you leave the fund, the full amount in your retirement savings account, made up of all these contributions and the investment returns that have built up, is available to you. This “savings account”, however, is not available for short term withdrawals. It is for retirement savings!

In a DC fund, the final benefit you get depends on how much money is in your retirement savings account on the day you leave the fund. You take all the risks and rewards of the investments of the fund – you receive the actual returns achieved by the investments.

In most dB funds, both you and your employer also contribute to the Fund. However, the benefits are based on a formula (defined) and as a result the contribution rate needs to be continually adjusted to meet the cost of those benefits.

The EPPF is currently a little different in that it is a “hybrid” DB pension fund. This means that the EPPF has a DB benefit structure combined with a DC contribution structure. In the EPPF the contributions are also defined (7.3% for members and 13.5% for employers), but your benefits are not affected by investment performance the same way as in a dC fund.

You receive a benefit at retirement based on a formula that takes into account your years of service and your salary at retirement. Essentially, there is a promise to pay you a certain amount when you retire - you receive a fixed percentage of your retirement salary for each year of service.

This benefit is not directly related to how much you or the employer have contributed to the fund. In a dB fund, you take less risks if investment performance is low, but you also do not receive any additional rewards if investment performance is good.

As you can see, a dC fund structure gives you a benefit directly based on the amount that has been paid to your fund, while a dB fund structure gives you a specific benefit based on a formula, namely your years of service and your pre-retirement salary.

PowerTalk | January 2009 4

Defined Benefit (DB) vs. Defined Contribution (DC) Funds - how it works

Member’s Contribution

(a fixed percentage of your monthly salary)

Employer’s Contribution

(a fixed percentage of your monthly salary

less any costs) Investment Returns

(this is the money that is made or lost by

investing)

Fund Benefit

(your retirement savings)

Investment Returns: This is the amount your investment makes from being invested. • If the investment returns are positive,

your retirement savings will grow. • If the investment returns are negative,

your retirement savings will become smaller.

You take the risk, but also share in the rewards of investment

market fluctuations

in a dC fund your benefit is made up as follows:

=

Defined percentage

Defined final

pensionable salary

Years of

pensionable service

Retirement Benefit in a

DB fund

XX

=

5 PowerTalk | January 2009

Why offer a dC fund option?

Currently the EPPF is fully funded - this means that the EPPF has enough money to cover all the “promised” member benefits. However, over time it has become clear that, because employer contributions are capped at a certain level, the current contribution rate is slightly insufficient to fully fund member benefits into the future. The EPPF therefore had to create a special reserve to provide for the shortfall. While there is no financial problem for the foreseeable future, it remains a fact that if the EPPF becomes under-funded, the rules of the Fund state that either member benefits have to be reduced or member contributions have to be increased. These alternatives are not ideal for all members.

But, while financial considerations are some of the drivers for change, one must also look at the employment challenges faced by Eskom and other employers.

Modern day employees have a different view of employment – gone are the days where employees remained with one company until they retired. Now the focus is on career building, shorter employment periods and higher promotional opportunities. As a result, employers now need to offer salary packages that include retirement fund structures that are easier to understand and offer greater portability of benefits.

Employees want to take their retirement benefits with them as they progress in their careers and move to other companies.

In considering the proposals it is possible that the introduction of a DC option could provide a win-win situation and could empower you to have a better say in your own retirement future.

So in summary, some of the reasons for considering a dC fund option are:

• Providing for a competive retirement fund structure that is attractive to prospective employees and is consistent with the Employer’s cost-to-company remuneration philosophy.

• Providing a retirement benefit in line with current retirement industry practice.

• Giving members the ability to better structure their retirement benefits according to individual needs.

• Avoiding cross subsidies as members’ benefits in the DC option will be based on their own contributions, employer contributions and investment returns earned on their own retirement savings.

You must understand that the proposal is that moving to the dC fund structure would be a voluntary option - you will have the choice to remain where you are (in the DB fund) or you can move to the dC fund structure.

Keeping you updated …Where to find more information on the new DC option

The Trustees of the EPPF and your employer know how important it is for you to make informed decisions. To help you with your decision, the Fund will create a special website for the DC Options Project. This website will be updated with all the communications to you as well as more information on the background and other important information on the project. Once live, you can go to www.eppf.co.za and click on the link to the DC Options Project. This website will be available from January 2009.

A special call centre will also be set up to answer any of your DC Option questions. This call centre will then specialise in the options for the DC Project.

So what can I expect in the next two months …

Once all parties agree, the EPPF together with Eskom, will be running Member Awareness and Education road shows

during January, February and March 2009. Please look out for more information about these sessions and make a special effort to attend – they will be invaluable in providing you with more detail on the proposed new DC option.

Based on the feedback received at these sessions, a more detailed roll-out will be planned for the future.

remember to book your seat!

Details about where and when information sharing sessions will take place will be shared with you through a combination of channels such as attachments to your pay slips, electronic mail, posters, etc.

Remember … only you can make sure that you have a comfortable retirement. The more you know about your Fund and the available options, the easier it will be to make decisions about your retirement benefits.

Look out for the next edition of Power Talk where we will focus on progress with the proposal(s), investments, the different asset classes as well as an update on new communication initiatives.

Your retirement plan – your option!

Continued from page 4

Important fact DB or Dc: proposal is that both will be pension fundsThe EPPF is a pension fund and the new DC fund option will be a pension fund too. In a pension fund your contributions are tax deductible (up to 7.5% of your pensionable salary). That means your contributions are taken off your salary before the amount of tax you have to pay is calculated – in this way you save for retirement and pay less tax during the period of contributing.

At retirement, you are allowed to take up to one-third of your retirement benefit in cash (the tax-free amount will depend on the tax laws at the time). At least two-thirds of your benefit MUST be used to provide you with a life-long monthly pension. This pension will be taxed in the same way as a salary is taxed.

So, your tax status will not change should you choose to move from the defined benefit (DB) fund to the defined contribution (DC) structure.

ENIG

MA

SOLU

TIO

NS

011

793

4084

caLL cEntrE:

tel number: 011 709 7492pax number: 8131 7492fax number: 011 709 7529

Email: info@eppf.eskom.co.zahttp://www.eppf.co.za

physical address: moorgate House Hampton park South 24 Georgian crescent Bryanston

postal address: private Bag 50, Bryanston 2021

In the event of any conflict between the information provided in this document and the official rules of the Fund, the provision

of the rules shall prevail.

DB Structure (Current) DC Structure (Proposed new Option)

Type of fund Pension fund Pension fund

Benefit structure Benefits are defined on a formula based on your annual pen-sionable salary and service.

Benefits are based on the cash value of your Member’s Share account.Member’s Share is made up as follows:All your contributions to your retirement savings, plus All your employers contributions to your retirement savings (less the cost of the death and disability benefits and adminis-tration cost), plusAny money transferred into the fund, plusThe investment returns (positive or negative) earned on all these amounts.

Member contributions 7.3% of pensionable salary(plus any additional voluntary contributions into a DC based cash scheme with individual accounts)

7.3% of pensionable salary (plus any additional voluntary contributions which go into the Member’s Share account)

Employer contributions 13.5% of pensionable salariesNo specific allocation to various benefitsAdministration expenses: no fixed allocation (no prescribed cap)

13.5% of pensionable salariesAllocated as follows:13.5%Less: 5% to 5.5% to death and disability benefits Less: a maximum of 0.75% for administration costs Net invested towards your retirement savings: 7,25% to 7.75%

Normal retirement age

Age 65 Age 65

Financial structure Rules provide that if benefits become unaffordable, benefits may be reduced or member contributions increased. Investment profits/losses allocated to central account.

Risk of affordability of benefits lies with the Member.Investment profits/losses allocated to Member’s Share.

Risk/Reward profile:

The Fund bears the risk – ultimately its members – although the effect may only emerge over a period of time. (Reduce future benefits and/or increase member contributions.)

Fund reserves decline – in the long run benefits may be reduced or member contributions increased. No direct effect on member’s benefit, formulae still apply.

The member bears the risk – the effect is more immediate as the cash value of Member’s Share follows the investment market returns.This means that you, the members, carry the investment risk – you receive the actual returns achieved by your invest-ment – whether positive or negative.

The risk that your Member’s Share could decrease when your investments don’t do well is yours. BUTThe rewards when your investments do well are also yours.

Benefit at Normal retirement age

Annual pension = 2.17% x average pensionable salary x pensionable serviceYour options:1/3rd cash lump sum2/3rd’s must be used for a pension

Pension paid from the Fund

Benefit = Full Member’s ShareYour options:1/3rd cash lump sum 2/3rd’s must be used for a pension

You can choose:Standard pension from the Fund ORPurchase a pension of choice from a registered insurer.

Withdrawal benefit

Cash benefit = Member’s minimum individual reserve (MIR) as set out by law.

Cash benefit = Full Member’s Share

Deferred benefit(resignation, dismissal or retrenchment)

Member may elect to leave their benefit in the fund – benefit can only be accessed when the member reaches retirement age from age 55 onwards and retires.

No deferred benefit

Ill-health or disability benefit

Pension based on a formula (based on potential service to normal retirement age

Insured benefit (with a registered insurance company) = a monthly salary until retirement then member will receive their full Member’s Share as for normal retirement.

Death in service benefit

Lump sum (based on whether or not you have dependants) plus a pension to dependants (based on the number of dependants)

Lump sum benefit based on your age at death Plus your full Member’s Share

CuRRENT DB or PROPOSED DC A closer look at the differences …

NOTE:

• Early retirement allowed

• Late retirement not allowed

NOTE: You will receive further communications on the specific details of the new DC death and disability benefit

structure.

NOTE:

• Early retirement allowed

• Late retirement not allowed

EPPF

ConTa

CT

DET

aIlS

6 PowerTalk | January 2009