A careful scrutiny of Finance Minister Pravin Gordhan’s 2011/2012 budget speech reveals that much emphasis was placed on issues relating to long term sustainability of the country, with particular emphasis on job creation, social security, health care and retirement reform.
There is a concern though. The proposed R200 000 upper deduction-limit, in respect of retirement fund contributions, may have a severe and adverse effect on high-income earners. Specifically, it will limit those earning more than R888 000 per annum from utilising full 22, 5 percent of their salary as a tax deduction.
Furthermore, two documents that have a bearing on the retirement industry were touched upon during the budget speech. These are: the final version of the long-anticipated amendment to Regulation 28 of the Pension Funds Act, as well as a policy document aimed at changing the financial environment in South Africa.
Enhanced competition for provision of living annuities
Currently, living annuities can only be provided by long-term insurers and retirement funds. Regulation 28 proposes that the list of service providers that are allowed to provide these annuities be broadened to include collective investment schemes and the National Treasury’s retail savings bond scheme. This will have a positive impact as it will encourage competition and offer customers with more choices.
Financial Sector Policy
Government issued a policy document setting out proposals on the financial services sector. A series of legislative and regulatory changes will be introduced over the next three years with a view to shifting the financial sector towards a twin peak model for financial regulation. Accordingly, market conduct will fall under the Financial Services Board, and prudential regulation under the Reserve Bank.
One of the factors that the policy document addresses is the protection of retirement fund members. As part of the protection of the members, a number of suggestions are made. These include withdrawals; member and trustee education; enhancing choice through disclosure and transparency; and, managing costs through umbrella funds and alternative products.
The issue relating to withdrawals is critical. The current tax system on withdrawal benefits does not serve as a strong enough disincentive, since people are still willing to pay the tax to withdraw their savings. The introduction of mandatory preservation on withdrawal is therefore critical. Moreover, there is a need for an enhanced system of portability. Portability refers to an employee’s ability to maintain or transfer accumulated pension benefits either to a preservation fund, retirement annuity or a prospective employer‘s plan when changing employment. This would introduce additional competition in the industry and possibly lead to a reduction in costs.
There is also an uneven treatment of the various retirement saving products. Due to the lack of compulsory preservation for occupational pension funds, there are reported cases of individuals resigning from their employer just to gain access to their pensions. At the other end of the spectrum, individuals who make use of retirement annuity funds are barred from withdrawing any of their savings in the fund before the age of 55 years. In this regard, there seems to be a need to ensure consistent treatment of the various products if the goal is to preserve retirement savings and close loopholes in the system.
*Cobus Strydom is Head of Consulting: Absa Consultants and Actuaries