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Prescribed assets would upset the rationale for pension funds

Which is why they are not a workable solution.
It is counterproductive to impose a tax on individual savers in the form of prescribed assets. Why offer a tax benefit with one hand, only to take it away with the other? Image: Nadine Hutton, Bloomberg

One of the main criticisms of prescribed assets is that forcing pension funds into these investments would hurt individual savers. Besides the market distortions that prescribed assets would create, everyone understands that they would deliver below market returns.

Under South Africa’s previous dalliance with prescribed assets, this impact was primarily felt by employers. This is because pension funds back then were run in a different way – they were all based on defined benefits.

This meant each member did not have their individual pot of money as they largely do today. Everyone was guaranteed a pension by their employer after retirement, which was a percentage of their final salary. The employer had to carry the risk of making sure that the pension fund had enough money to meet these payments. When prescribed assets lowered returns, employers simply had to put more money into their pension funds to ensure that there was enough there to pay out what was required.

If prescribed assets were introduced today, however, it is individual members within these funds who would face this problem.

If they had to accept lower returns, their prospects for being able to retire comfortably would be directly affected. In a country where it is already accepted that the vast majority of people cannot expect to retire on anything close to a reasonable percentage of their final salaries, this cannot just be brushed aside. There is no question that prescribed assets would only make this problem worse.

It’s not just about the money

There is a counterargument to this; that regardless of the financial benefit workers can expect to receive in retirement, many South Africans have little worth retiring to. The infrastructure in many parts of the country is so poor that whether people can ‘afford’ to retire or not, their standard of living is going to be low because their basic needs like sanitation, transport and healthcare are not being met.

According to this line of thinking, taking some of their pension money and using it to improve infrastructure in the areas where people may want to retire to is, therefore, perhaps of even greater benefit to them than the money itself.

This may appear to be an alluring argument, but it is fatally flawed. That is because the provision of infrastructure and the services that go along with it is government’s responsibility. Any money appropriated from anywhere to pay for these things is therefore a tax.

One of the fundamental elements of retirement savings vehicles in South Africa, however, is that the money invested within them attracts no tax.

Members are not taxed on their contributions, they are not taxed on any interest they earn within the fund, and there are no capital gains tax considerations. They only potentially pay tax on what they take out at the end.

This is arguably their most vital feature. Government has carefully constructed these vehicles using these tax incentives to encourage people to save.

It is therefore counterproductive to then impose a tax on individual savers in the form of prescribed assets. Why offer a tax benefit with one hand, only to take it away with the other? These two things would simply cancel each other out.

The tax incentives matter

This is not just a case of muddled thinking. It is a profoundly problematic proposition because if a tax is introduced into pension funds, this will discourage saving.

The argument in favour of prescribed assets assumes that the pot of money inside South Africa’s pension funds will always be there. However, there is no obligation on companies to offer a pension fund to their employees, and those who do not have a company pension fund are not obliged to save in a comparable vehicle.

Currently, both of these groups of people do so because they see the benefit in these products. But that does not mean they will continue to see things this way under any circumstances.

Bear in mind that money in any retirement vehicle is inaccessible until the member leaves employment or retires. People will reject having their money tied up in this way if they are not getting a significant benefit from it.

At the moment, that is what the tax incentives do. Overriding those with prescribed assets will upset the rationale for these products.

Of course, there is a certain amount of money that is already in pension funds that cannot be withdrawn, but that only makes the problem worse if prescribed assets does have the effect of chasing investors into other vehicles or from saving at all. That is because government would effectively be prejudicing those whose money is held in those pension funds and who can’t get it out. That is profoundly undemocratic.

Let’s have the right discussion

There is no question that South Africa has a legacy of unequal infrastructure and service provision that must be addressed with a great deal of urgency. There is also no question that private capital should also play a role in doing so.

We would, however, be far better off debating how we make that happen in a sustainable fashion rather than talking about prescribed assets. That is not a workable solution and will ultimately create more problems than it solves.

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South Africans should be actively discouraged to save anything in South Africa.

SA has a government of thieves that actively steal their money so why should they be trusted. Has anybody noticed that they have a socialist agenda and they take from the have’s and give to the have not’s.

This is just another way of doing it and essential for the thieves to stay in power.

Dont cry when it is too late. You have been warned.

Deciding whether to invest in a pension scheme is essentially a balance between the benefits (deferral of tax until post retirement – so the time value of money – together with, potentially a lower effective tax rate from the point of retirement) and the drawbacks (money typically locked up until retirement age, and any other regulatory issues, such as “prescribed investments”). There is no doubt in my mind that a prescribed asset requirement would powerfully tip the balance away from any incentive to lock up cash in the retirement savings sector. Basically, nobody who can afford to save for their retirement would trust the ANC not to squander their assets, confiscate them or otherwise impoverish them in their hour of need.

Sometimes it is however not a choice. If your employer runs a pension scheme you are typically expected to contribute. Typically most people do not have a problem with that, as you point out it is a very tax efficient way to save.

Pension schemes will become a much less attractive benefit for employees, which could lead to employers dropping pension schemes alltogether and leaving retirement planning in the hands of employees.

That in turn will lead to one central government pension fund, with enforced deductions from paychecks, the national insurance discussion that was going on a while ago. Comrades will then control both sides of the equation – collecting your savings and spending it, with loads of opportunity to siphon off cash in between.

Of course Patrick and the rest of the Rainbow club will tell us all will be fine and we should stop being negative.

Good article.

Rational arguments do not hold much sway with a populist, corrupt government. It is a mistake to think that prescribed assets would be used for productive assets. In all likelihood they would fund the salary commitments of SOEs and government departments. An investment case for the retail sector?

If the Govt does proceed with prescribed assets, they will most likely start at a level that doesn’t affect people too much so as not to cause immediate panic. They will however increase the rate as their needs, greed and incompetence increase. This is where the big problem lies – the old boiling frog analogy here again. If they start, pensioners and retirement savers are doomed, it’s just a matter of how fast it happens.

I believe this is exactly what they have in mind with the new expat tax. First mil is exempt now, in a year or two 500k exempt and then nothing exempt soon after.

The way to get your money out would be to resign from employment. isn’t that what people were doing when there was a threat that provident fund rules were going to change so that you could not draw the whole amount on retirement. Of course there is an adverse tax consequence if you do resign to get your pension.

End of comments.





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