JOHANNESBURG – Finance minister Pravin Gordhan has insisted that most of the retirement industry has “absolute certainty” about the direction of policy reforms.
This follows after cabinet postponed a regulatory requirement that was due to be introduced on March 1 this year and that would have compelled provident fund members younger than 55 to annuitise two thirds of their pension at retirement insofar as these benefits were accumulated after March 1 and exceeded an amount of R247 500. The requirement, which may still be amended during a consultation process, has been postponed to March 1 2018.
Currently provident fund members can take their whole benefit as a cash lump sum at retirement. Members of pension funds and retirement annuities are already required to annuitise and won’t be affected by the delay.
Cosatu has been vocal in its opposition to the regulations and warned that it may withdraw its support for the governing party in the upcoming municipal elections if its demands weren’t met. The fact that the paper on Social Security Reform has not been released has also been a point of contention.
Answering a question during a conference call on Thursday, Gordhan said Treasury has a very strong history of taking time to revise policy papers repeatedly, releasing it to industry and interested parties and getting input before going through the parliamentary process – something very few countries do.
“The only element that we are changing here… is annuitisation and we are very aware of the fact that we need to give business certainty and that is why we have kept them in the loop,” he said.
The postponement is only applicable to compulsory annuitisation. All tax related measures, including the harmonised 27.5% tax deductions on contributions to pension funds, provident funds and retirement annuities will still be implemented on March 1 this year. Deductible contributions will be capped at R350 000 per annum.
According to data from the Financial Services Board, there are roughly 5.8 million provident fund members, 4.2 million pension fund members and 4.1 million retirement annuity members in South Africa. Some members belong to more than one of these vehicles.
Gordhan said there has been a lot of confusion amongst fund members following the signing of the Taxation Laws Amendment Act.
“We need to clarify that this has nothing to do with pension funds. It has nothing to do with government employees that belong to the Government Employees Pension Fund. So whether you are a teacher, a nurse or a civil servant, none of these provisions actually impact upon you at all.”
Gordhan said it was this confusion and the need for further clarity in the minds of people who will be affected that led Treasury to believe it was appropriate to postpone one element of the retirement reform framework, namely compulsory annuitisation.
Treasury has made a commitment to trade unions that the Social Security Paper will be released as soon as consultations between the Department of Social Development and National Treasury can be finalised and clarity will be provided in the “next week or two”.
“Why throw in the towel on a matter that is actually in the long-term interest of people? So we might well learn a few things about let’s call it the design of annuitisation,” Gordhan said.
Treasury appealed to labour constituents to work with them to change the design so that it could meet the requirements of specific categories of workers who have particular needs.
“In the longer term, savings are a very important part of both the sound financial future of families and the sound financial future of the country. So what we want is to use the two-year period to engage on what are the other concerns. How do we clarify some of the things that might have been confusing until now and ensure that if it is possible come up with a better design on annuitisation,” the minister said.
Cosatu said while it took note of the postponement, it wanted the aspects of preservation and annuitistion scrapped from the law and that it would intensify its efforts until it got a clear resolution on the matter.
Richard Carter, head of product development at Allan Gray, said the current round of regulatory changes did not tackle the most significant issue – compulsory preservation of retirement benefits when changing jobs. It was unfortunate that compulsory annuitisation, which was a small step in the broader reform process, has been postponed, which made it difficult for the process to gain momentum.
Carter said while technically there was policy certainty with regard to retirement reform, any indecision with any legislative changes could undermine confidence in South Africa’s ability to make tough decisions.
Dave Crawford, founder of Planning Retirement, said while the effect of the postponement of the rationalisation of pension and provident funds will be minimal in the short term, it will probably push up the costs of administration as administrators spent a lot of money gearing their systems up for the new dispensation.
While the introduction of the increased tax deduction of 27.5% will be good news for most taxpayers, the postponement is yet another distraction from the really awful pension statistics in South Africa, which haven’t really improved over the last four decades, despite great fund management, pension fund administration and an effort to professionalise the financial advice industry through various reforms and regulatory changes, he added.
To listen to the radio interview on the implications of the postponement with head of product development at Allan Gray, Richard Carter – please click here.