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Gordhan: We have policy certainty

Following postponement of compulsory annuitisation of new provident fund benefits.

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.



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Absolute certainty is one thing Mr. Gordhan, but manipulating legislation so that the government can grab Provident fund money which was not theirs to take before and needed new laws to do so is the same as dipping the greasy fingers in the cookie jar.

Buying Provident funds is usually voluntary so keep it that way. That money is not for the government to decide on. There is no tax benefit having a Provident fund, so keep the establishment pilferers away from that cash.

Oh for bleeps sake. Could you please at least be ACCURATE! about your claims???? The legislation doesn’t give government access to the cash AT ALL. You can still invest with which ever service provider you like.

All it does is say that instead of taking the full amount as a lump sum on payout, you take 1/3 and buy an annuity with the rest. You know, to let you have a monthly income for retirement. Which is the entire point of a retirement fund?

You have missed the point I think. The government should not be able to control where the money goes as they don’t give tax benefits on the premiums and the decision to buy a Provident fund is a voluntary decision by the employee. Provident funds and very different to Retirement Annuities or Pension funds.

Reply is not working properly Sweetpea. But you’re not making sense.
1) Government doesn’t influence who you have to have a provident fund with. Hell, they don’t even legislate who you have to buy your annuity from.
2) The WHOLE POINT of the adjustment is that with annuitisation provident funds will get the exact same tax benefits as retirement funds and pension funds.
3) Buying a retirement annuity fund is also a voluntary decision, what’s your point?
4) Only some employers require you to be a member of a provident fund or a pension fund. By the old laws you can only be a member of either if it was an employer run scheme. Why are you arguing that they are so different?
5) This is simply going to align the treatment for all types of funds – what exactly is it about that that upsets you so much?

I understand it full Carmen and thank you for the clear explanation. However, before legislating it should be explained clearly to those who are paying for it, and not just imposed on them. My guess is that you are in the insurance or an allied industry and make money from these sort of policies, so I understand where you are coming from too. I am already way past retirement. But decisions were made and legislation drawn up without proper consultation with all parties. I am sure that you know and understand that. That is what is wrong.

1. I never got any tax relief on the premiums I paid into the Provident fund.
2. I did put my proceeds 100% into an annuity.
3. The rules for Pension funds and Provident funds have been different for each fund up until now.
4. And yes, you can be a member of both Provident and Pension funds. Many people have both they are paying for. Up until now one had tax relief benefits and the other never did. I am sure you know that too.
5. No matter the reasons, if the government want to change the rules mid term of policies for so many people, they need to get the buy in of those who own the funds, those people are the policy holders. The government never got their buy in at all. It is not a case of just deciding to be big brother and preserving other peoples money. Rules applicable to existing policies, some of which have run for decades are being changed without consulting those whose money it is. You may like that idea Carmen, but for the most part nobody else does.
6. I have no issues with aligning all retirement funds with similar rules, I just expect to be in on the decision making if it is my money.
7. If you don’t understand that, I can say it in simpler terms.

In Pension Funds you get tax deductibility on your contributions to the fund.
In provident funds you do not. However, most employers have a salary sacrifice scheme of sorts. At retirement, in a provident fund, your contributions made to the provident fund are deducted before applying tax to your retirement benefit.

Essentially in Pension funds you get tax benefits today and less at retirement and in provident funds you get tax benefits at retirement and not today.
This differentiation between Pension and Provident funds is partially what the proposed tax harmonization relates to.

How do you propose that every single person gets a say in matters relating to reform proposals? I am sure that Treasury invites public comment when drafting proposals.

Sweetpea, for some Provident Funds are not optional. They are a condition of employment. Also, for many of us, we have full tax deductibility because the contributions reduce our our taxable income by being considered an employer contribution.

The changes from 1 March will have the effect of standardising things for those whose contributions are treated as a deduction – they will also be tax-deductible.

Hi Sweetpea I am actually replying to your later post but can’t seem to do it there, anyways just wanted to say I hear your point about the need for consultation and the need not to change the rules mid way for existing policies and provident fund members and that’s valid. However I don’t know if you are aware of the vested rights protection and the increase in the new deminimus amount to R247,500? Put simply government has been careful not to change rules retrospectively or for existing money, in other words any money already in the system is not touched by the new rules at all. Even the new money is exempted up to R247,500 which means for most workers they will not see any changes for many years to come. The rules changes are basically meant to change things over the long term rather than suddenly or in the short term. Actually some provident fund members may actually see an increase in their net income in the short term because of the tax deductibility of contributions from the1st of March.

Very well said. I hope this gives more clarity to @sweetpea. Reading through his various comments, I get the impression that he bought a “provident fund” voluntarily. His use of the words “policy” and “premiums” seem to indicate this, as one usually hears the terms “fund” and “contributions” in connection with all retirement vehicles. He also says that he put 100% of the proceeds into an annuity. That raises the point as to what type of annuity – voluntary (where only the interest portion would be taxable or compulsory, where the whole lot would be taxable. @sweetpea, you can tell me to mind my own business, but I was in insurance and investment services the whole of my working life, and I have seen countless cases of endowments being sold as “provident funds” (to make them sound better) where something like an RA would have been better, but would have given the intermediary a somewhat lower commission. I am just trying to help here, though I realise it is all history now.

To add to Becks’ comment – those who are 55 plus on the date of the change will not be affected. All their future contributions will still fall under the old rules, so those closer to retirement will not have to change their plans.

Agree 100% on this aspect. But we need to get our people (young and not so young) to maintain proper long-term savings and not use it for unnecessary shrewd marketing driven consumerism – and here is where one is disappointed in the leadership of our Unions who often appear to fall into the same trap of short-termism vote greedy tactics. Dependency on government handouts is in all respects and for all involved just not a good strategy.

You are correct. Through the Unions and any other method that needs to be used and put in place , those who already have money in the Provident funds should be consulted as their expectations are according to the rules they were committed to originally. There is nothing wrong with getting buy in to get people to save more and look after their own future.

I would just like to add the point that it was never intended that benefits already accrued in a provident fund up to 29 February 2016 would be subject to “annuitisation”. It would only be in respect of contributions made on or after 1 March 2016 (now postponed to 2018 and possibly later). The published changes were quite clear about that as well as certain other exclusions. I think that Cosatu and others have failed to understand the changes in their entirety and have rushed into print prematurely. But I still think the whole idea of preservation as a pension will always be unacceptable to the unions and their members. The Nats tried it back in the early 70’s and had to backtrack very smartly. Nothing has changed – in general, people want access to their money to do with it whatever they wish. Pity but…

I have said it before and I will say it again – allow the provident fund holder to take most or all of their funds on retirement and do with it as they wish, however these people need to be flagged on a data base that they may never ever claim an old age pension from the state/tax payer. If they want to be frivolous with their life’s saving so be it, but, they need to know that after it has all gone there is a penalty. The state should not ever stoop to being a nanny state people need to be accountable for their decision and realise that poor decisions have severe consequences

Agree. Let them take the money and run.
BUT Govt is either unable or reluctant to bar them from drawing a social pension.
That is the crux of the matter!

What you have said is correct. The reluctance to bar people from drawing a social grant if they have wasted their money elsewhere costs votes. That is what it is about.

Part of the problem here is that the majority of provident fund members have a very low personal expectation of ever getting to retirement age. There seems to a growing concern that as they are unlikely to ever reach retirement age or enjoy a lengthy retirement they will never enjoy the full benefit of their accumulated provident fund savings. Given the AIDS epidemic, lack lustre performance of hospitals, high levels of
crime and poverty maybe this concern is warranted.

The real concern here is that a union can prevent the implantation of law by simply flexing its muscles. It seems the government is so weak and so beholden to voters that they throw their hands up in surrender every time part of their voting pool disagrees with them. No increase in tertiary education fees, no implantation of a sensible change to retirement funding. These voting blocks represent a big opportunity for manipulating government policy. There is nothing certain in any of this.

While i understand both sides of the argument (COSATU vs Treasury), what is criminal is indecision and lack of clarity.

According to Novondwe in the paper “South African Social Security and Retirement Reform: A long journey towards the redrafting of the new Pension Funds Act”:
The proposed social security and retirement reforms have their roots in the following processes:

— the 2002 Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa;
— the 2004 National Treasury Discussion Paper on Retirement Reform;4 and
research undertaken on behalf of the Forum of South African Directors Generals Social Sector Cluster task team on comprehensive social security.

On 23 March 2007 National Treasury released its long-awaited Second Discussion Paper on retirement reform. Significantly, this one was entitled Social Security and Retirement Reform,5 marking the shift from the relatively minor reform measures contemplated in the December 2004 Discussion Paper on Retirement Reform to the fundamental policy reform proposed now. This is the biggest reform of economic policy since 1994
COSATU is unclear about what they’re fighting for. Scrap preservation and annuitisation… why COSATU? What is wrong with it? What is the alternative? Do you really mean that you want a Compulsory Social Security System (CSSS)? If so, please explain what in your view is a CSSS. How will this benefit people? How does it differ from the present retirement system?
COSATU insists on wanting a CSSS PAPER… since 2002 they’ve wanted this paper. Don’t they have a draft after all these years? Cant they articulate what this CSSS they envision entails??????? In its absence they argue illogically and cause detriment to people.

Treasury on the other hand… You too have known since 2002 from the Retirement Fund Reform Proposals that a CSSS is wanted. Why have you ignored this for so long? Is it too complex for you to comprehend and/or rationalize?

While these two groups haggle with ignorance and irresponsibility, people are affected. What this means for people saving for retirement is best explained with an example.:
Consider 4 people who can each earn a return of 15% per year. They save R1000 per month for 40, 30, 20 and 10 years respectively. Their values at retirement are:
— 40 year save: R31 million
— 30 year saver: R6.9 million
— 20 year saver: R1.4 million
— 10 year saver: R275 thousand

COSATU, who benefits? Treasury, your inability to Act is to who’s detriment?
In the meantime, our top man is still busy trying to explain the cost of a fire pool!

DeBono thanks for your rather informative contribution. The one thing I have been trying to figure out over the last two days is the logic and where we are going with the postponement of compulsory annuitisation bit just for 2 years and your input might have shaded some light for me.
Anyone who understands vested rights and the new de minimus knows already that the 2 year postponement changes nothing for anyone in the short term especially union workers in subsistence unless it’s obviously with the goal of using the period for meanfully consultation as you calling for and deciding once and for all whether we going to scrape the compulsory annuitisation of provident funds and keep things as they are or rather agree or disagree with some sort of final resolution process on how the whole social security and retirement industry works or rather should work and compliment each other.
In the whole process honest and serious leadership with less political posturing from both sides will be required. I feel you have more insights around social security reforms and would be keen to tap into your thoughts and knowledge on that topic, as this is ultimately the crux of the matter and Cosatu’s real issue that government has to take leadership and resolve going forward.

Hi Becks

Most readers of MoneyWeb are not union members and thus have a different view of pension funds and union objectives. We need to understand COSATU’s perspective:
– South africa has high unemployment, income inequalities, a narrow elite and a broad group of people living in poverty.
– Since the 1980s COSATU have strongly opposed mandatory Preservation. They argue that workers may go for long periods unemployed, they belong to households with one breadwinner, etc. This makes it difficult for their members to exercise financial discipline and/or be financially secure in times of need. Contrast this to higher income earners and households.
– COSATU wants a CSSS. SA has a retirement fund system with 2 pillars – State and Private sector. State provides the the State Old Age Pension (SOAP) grant of +/-R1300 p.m. and Private sector is made up of Employer sponsored retirement funds and Retirement Annuities. A gap exists between the SOAP and the private sector funds.
– The crux is how to increase the the SOAP? Note the SOAP is merely a grant not a pension. It, to my knowledge, has no methodical funding source.
– Mandatory preservation does nothing to increase SOAP – it serves to increase private sector retirement values.
– In neglecting increasing or amending SOAP (in favour of a state pension fund), COSATU will object to any proposed changes. They see this as a ‘piecemeal’ approach. Also, they believe that small changes (compulsory preservation) may weaken their ability to implement a CSSS
– COSATU is an admirer of the Brazil economy which improved social benefits and reduced poverty

I empathise with the noble fight being put up by the Unions. However, they must realise that if they are not part of the solution, they are part of the problem. From 2002 till now, 14 years have passed and Government and COSATU are still arguing about a CSSS. A 3rd of an ordinary person’s working lifespan has gone and nothing has happened.

Maybe its impossible to implement, or maybe they just don’t know how to do it?

Hi DeBono…

Thanks for your response, I definitely have been listening a bit more closely to Cosatu and why workers are so deeply upset with these seemly modest changes to many including myself.

I think I am increasingly appreciating Cosatu’s view that their members are simply not in a position to save any more that they are already doing in their provident funds, whilst many a elite in addition to their retirement funds have their TFSA, unit trusts Acc ecterera they can use for other equally important needs like their children’s education, putting a roof over the family etc.

Further not all provident fund members waste their savings when they cash out whether because of retrenchments or at retirement but quite often also use it for very important family needs that quite often come before and/or are equally important as provision for retirement which the reforms are suggesting should take precedence over all other needs and that’s where the fundamental disagreement is coming in.

My suggestion is a compromise where provident funds can be allowed to continue as they are but necessary checks are put in place to restrict them to qualifying low income earners to eliminate abuse both by higher income earners and in the absence of a better social security structure people somewhere in the middle who should be annuitising at least some of their savings to provide for their own retirement and relieving the pressure on the fiscus. I think there is middle ground to accommodate lower income earners whilst still moving ahead with the broader objectives of the retirement reforms albeit possibly with just pension funds and RAs, just my two cents.

I think what most people are also missing is that annuitisation is not compulsory if your pension fund is less than R350 000. So this will not apply to most COSATU members they are supposedly protecting.

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