Can you get by on R1140 per month? This is the amount South African citizens permanently resident in the country qualify for under the State Old Age Grant scheme, from 1 March 2011.
You can apply for the grant from age 60, provided your existing income from sources such as pensions or other assets does not exceed a certain minimum amount — the “means” test. The current grant is clearly insufficient to secure the quality of life envisaged in the country’s Constitution.
In an attempt to simultaneously improve retirement benefits and reduce the burden on public sector resources, government recently proposed far reaching retirement reforms to include the establishment of a National Social Security System (NSSS). The early discussion documents call for a mandatory contribution from both employer and employee, collected at payroll, pooled and then centrally administered.
“The retirement reform papers have been with us for some time and we await government’s latest thinking on the topic some time in the second quarter of 2011,” says David Gluckman, Managing Director of Umbrella Solutions at Sanlam Employee Benefits. The paper will clarify how the state retirement solution will be funded as well as how the existing private sector occupational and retirement funds will fit in. Paper or not, an NSSS is clearly some way off.
“The 2011 Budget suggests that government is aware that fundamental retirement reform is a very tricky process and could take many years to implement,” says Michael Prinsloo, Head: Employee Benefit Consulting Strategy at Alexander Forbes. “We also need to consider that government plans to introduce National Health Insurance (NHI) in a staggered manner over the next 14 years.”
A similar retirement solution timeline could result in the fund only being fully operational as late as 2025. Even then, beneficiaries will have to wait 35 years before it is fully funded. Early beneficiaries of the system will probably be disappointed. “It will definitely not be a good idea to rely entirely on the mooted NSSS to meet your retirement funding goals,” says Prinsloo.
“Assuming the solution is implemented tomorrow, our research has shown that a well structured and low-cost retirement fund requires a 15% salary contribution over 35 years to achieve a pension of above 75% of final salary.” He concludes the system is unlikely to address the nation’s retirement funding problems over the short-term.
Instead, its real value will stem from the ability to instil a culture of saving among ordinary South Africans. It is still too early to say how state and private sector retirement solutions will interact. “We still await clarity on this issue,” says Craig Aitchison, Managing Director of OMAC Actuaries and Consultants.
“If funds or members can opt out of NSSF into an employer-sponsored retirement fund or umbrella fund, the existing industry will work along- side the state-owned system.” He said future retirement regimes might include the uniform taxation of contributions to pension, provident and retirement annuity funds, with a cap on the amount of tax deduction an individual can enjoy.
We can also expect compulsory transformation, compulsory NSSS contributions and a steep decline in the number of retirement funds. One of the difficulties government faces is to prioritise projects given the country’s many pressing social needs.
Gluckman concludes: “Reform will be a long-term process and other issues such as healthcare could take priority. We expect it will be several years before we see a full scale retirement reform implementation.”