South Africans are notoriously bad at saving for their retirement – interventions may be required, writes Chantelle Benjamin.
Retirement costs could actually be much higher than the treasury's original estimate, making reform of the sector even more important for a government wishing to encourage saving, an official said.
The treasury's July 11 2013 technical paper, Charges in South African Retirement Funds, estimated that such charges are as high as 3.5% a year, when they could be closer to about 0.5% a year. This is identified as a significant deterrent to people choosing to invest in retirement funds and is seen as contributing to the country's worryingly poor savings culture.
"The level of charges in defined contribution retirement systems is an international concern," it said at the time.
This week, Dr David McCarthy, a special adviser to the treasury, said: "South African charges may be worse than estimated [in 2013], since some implicit charges which come out of investment returns were not included in the analysis. With the right kind of reforms, we could get a lot better value for our retirement savings."
He said it was hard to draw up an accurate comparison because there were so many variables within funds, one of the reasons treasury is seeking to push for transparency in costs and greater similarity in fund design.
At the same time, he said, the treasury was aware that these changes affected millions of South Africans, "so should not be rushed and must be done properly".
The reality is that South Africa has little choice. As Finance Minister Pravin Gordhan made clear in his 2014 budget, the country has to develop a savings culture if it hopes to grow. More investment is also expected to help lower costs without having a major impact on the retirement industry.
Kobus Hanekom, the head of strategy governance and compliance at Simeka Consultants and Actuaries, said South Africans did not have a savings culture.
Treasury's policy interventions
"A worrying survey from the latest Sanlam Employee Benefits Benchmark survey is that employees begin looking for retirement savings advice on average only 11.2 years before retirement. If you leave savers to their own devices, they wait until it's a bit too late before they take corrective steps."
The issues identified by the treasury as hampering retirement savings were that contributions to pension funds were voluntary, there were too many funds in the market (about 3 000) and the fact that most workers choose to cash in their pension when resigning.
Worst of all, poor governance of the sector leads to low disclosure to members of charges and opens the way for questions about the incentives offered to financial intermediaries, including advisers.
Following the paper's release, there were a number of submissions from stakeholders, most of whom agreed that there was a need for improvement, but raised concern about what impact the treasury's policy interventions would have on the sector, according to the March 2014 reform paper, Budget update on retirement reforms. One of the most heated debates was over passive versus active investment.
The treasury has long expressed concern at the charges levied by retirement annuity funds and umbrella funds, saying that buying into a fund that automatically tracks the performance of an index such as the JSE Top 40 (known as a passive fund) offers equal returns to that of an investment analyst or adviser.
McCarthy said the treasury had noted the recent increase in the number of companies offering passive investment options in the market.
'Commercial umbrella funds'
Measures proposed by the 2014 budget include: making retirement saving compulsory for all formally employed South Africans in a bid to include the six million workers currently not members of retirement funds; simplifying products and making them portable between providers; and improving fund disclosure.
For obvious reasons, the treasury wants to see an improvement in the preservation of pension funds and a standard manner of expressing fund charges so that they can be compared. "This will prevent certain funds, like commercial umbrella funds, from downplaying significant portions of charges such as investment management fees, which may seem small to consumers, but over a long period have a significant impact on members," said McCarthy.
Concurrent with the 2014 reform paper, the Pension Fund Act was amended to strengthen the governance of retirement funds by allowing the registrar to impose requirements such that trustees be trained, and to clarify their fiduciary duty to members and to the fund itself.
It also criminalised non-contribution to pension funds by employers who had deducted contributions from their employees' pay checks.
The registrar of pension funds has been empowered to impose new standards for the governance of retirement funds and is expected to do so by notice in the near future.
Two short-term reforms are being introduced, the first is a retail distribution review, to be released by the Financial Services Board in May 2014, which plans to replace upfront sales commissions on insurance policies with transparent and negotiable fees.
The second is the introduction of a mandatory default investment portfolio option.
Craig Aitchison, the general manager of corporate customer solutions at Old Mutual, has hailed the default preservation proposal as an important inclusion as it protects the vulnerable. Draft regulations on these default reforms are expected to be released shortly. "Currently, when a member exits their current employer, cash withdrawal is the unintended default [because they are not aware of the preservation fund offering].
"The findings of the 2013 Old Mutual Retirement Monitor showed that of the respondents who took cash on leaving in the past 15 years, 61% accessed their entire entitlement," he said. "The reforms will help promote saving."
Aitchison questioned whether encouraging portability of funds would be in the best interest of clients without offering proper advice. "For instance, exiting investments at the bottom of a performance cycle and entering at the top could destroy value in the long run. We therefore encourage clients to seek advice to avoid value destruction."
The treasury is looking at a number of ways to encourage savings, including increasing the tax-free threshold for lump sums that can be removed from retirement funds at retirement from R315 000 to R500 000.
It is also changing the rules relating to RSA Retail Bonds later this year in a bid to attract more investors. In the past, investment could occur only as a lump sum of at least R1 000.
A timetable has been set for reports, which deal with the reforms discussed, to be completed. Late this year, the treasury expects to release a policy report on extending retirement system coverage and next year, it will release draft regulations on charge disclosures for retirement funds, draft amendments to the Income Tax Act and Pension Funds Act to allow workers to access retirement savings before retirement, but limiting it to 10% of capital value.