David Le Page
No matter how long you’ve been laying the groundwork for your retirement, there’s always a risk that the government will charge in and deliberately or inadvertently stomp all over it. Fortunately, that’s unlikely to be the case with the budget for fiscal 2000. It does, however, introduce a number of measures which will affect investors and pensioners.
Importantly, Minister of Finance Trevor Manuel has announced that pension fund surpluses which companies choose to repatriate will be taxed at the corporate tax rate of 30%. This move follows in the wake of considerable – and acrimonious – dispute over how the nation’s pension fund surpluses should be handled.
Currently, there are no regulations specifically preventing employers from withdrawing surpluses from pension funds, threatening what most believe are benefits due only to employees.
Giselle Gould, executive director of the Institute of Retirement Funds, said she expected the industry would be relieved that the government is finally addressing the issue of pension fund surpluses. But she said the measures announced in the budget are inadequate and merely a first step.
There is an estimated R80-billion worth of surpluses tied up in the nation’s R600- billion worth of pension fund monies, a considerable amount of money which less scrupulous employers are dead keen to get their hands on.
The Financial Services Board’s appeal board recently allowed the Paarl Municipal Widows and Orphans Pension Fund to “repatriate” surplus assets to the employer on the fund’s liquidation, a controversial move which is considered by many to have made the need for clearer legislation on the subject even more pressing.
The issue remains the subject of heated debate between the board and the Congress of South African Trade Unions.
Gould said the institute was “very disappointed” with the rest of the budget, although grateful that employees will be able to save more, now that personal income taxes have reduced. But she said the government has failed to create the greater incentives needed to encourage savings, despite this being declared a national priority by President Thabo Mbeki in his recent speech opening Parliament.
However, there are other consolations for pensioners. The interest exemption has been increased from R2 000 to R3 000 for those under 65, and from R3 000 to R4 000 a year for those over 65.
What does all this mean to you? According to Gould, not a great deal, unless you happen to be on a defined benefits fund. Defined benefits funds hold most of the pension fund surpluses.
If you are in such a position, and are on the verge of retirement, watch that your employers don’t pull any fast ones. Any moves to withdraw pension fund monies should be based on consultation with employees and not undertaken unilaterally.
What about the difference in limits on offshore investments for unit trusts (20%) and pension funds (15%)? Are pension funds losing out while unit trusts get an unfair lead, as many pension industry officials argue?
Not according to Peter Worthington of investment bank JP Morgan.
Commenting on the difference in offshore investment ceilings allowed unit trust funds and pension funds, he said it probably came down to the fact that investors in unit trust funds usually have more of a choice about where they are putting their money, and the degree to which it will be invested on a speculative basis.
He said all capital controls are likely to be lifted over the next four years. Then the difference between the treatment of unit trusts, pension funds and insurers will come down to Financial Services Board guidelines.
He commented that although South Africans tend traditionally to believe offshore investments are superior, that was not the case in 1999, nor is it likely to be this year.