The 50-year-old Pension Funds Act is today a hodge-podge of amendments, guidance notes and interpretations, long in need of consolidation. Reform has been under way several years already and is unlikely to be resolved before 2010.
The national treasury in 2006 released a discussion paper on retirement fund reform with wide-ranging proposals on all aspects of retirement savings. A second draft was published last year and these proposed changes are likely to radically change the way retirement funds are managed.
Leanne Dewey, Liberty Life legal services group executive, believes the initially proposed 2010 deadline for implementation is at risk and a ‘big bang” approach is unlikely.
‘It is more likely to be introduced in a phased manner. The overall challenge will be to minimise complexity — such as a whole new generation of retirees for each phase — and to ensure that unforeseen consequences are managed at each phase,” says Dewey.
South Africa is unique among comparable countries — and certainly among developed countries — in that it has no mandatory compulsion to save towards retirement. Providing adequate incentives to save, as well as disincentives to access savings prematurely, must therefore be an important part of any new retirement regime.
A key component in the paper is a proposed National Social Security Fund (NSSF) that aims to increase formal savings by low and irregular income earners. Savings is a difficult enough challenge at the top end where there is at least disposable income, but far more difficult at the bottom end.
Thankfully, the potential for a solution is being stimulated by current strong economic growth — more jobs are being created and, though they’re still not saving, at least compulsory-savings mechanisms become more viable.
The NSSF will provide certain minimum retirement and risk benefits to members, divided into three categories: basic retirement benefits, which will not permit lump sum payouts; death and disability benefits to survivors; and post-retirement healthcare.
Rajeev Keso, legal executive at Lekana Employee Benefits Solutions, outlines a future retirement fund scenario as a four-tiered one.
There will be a premier package (fourth tier) for those able to look after themselves, who will have access to flexible products. This includes the area of supplementary products such as retirement annuities (RAs). The proposal at the moment includes supplementary products possibly losing their tax deductibility on the basis that equity is achieved in the taxation of pension contributions and benefits across the spectrum of low to high-income earners.
‘We support government’s reform process, especially the endeavours to address gaps in the current retirement system as well as measures to protect people against poverty in their old age,” says Keso.
There will be a third tier of people earning more than R60 000 a year, which will be addressed with regulated and accredited portable products allowing employees to switch employers without affecting their pension scheme. It will be employee-dependent rather than employer-dependent, similar to an RA or an umbrella scheme. It will offer all the benefits of a group scheme, including low costs. It will have tax deductibility up to a certain threshold.
However, much remains to be decided in the area of products in this category, says Keso. For instance, the differences between pension and provident funds will disappear.
The second tier will be a universal fund for all employed people, with mandatory contributions to the NSSF, based on earnings up to R60 000. They will be compelled to save 15% (as has been mooted) of their income with tax incentives, though with a wage subsidy introduced by government.
The first tier will remain as it is now, being those people who depend of social grants and who are unemployed or causally employed.
The NSSF poses the unresolved question of how to capture the bulk of the population. It cannot be done through the tax system as many will be in the informal economy and beyond the scope of tax incentives. A co-contribution by government, accessible only at retirement, could be one option.
It will have to accommodate both regular and irregular contributions, and the administration will have to facilitate contributions as small as R50 a month. The costs of administration will therefore have to be subsidised in some manner.
For the R1,2-trillion asset management industry, despite the difficulties faced by the regulators, this is an unparalleled opportunity. With the introduction of compulsory savings and preservation of existing retirements savings, for the first time in decades the savings pool in South Africa will begin to increase. The per capita amounts may be small, but the opportunity will lie in growing those amounts over the years.
The other major problem facing the industry is the high costs associated with savings. Of the approximately 13 000 retirement funds in South Africa, about 85% have fewer than 100 members each, excluding them from the economies of scale.