The national treasury announced further retirement reforms with provident funds and retirement annuities coming under the spotlight and mandatory preservation mooted.
From March 2012 all employees will be allowed to deduct up to 22,5% of their taxable income for contributions to retirement funds up to a maximum of R200 000. This is part of an on-going proposal to bring provident funds in line with pension funds and retirement annuities.
This effectively allows employees contributing to pension funds and retirement annuities to increase their tax-free savings significantly. Provident funds are funded by employer contributions with the industry norm around 20% but in local government can be as high as 33%.
Now employers’ contributions will be treated as fringe benefits encouraging the move to employee contributions, which will simplify the structure of salary packages.
The tax deduction will be levied against taxable income as opposed to pensionable income, which will further simplify the calculation and thus increase the portion of one’s salary that you can use for the tax calculation as it would include bonuses and fringe benefits such as a car allowance.
This could have an interesting knock-on effect for retirement annuities. Although self-employed people or people who do not participate in a company retirement fund may increase their retirement annuity contributions, it could do away with the benefit of retirement annuities as a retirement top.
One can currently invest up to 15% of non-pensionable income into a retirement annuity, but with the move to taxable income as well as the higher contributions, this addition may no longer be necessary if the company scheme provides for the higher deduction.
Treasury mulls retirement fund changes
The budget also recommended a proposal that the one-third lump sum withdrawal limit applicable to pension and retirement annuity funds should also apply to provident funds. The treasury said, however, that this will not apply retrospectively to members in existing provident fund structures.
A policy document issued by treasury, “A Safer Financial Sector to Serve South Africa Better”, suggests that the treasury is considering mandatory preservation of retirement funds. On average 52% of South Africans cash in their retirement funds when changing jobs and 90% take cash payments on retrenchment with only 2,4% of people preserving their retirement benefits from divorce settlements.
The treasury is concerned that the current default system makes it easier for people who are not going through financial hardship to withdraw their savings because the current system does not compel preservation of retirement savings. The document states that taxation clearly does not serve as a strong disincentive because people are willing to pay it and withdraw their savings and that “the introduction of mandatory preservation is therefore critical and national treasury plans to extensively consult all relevant stakeholders”.
Retirement annuities are also going to come under review. The treasury would like to see increased competition for annuities by reviewing the need for a collective investment scheme (CIS) to obtain a long-term insurance licence, which would reduce the cost of CIS living annuities. “Enabling collective investment scheme companies to offer living annuities without the need for a long-term insurance licence could open the market and foster competition.”
The treasury would also look into the fees charged by pension funds and would work with the industry to draft a code of ethics and address concerns about high fees. Pension funds need to improve their level of disclosure to clients because a lack of transparency prevents customers from being able to compare products across funds that results in excessive charges.
There would also be a review of fees and commissions on annuities as there are concerns that CIS companies are not subject to commission regulations and are permitted to charge an additional unregulated trail fee for ongoing advice to clients.
New rules for industry
In his budget address Finance Minister Pravin Gordhan announced that regulation of the financial industry would now be split between the South African Reserve Bank and the Financial Services Board (FSB).
This follows a so-called “twin-peaks” approach that will see the prudential aspects of financial services, such as solvency ratios, liquidity, capital adequacy and systemic risk, fall under the Reserve Bank, and market conduct, such as fair pricing, transparency and the interaction of the public with financial institutions, will be handled by the FSB.
Currently, prudential regulation of banks falls under the Registrar of Banks, which falls under national treasury and the insurance industry falls under the auspices of the FSB. The change will challenge both regulators, which will need to become more familiar with these sectors.
Banking Association head Cas Coovadia says the new structure makes sense, but the devil will be in the detail. “It is in principle a move in the right direction, but the Reserve Bank will have to gear up for prudential oversight of the entire financial industry. The FSB will have to improve its capacity and understand how the banking sector works.”
It is expected the move will assist to bring about many of the changes to the banking industry recommended by the Competition Commission’s inquiry.