Improving savings a priority for South Africa, even in our harsh economic climate
While changes in tax and retirement laws have significantly impacted the planning and structuring of retirement, growing a culture of saving is still at the centre of all measures to provide for retirement.
With South Africa’s poor savings record it is a big challenge for the long-term savings industry and the government to encourage the development of a savings culture across the nation. This is especially with the economy struggling and significant outflows from pension funds due to retrenchments, says Natalie Phillips, head of SA Institutional at Investec Asset Management.
“Identifying ways to improve savings outcomes is a priority for us all,” says Phillips. At the same time, however, she acknowledges the constraints imposed by the economic environment of relatively high inflation, high interest rates and very sluggish economic growth.
“It is positive that government has stepped in through retirement and tax reforms to encourage people to think more carefully about saving for their retirement, make certain that industry participants behave responsibly by ensuring there is greater transparency, and make sure the person saving understands the investment product and the costs involved,” says Phillips.
“Government is also ensuring a more responsible approach to the default option by encouraging the appointment of a retirement funds counsellor, who is able to explain to members their alternatives when they decide to retire.
“Secondly, the default regulations do give the option of considering a passive solution at the same time as understanding the risks and options that are available to them.”
Phillips says the regulatory environment is encouraging more transparency and responsible behaviour while levelling the playing fields among the various service providers, whether it’s the asset manager, actuary, or administrator.
She says another positive from the new regulatory environment is that up to 50% of the trustees of a retirement fund can be employee representatives. Employees have been given greater ownership in terms of electing representatives to act on their behalf — but this also requires a great deal more training in investments and investment administration, so that those members who are on trustee boards have full knowledge when making decisions on behalf of the fund.
However, while there are many positives resulting from retirement reform, Phillips says a lot of work remains to be done to build an appropriate, outcomes-based attitude to saving.
Education is crucial, so that pension fund members understand the risk profile strategies in which they have invested and the implications for their pension outcomes.
Phillips contends that what is needed is a collaborative approach to education by government, the asset management industry, investment industry, unions, and pension funds, because ultimately all parties want the individual to be in a position to retire with dignity.
In addition, a generic strategy may not be aligned to the outcomes people are after and the risks they are willing to take on. A life-staging strategy, for example, may not deliver sufficient growth as investments shift, over time, into more conservative asset classes.
Phillips adds that it is also imperative for trustee boards to ensure that they have a proper governance structure in place. “A professional trustee board, with a number of independent representatives who have proven industry skills, can add value where specialist skills are required for certain decision making.”
This is especially important in a defined contribution environment, she points out, given that funds have up to half of the trustee board comprising member representatives who don’t necessarily have investment, actuarial or administration skills, and who are therefore not necessarily as well equipped to make effective decisions relating to their retirement funds.
“Also, high turnover on trustee boards can delay decision-making on important strategic matters, which can result in a significant opportunity cost for a fund and ultimately, its members.”
Phillips says the appointment of independent, specialist investment advisors and administrators who follow global, best-of-breed practice, can also allow for more informed and balanced outcomes.
PAGE FOUR SECOND STORY — Romeo Msipha pic
Knowledge key to successful retirement planning
While the hype surrounding the tax laws changes implemented on March 1 2016 may have subsided, the fact remains there are now measures in place to assist and encourage individuals to save more for retirement.
According to Romeo Msipha, senior consultant at Old Mutual Corporate Consultants, retirement fund members need to take responsibility and educate themselves about these new laws in order to maximise retirement savings.
He said that one of the main benefits of these amendments is that members of company retirement funds can now contribute more into their fund each month, which can significantly boost their retirement savings.
Msipha provided five reasons why members should use their retirement fund to boost their savings and ensure a comfortable retirement.
- 1.It’s tax efficient: The new tax laws mean payments into a fund are tax deductible up to significantly increased limits (27.5%); contributions that aren’t deducted from tax can be used to reduce the amount of tax on the lump sum at retirement, and even on the pension income.
- 2.The growth on retirement investments is tax free: individuals who invest their savings outside of retirement funds or tax-free savings vehicles are subject to a number of different taxes on the growth of the investments; the investments in a retirement fund are free of all of these taxes, which significantly boosts growth over the long term.
- 3.It’s cost effective: fund members pay lower investment and administration costs than they would if they tried to save the same amount outside of their fund.
- 4.There’s no estate duty on retirement investments (with the exception of undeducted contributions): broadly speaking, when an individual dies and their net estate is more than R3.5-million, their estate is taxed at 20% before the proceeds are paid to their heirs. Retirement fund savings are excluded from the individual’s estate and do not attract this tax.
- 5.Retirement fund savings can’t be touched by creditors: in the event that an individual is unable to meet their debt obligations or is declared insolvent, all their assets with the exception of their retirement fund savings and certain long-term policy benefits (as set out by s63 of the Long Term Insurance Act) can be attached by creditors.