Retirement fund reform will affect us all. In this article Christo Terblanche shares some insights on the current proposals and the complicated debates taking place. In upcoming articles we plan to tackle some of the issues in more depth and, where appropriate, give you our views on them. We do not anticipate a speedy resolution to the process.

Retirement fund reform is a complex topic

Retirement fund reform refers to the way the retirement system in South Africa is being changed. This process began more than 10 years ago with a series of reviews of the tax system and is now firmly in the spotlight as stakeholders try to bed down the best way forward. Broadly speaking, the changes aim to increase participation of all South Africans in the financial system (through an increase in savings) and provide a social security net for the vulnerable and poor.

The range of objectives policymakers aim to meet is diverse, and includes:

• Poverty alleviation

• Increasing savings

• Limiting the impact on the state’s purse

• Increasing public confidence in the retirement fund system

• Capital market stability

• Labour market incentives

Consultative processes take time and there are divergent views on many issues

It has taken some time to get to the stage in the process where there is coordination (but not necessarily consensus views) between government departments on the various issues. There are also many other groups involved in the process with vested interests and differing views.

An overview of the current proposals and issues: Proposed pillar one — social security

The first proposed level (or pillar as they are also referred to) is about making sure there is a safety net for everyone. It is intended to be a public grant system to deal with poverty.

You will not have to contribute directly to this — the state will fund this out of tax revenues. It is proposed that everyone will get access to three basic social grants: an income grant, child support grant and old age pension.

There is some interplay between this level and the next, which covers compulsory retirement saving. Depending on the level of the state old age pension, it either increases or decreases the level of importance of the next pillar: the funded element.

Proposed pillar two — mandatory saving for retirement together with mandatory risk insurance (life and disability)

A lot of the debate is about the compulsory retirement savings level or pillar of the proposed new retirement system. This level is about establishing a 'mega' government fund called the National Social Security Fund (NSSF). Every employed person will have to contribute a percentage of his or her salary to this fund.

It is not completely clear how many people will be covered in each level. If the limit for mandatory contributions before individuals can opt out is R150 0000, how many people will qualify? Alexander Forbes estimates that only one million people in South Africa earn more than R150 000. This means that potentially only one million people will be investing in retirement products outside the mandatory fund space.

Proposed pillar three — voluntary savings

Pillar three is similar to the current retirement annuity fund world, where individuals may choose to contribute to and build up retirement savings in addition to any employer based retirement funding arrangement.

Benefits at retirement: compulsory pensions

Regarding what you get at retirement (the so called 'benefit' stage) — there is a big push towards requiring everyone to take out an annuity with no ability to withdraw a lump sum at retirement. The key question is whether one will be forced to buy a guaranteed annuity (a conventional pension) or whether one will be given the choice to invest in an investment-linked annuity (a living annuity). A conventional annuity requirement is likely to prejudice poorer people as the richer tend to live (and hence draw pensions) for longer than the poor.

The role of consistency in creating public confidence

Once design issues are resolved and the debates are over, a consistent approach is required to maintain and build public confidence in the retirement fund system over the long term. Some reassurance has been given to members of existing schemes, who were concerned about whether their existing savings would be transferred to the NSSF to their detriment.

In conclusion: the reforms will grow the savings pool…or will they?

Our role in the industry may change under these proposals as a larger number of individuals will be required to save for retirement. The potential growth in savings will be very good for the economy which is starved of domestic savings.

There is a caveat to this. One of the design issues currently being debated is how the NSSF scheme will be funded: should it be what is called 'pay as you go' (PAYG), or will it be a funded system? If it is PAYG, there is little if no increase in savings. We will address this debate in a future article.

While we are supportive of the broad objectives of retirement reform, we caution that the devil is likely to be in the detail.

On page two: a complete overview of the looming retirement fund reform as well as a point-by-point discussion of the current debates surrounding this issue...

Page: 1 of 2 - next

RSS

Digg

de.li.cious

facebook