Government’s concern around South Africans’ savings
During the 2012 Budget speech the Minister of Finance announced that a focus would be on promoting household savings and reforming the retirement industry. Most South Africans do not save for retirement and only half of the country’s workers belong to a retirement fund.
Retirement savings are the single largest source of income after retirement, for the average worker. Unfortunately the largest percentage of workers leaving employment take their retirement savings in cash! “Cashing in” impacts majorly on retirement savings, which usually results in chronic poverty and increased reliance on others (including the State).
A technical discussion paper – “Preservation, portability and governance for retirement funds” – was released by National Treasury on 21 September 2012 for public comment. This paper proposes various options to increase preservation of retirement savings and protect retirement savings from misuse, due to lack of foresight and long term planning when members leave employers prior to retirement. Some of the topics are discussed in the rest of this document.
How to address “cashing in” (before retirement) from a retirement fund
Preservation in the context of this document is the safe guarding of retirement savings when individuals leave an employer, until retirement.
a) Increasing preservation:
Mandatory preservation could be implemented. This will lessen the impact of workers viewing their retirement savings as a short to medium term saving. It is impor tant to note that vested rights on existing savings of workers will always be protected.
b) Options for increasing preservation:
It is proposed that full protection be granted for accrued or vested rights (benefits), i.e. existing savings. The discussion paper makes reference to a number of preservation variations, from taking cash (resulting in increased tax payable) to partial withdrawal (one third of the benefit), as well as monthly income payable from the fund. In the event of retrenchment, a softer approach to full preservation
c) Por tability and better defaults
Portability pertains to workers leaving an employer and transferring their retirement savings to their new employer’s retirement fund, or to leaving the benefit in the former employer’s fund or transferring to a preservation fund. Workers will likely have numerous jobs during their lifetime. A portable retirement savings benefit ties pensions to “individuals” instead of “jobs”.
It is proposed that every retirement fund establishes a preservation fund and that workers retirement savings are transferred automatically into the preservation fund on leaving employment, unless requested otherwise. All funds would be required to amend their rules to accept transfers from other funds. (It is however recognised that this might be complicated in defined benefit funds and that they should be excluded.)
d) Auto enrolment
A complementary option to consider will be to oblige formal employers to ensure that their employees join a retirement fund.
Enabling a better income at retirement
The biggest risks in retirement are longevity and investment returns. Guaranteed and living annuity pension products are designed to eliminate longevity risk. In provident funds, workers tend to spend their savings quickly (as they are not required to purchase an annuity/pension at retirement) and then subsequently rely on the state or family to suppor t them. It is suggested that the retirement conditions of a provident fund include the purchasing of an annuity / pension.
Retirement Fund Governance
In an increasingly complex financial world that demands very specific expertise of trustees, trustees may lack the competence or experience to make decisions to the best interest of members.
In an attempt to address governance, Pension Funds Circular 130 (PF 130) was issued. This Circular covers elements relevant to the sound operation, conduct, duties and obligations of boards of trustees extensively. The FBS also developed the Trustee Toolkit for the development of trustees. This voluntary training aid is structured in line with PF 130.
It has been suggested that PF130 as well as the Trustee Toolkit be legally enforced in order to be rigorously applied and complied with by boards of trustees.
Government is also considering making it a statutory requirement that trustees be “fit and proper” with relevant qualifications and expertise in the managing of retirement funds.
Important note: The above is a summary of the circulated discussion paper and its proposals for information purposes only. This in no way represents the view of Verso Financial Services (Pty) Ltd.
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