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Budget reaction - Employee Benefits

28 February 2013 Various

Budget speech commentary - Financial Intermediaries Association of Southern Africa

Employee benefits:

Pieter Cronjé, Chairman of the Employee Benefits Committee at the FIA, comments on Employee Benefit related announcements:

Tax deductibility of Contributions

The FIA supports the harmonisation of contributions towards different types of retirement funds and is comfortable with the overall caps and allowance for the rollover of non-deductable contributions. The FIA again wants to reiterate the danger of contribution caps per individual on defined benefit arrangements.

Change to Provident Funds

The FIA welcomes the protection of vested rights for provident fund members older than 55 and the retention of the ability to withdraw the capital value and growth thereon subsequent to implementation of the changes.

Means Test

The proposal to remove the means test with corresponding adjustments to the rebates is welcomed by the FIA.

Preservation

The FIA supports preservation but cautions that vested rights must be protected in order to prevent a situation where members start to withdraw their retirement benefits because they are afraid that access will be restricted at some future date.


 

Kobus Hanekom, head of strategy, governance and compliance, Sanlam Employee Benefits, delves into the impacts on the retirement fund industry and members of retirement funds

In the 2013 budget the Minister of Finance made a number of proposals that are relevant for the employee benefits industry.

Retirement reform proposals for further discussion
National Treasury makes the point that employers which take greater responsibility for the overall financial well-being of their workers, including through the design of their retirement funds, reap the rewards of a more stable and happier work force.

The policy proposals introduce defaults in retirement fund or benefit structure design in order to nudge, rather than force, individuals into making decisions which serve their long-term interests.

Taxation of retirement funds
From T-day (2015), employer contributions to retirement funds will become a fringe benefit in the hands of employees for tax purposes. Individuals will be able to receive an annual tax deduction on employer and employee contributions to a pension fund, provident fund or retirement annuity fund up to 27.5% of the greater of remuneration and taxable income (excluding retirement annuity or lump sum income). A ceiling of R350 000 will apply.

Observation: The threshold has been increased from R300 000 and the age distinction in respect of those under 45 years (22.5% and R250 000), referred to in the 2012 budget, has been discarded.

It is still unclear how this will affect defined benefit pension plans.

Fund Governance
The duties of trustees to act independently and free from conflicts of interest will be strengthened by elevating PF Circular 130, which deals with the governance of retirement funds, to a Directive. A draft will be published for consultation later this year.

The FSB will monitor trustee appointments and will help ensure that trustees meet ‘fit and proper’ requirements.

The current FSB Trustee Toolkit may be elevated into a basic, independent, compulsory and free training kit for Trustees.

The Minister will convene a trustee conference with a view to further strengthening the governance of retirement funds.

Preservation of withdrawal benefits
A number of preservation related measures will be introduced from P-day. No indication has been given as to when it might be.Full vested rights with respect to withdrawals from retirement funds will be protected. Amounts in retirement accounts at the date of implementation and growth on these, can be taken in cash, but only from a preservation fund, and will be subject to taxation based on the current principles.

From P-day, preservation funds will be used to manage and help contain cash withdrawal payments and payments resulting from divorces. Retirement funds will be compelled to identify a default preservation fund or fund section and transfer members’ balances into that fund (or another fund) when members withdraw. An amount limited to the greater of the state old-age grant (OAG) or 10% of their initial amount transferred, excluding any portion to which vested rights apply, can be withdrawn annually from the preservation fund. Unused amounts may be carried forward.

Annuitisation: Provident Funds
A number of annuitisation rules will also be introduced from P-day. The annuitisation requirements of provident funds and pension funds will be harmonised, in other words, from P-day members of provident funds will also be required to use two-thirds of the benefit to purchase a life annuity.

The new rules will only apply to new contributions made to provident funds after P-day, and growth on these contributions. Existing balances in provident funds and growth on these, will not be subject to annuitisation. Members of provident funds who are older than 55 years on the date of implementation will not be required to annuitise any of their balance at retirement, provided they remain in the same provident fund until they retire.

To lessen the impact on provident fund members, the means test for the old age grant will be phased out by 2016, and the de minimis requirement for annuitisation will be raised from R75 000 to R150 000.

Observation: The financial planning of members older than 55 years will not be interrupted by these new measures. When these measures are implemented the tax and benefit requirements of provident funds will be the same as for pension funds. Over time it will make sense to consolidate hybrid funds.

Annuitisation: Default arrangements
Trustees will be required to guide members through the retirement process, to identify a default retirement product in accordance with a prescribed set of principles, and to automatically shift members into that product when they retire, unless members request otherwise. The fund itself may provide the default product, or it may use an externally-provided product.

Living annuities will be eligible for selection as the default product, provided certain design tests on charges, defaults, investment choice and drawdown rates are met.

Observation: This is a significant departure from the position taken in the technical discussion paper entitled “Enabling a better income in retirement” in which a fundamental restructure of the annuities market was proposed, one of which was a compulsory guaranteed annuity in respect of the first R1.5 million.

Annuitisation: Member advice and support
Trustees that make commission-free financial advice available to members on retirement, paid for out of the fund on a salaried basis, will be given some legal protection in respect of the choice of the default.

Observation: In this budget addendum National Treasury for the first time makes the point that it “is the responsibility of trustees to guide members through the process of converting their defined contribution lump sum accumulation into an income”. An FSB directive will be issued to outline minimum requirements.

To increase competition, providers other than registered life offices will be allowed to sell living annuities.

Tax-preferred savings and investment accounts

Government intends to proceed with and introduce tax-preferred savings and investment accounts by 2015. All returns accrued within these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, to be increased regularly in line with inflation. The new accounts will coexist with the current tax-free interest income dispensation. The current interest exemption has been inflation-adjusted in this budget, possibly for the last time.

Broader reforms
Any biases in retirement fund rules which may discourage individuals from working past the retirement age of their funds will be identified and removed.

Observation: It appears that Treasury wishes to remove the retirement date from the rules of the fund so that it will be solely determined by the conditions of employment. This might create a couple of challenges in respect of risk benefits.

The formal consultation period on these proposals will close on 31st May 2013.

P-day: Preservation rules change for all retirement funds (expected to be on or after 2015)
T-day: Taxation rules and annuitisation requirement harmonised across all retirement funds (expected to be on or after 2015)

Not included in this budget
The Minister did not announce any inflationary adjustments to the tax free amounts upon withdrawal, retirement or death.

Personal income tax relief
Government proposed to reduce personal income tax by R7 billion to compensate partially for inflation. Most of the relief is provided to taxpayers in lower income brackets.

Income tax brackets will be adjusted to offset the effect of bracket creep. Income tax thresholds have been raised from R63 556 to R67 111 for below 65’s and from R99 056 to R104 611 for 65’s and older. For 75’s and older the threshold will increase from R110 889 to R117 111.

The primary rebate for individuals will be increased from R11 440 to R12 080 and the secondary rebate (for 65’s and older) from R6 390 to R6 750. A third rebate for those older than 75 has been increased to R2 250.

Medical scheme contributions
Monthly tax credits will be increased from R230 to R242 for the first two beneficiaries and from R154 to R162 for each additional beneficiary with effect from 1 March 2013.

Social grants
Social old age grants for the aged will increase by R60 to R1260 from 1 April 2013. For pensioners over age of 75 the old age grant will increase by a further R60 to R1280 per month.

Child grants will be increased from R280 to R290 per month in April 2013.

Cross-border remuneration and retirement savings
Cross-border pensions: South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds, which gives rise to a variety of tax issues. While certain limited rules have long been in place, these rules are largely ad hoc. With overall retirement reform now in effect, cross-border pension issues need to be fully reconsidered. The main issue is whether the tax focus should rely solely on the national source of the services provided or the national origin of the pension fund serving as the savings vehicle.

Disability or income protection policies
All non-retirement fund disability and income protection policies to conform to the overall tax paradigm of non-deductible contributions and exempt pay-outs.

Observation: This would be a very unpopular measure and will reduce the average employee’s take-home pay.

Hedge Funds
Hedge funds will in future fall under collective investment scheme legislation.

Sanlam Employee Benefits
Contributors:Anton Swanepoel, Danie van Zyl, Kobus Hanekom, Lance Hoffman, Awie de Swardt, Carien Veenstra, Freddy Mwabi



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