Employees and trusted advisors need to start preparing for mandatory retirement preservation or risk operational challenges

Reforms around mandatory preservation of retirement benefits are moving fast. The National Treasury (in its 2014 Budget Update on Retirement Reforms, released 14 March 2014) confirmed that its latest proposal was being discussed at NEDLAC, and that proposals would be implemented following ‘final consultations’ .

 

"With the impending deadline, it is becoming even more imperative for the industry as a whole to be mindful of the changes and start to prepare for these – or risk facing unnecessary business challenges in the future,” says Anitha Giridhar, Associate Director of FIST at Deloitte.

 

In 2013, the proposal was that each worker would be permitted one withdrawal per preservation fund per year, the amount of which would be limited to 10% of the capital value of the retirement savings preserved, with a minimum value.

 

Unused withdrawals would be permitted to be carried over so that members would not feel the need to withdraw the maximum amount each year, to minimise potential financial strains in the future.

 

After stakeholder engagement, the proposal has been amended to include the following:

• A de minimis requirement has been introduced to remove the need for small sums to be preserved.

• The number of withdrawals will be limited to one withdrawal per taxpayer per year, rather than one withdrawal per preservation fund per year, to reduce the number of withdrawals.

• Under consideration is a review of the tax treatment of pre-retirement withdrawals to ensure fairness and to discourage withdrawals for frivolous reasons.

• Any withdrawals before retirement will serve to reduce the amount that can be paid by a pension fund in the form of a lump sum (i.e. one-third of the capital value if no prior withdrawals have been made) to minimise the erosion of retirement benefits by early access.

 

"While further clarity is required from the National Treasury and the Financial Services Board, it is likely that new preservation rules could possibly come into effect as early as 2015. This emphasises the extent to which retirement preservation has become a reform priority,” says Kaveer Beharee, Principal at Ubiquity Consulting.

 

While the industry awaits the National Treasury’s release of its set of draft regulations on default strategies, including requirements for funds to have default investment portfolios, default annuity products for members on retirement and default preservation rules for members on termination of membership before retirement.

 

While retirement preservation is a big step towards improving an individual’s quality of life during their pension years, the current proposals will bring about significant changes in the running of funds.

 

Moving forward (and ahead of further consultation with the National Treasury), employers, funds, providers and trade unions will have to consider the following:

 

• Preparing for benefit administrative challenges to cater for preservation changes

Considering funds and retirement service providers – especially benefit administrators – will require time to adapt to new regulation. The industry should possibly consider requesting that new regulation be staggered over a period, giving various stakeholders sufficient time to put these changes into effect.

 

• Driving down costs

Cost-efficient structures and transparency support reform objectives. Retirement service providers and boards of funds should understand how cost-efficient "compulsory preservation models” implemented in other countries are. Currently, a default opt-out model appears to be the favoured model for ensuring a smooth transition once a member leaves the fund to a preservation fund. This will possibly reduce the need for a member to acquire a solution on the retail market.

 

• Governance by the boards in implementing the new changes

In its current format, preservation proposals will require fund boards to acquire advisory services with respect to the discretionary rules that funds can apply to annual withdrawals. Current proposals limit annual withdrawals to a maximum of 10% of the capital value of the retirement savings preserved. In determining withdrawal rules, funds will have to ascertain the profile of fund members, member needs, efficient and effective communications with members and ongoing support to members with regard to withdrawals. These new rules will ideally also be revised in accordance with King III and PF130 provisions.

 

• Ensuring new regulations do not impede current operations

Boards of funds will have to ensure that the implementation of new rules and regulations will not affect the services provided by benefit administrators’ capabilities like benefit withdrawals. Funds can do this by having control audits like ISAE 3402 performed to ensure system integrity.

 

• Regulatory preparedness in dealing with changes arising from this legislation

Preparedness by the Financial Services Board to process large volumes of regulatory amendments resulting from the reforms to ensure timely and effective implementation by the various stakeholders.

 

"While we support mandatory retirement preservation and the consultative process by the National Treasury, retirement funds and service providers should start developing strategies and processes to ensure that new regulations do not lead to operational failures,” ends Giridhar.