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The role of legislation in retirement fund savings

08 November 2012 Rezco Investment Consulting

Retirement fund savings are at critically low levels in many countries around the world, resulting recently in the UK government announcing plans to automatically enrol millions of people into workplace pension funds. But a local expert says that while th

Windall Bekker, Partner at Rezco Investment Consulting, says that while many positive developments have been imported from changes in the UK, it is crucial that the South African government does not attempt to apply first-world principles to a third-world economic situation. “In theory, a compulsory retirement fund contribution scheme should work in South Africa. However, on a practical level there are a number of concerns. Firstly, unemployment in South Africa is extremely high by world standards and many people are either unemployed, or employed outside the formal sector, which means that they will not be affected nor will they benefit by a forced retirement fund scheme.”

Bekker notes that the generally low level of savings among South Africans, coupled with people earning extremely low incomes, and the fact that if a person is retrenched, there is no significant support from the state as occurs in some more developed nations, presents a number of challenges to any form of compulsory retirement saving. “Unfortunately, enforcing retirement savings in the work force, as has been implemented in the UK, will not work until the issue of unemployment has been addressed.”

He adds, however, that a forced retirement fund contribution scheme could work in South Africa in the future. “If members start building up their accumulated credits earlier in their working life and preserve these benefits when they change employment, they have a much bigger change of retiring with financial security. This in turn decreases the burden on future generations and the state: younger generations will no longer need to subsidise their parents’ retirement years, and the cost to the state will lessen with a decreased reliance on government pensions. However, it must be emphasised that serious economic factors need to be addressed before an optimal situation exists for the enforcement of retirement savings schemes.”

He says this is also true of the National Treasury’s recently released technical discussion papers on Retirement Reform. “Again, the proposals are an excellent initiative but there is an apparent dislocation between the theory and the country’s actual unemployment levels. However, we do believe that the initiative to simplify products and make them more transparent is an excellent starting point, as is the reference to the inappropriate use of guaranteed retirement products.”

One issue that is of concern, says Bekker, is the implementation of the National State Saving Scheme. “We are not certain who will manage this pool of assets and what the mandate will be. If we then overlay the recent Treasury statements on prescribed investing, we see the potential to invest the money in a sub-optimal way that would potentially not be in the retirement fund members’ best interests. In light of mismanagement in many state-owned entities, we are concerned about the state’s ability to manage this pool of assets if the government chose to legislate where retirement fund contributions need to be invested.”

Bekker continues, “We have also seen much discussion about the viability of forcing people to preserve their employer-related retirement savings and investments when leaving an employer. Again, if people are existing at very low income levels, then forcing them to fully preserve their retirement savings in the event of resignation or, worse, retrenchment, is something that needs to be thought through very carefully.”

“If South Africa continues to work on those basic economic issues of employment and income levels, and the government resists the temptation to dictate where retirement funds invest members’ contributions, the retirement fund industry could eventually lend its support to viable legislated proposals,” he concludes.

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