After more than two years of waiting, the second discussion paper on retirement fund reform was finally released on Friday, 23 February. Titled Social Security and Retirement Reform, the document further describes governments vision for a national social security system.
Government hopes to implement the system in 2010. It will provide basic retirement benefit, life cover and disability cover for all South Africans. The intention is to extend the cover provide by the scheme to include social healthcare insurance at a future date. There is a possibility that existing benefit systems including social grants, the Unemployment Insurance Fund, the Compensation Funds and the Road Accident Fund will be collectively administered.
According to Jonathan Dixon, National Treasury's chief director for financial sector policy "the social security fund is designed to provide a basic retirement benefit and risk benefit. For people above a certain income, their level will have to continue to contribute to a supplementary private pension scheme."
A three-tier system
The basic proposal contained in the discussion paper is as follows:
1.Mandatory participation in a national social security system
This participation will apply to all employed individuals up to a proposed threshold which could be as low as R60, 000 per annum. Low income individuals will not be negatively impacted by the contributions due to a wage subsidy, funded out of government coffers. Government will effectively 'pay' their social security contributions.
2.Additional mandatory participation in a private occupational or individual retirement fund for individuals with earnings above a certain threshold
Individuals earning more than the threshold amount will be required by law to contribute to a regulated, competitive private fund.
3.Supplementary voluntary savings
Individuals who feel the government social security pension will be inadequate to support their quality of life will have to take appropriate action to increase their retirement funding.
Clarity on the role of existing private companies
The private pension industry will continue to play a roll in the future of retirement funding in South Africa. The discussion document acknowledges that "ensuring and maintaining a strong, cost-effective and well regulated private pensions sector is a critical element of South Africa's overall retirement funding strategy."
Certain characteristics of the retirement industry were highlighted as areas of concern. First amongst these was the high cost of local retirement products relative to the rest of the world. Retirement annuities provided by the life industry were singled out in this regard.
Secondly, the fragmented nature of the private pensions industry was placed in the spotlight. There are more than 13,500 private pension funds operating in South Africa, with the vast majority of these having less than 100 members.
We can expect further regulation in an attempt to address the problems of high costs in the industry. The life industry might have to make further concessions- while some form of consolidation in the pension fund arena is possible. Legislation will also seek to stop individuals from surrendering their retirement funds, or cashing in their benefits when they change jobs.
Individual taxpayers will fund the system
Contributions to the social security system will be mandatory and collected by way of a payroll tax. This will require that all working citizens contribute between 13% and 18% of their after-tax salaries to the fund. No indication was given as to whether employers would be bound to contribute a portion of this amount.
Individual taxpayers will probably be slightly out of pocket when the system trials in 2010. The proposal is that any mandatory contributions to retirement funds (over and above the social security tax) will qualify for some form of tax relief.
The document also proposes limited concessions for voluntary retirement fund contributions. An upper limit for such relief will be established.
The second discussion paper on retirement reform gives a clear indication of where government is going- though it still fails to provide enough detail on the impact to individual savers and private pension funds. Further discussion papers and technical papers will be released during the course of 2007.
Editor's thoughts:
The reforms proposed in the second discussion paper are ambitious and far reaching. Will government be able to implement these plans given current administrative weaknesses? Send your comments to gareth@fanews.co.za
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