Preservation, a double-edged sword

As a result of this poor preservation track record many South Africans do not have sufficient savings to provide an adequate income during retirement. It is hoped that South Africa’s proposed retirement reform will overcome the various challenges identified within the current savings landscape. The reform will affect both the income we receive during retirement and how we save for it.

Gordhan believes that a partnership between government and the private sector is critical for South Africa to effectively address an impending retirement crisis. The big question is whether there is place for both sectors within the proposed reform? And whether the financial services industry has a role to play going forward?

The recommendations made by the 2000 Taylor commission are central to the proposed reform. The three pillars detailed in this commission are Social Assistance, Social Insurance and Voluntary Insurance.

The first pillar, Social Assistance, is a non-contributory tax-funded vehicle aimed at alleviating poverty. The second pillar, Social Insurance, hinges on the creation of a National Social Savings Fund. All employees earning between a proposed income floor and income ceiling will make mandatory contributions into this Fund.

This Fund will function as a defined benefit (DB) scheme, which would look to guarantee a minimum income rate of 40% of a person’s final salary. The tax benefits of current retirement savings schemes will be adjusted to allow tax relief for mandatory pillar two contributions. The Voluntary Insurance pillar will function in line with the current market as a defined contribution arrangement.

In principle, the three pillars will look to overcome the challenges identified within the current retirement savings regime. But in practice there are many questions around how pillar two will be implemented – and what its subsequent effect will be on the financial services industry.

The proposed reform calls for a single provider of the National Social Savings Fund (proposed in pillar two). It has been confirmed that this Fund would most likely be a government institution. The proposed income floor and income ceiling rates defining this pillar will swallow between 50% and 75% of existing pension contributors. This leaves only a small portion of people with the financial capacity to make voluntary contributions to the third pillar. Could it be that the next retirement battle will be for the preservation of financial services institutions?

Further complicating the Voluntary Savings pillar is the large portion of tax relief that will typically be "shifted” to pillar two, removing much of the savings incentive from those with the financial means to save voluntarily.

Although the reform intends to eradicate poverty, it is possible that its implementation will threaten the viability of many private sector firms. As financial services institutions consolidate to survive, it is suspected that there will be a knock-on effect on unemployment countrywide.

The issue of a single provider is problematic as it destroys a once competitive environment. Competition ensures accountability. In an environment devoid of competition, what ensures accountability and more importantly transparency?. Would a single government-controlled institution properly safeguard the savings of hard working South Africans?

The industry has its work cut out to ensure that all hard working South Africans benefit from their retirement savings. Once the consolidated retirement reform document is approved by Cabinet, industry stakeholders should look to play an active part in the consultation process.

The response formulated by industry should focus on how to provide retirement benefits that are affordable, efficient and equitable. All in all, the reform model should ensure that social obligations are met without increasing unemployment.

By ensuring that the current financial services industry emerges from the process unscathed, we will guarantee a competitive retirement funding environment complete with accountability and transparency.