Reform of the retirement fund industry

Over the last two decades, a number of countries have reformed their pension systems, but South Africa has very unique demographics and therefore will require a unique solution, specifically for South Africans in the lower income brackets and for those with irregular incomes.

There has been much debate around the plight of the poor and how future generations can be lifted out of the poverty trap, with significant focus on the role that retirement savings can play. As a consequence, Government started the Retirement Reform initiative a few years ago. A number of discussion papers have been released and a number of ideas have been tabled.

One of the proposals to address the low savings culture in South Africa is the possible introduction of compulsory contributions into a new National Social Security Fund.

Options explored

In the recent budget review, it was mentioned that Government’s current focus is on the design of a standard, basic retirement saving and income protection scheme that is affordable, simple and cost-effective and that focuses specifically on employees with low or irregular earnings.

It also stated that Government is considering allowing accredited private funds to operate alongside a statutory default arrangement, allowing existing provident and pension funds time to adapt to more stringent minimum standards. If this route is followed, the proposed pension reforms will probably have a much lower impact on the existing retirement industry than originally anticipated.

Umbrella funds: a solution?

If stricter minimum standards were implemented, it would probably make sense for many stand-alone private funds to move to umbrella funds. An umbrella fund is essentially a retirement savings vehicle catering for more than o¬ne employer group.

The larger umbrella funds already meet strict governance requirements, are very cost effective and offer protection benefits for employees such as death and disability cover.

There has already been considerable growth in umbrella funds in recent years as employers seek to transfer trusteeship responsibility to specialists in an increasingly legislated industry, while also attempting to reduce costs.

Preservation and saving

One of the key reasons for South Africans not having sufficient retirement savings is the fact that they do not preserve their retirement savings when they change jobs. Only six percent of South Africans can maintain their standard of living when they retire.

Government is viewing this issue as extremely serious, with some level of compulsory preservation likely to be included as part of the proposed retirement reforms.

There is no sense in delaying savings in anticipation of the new legislation. This is particularly true for people who currently do not have a retirement savings plan. Compound growth on savings is especially evident over longer periods of time, so the longer that South Africans remain invested in a retirement savings vehicle, the more money they will have when they retire.

The role of the broker

It is crucial that financial advisors encourage their clients to continue saving for retirement, while the reform unfolds. Financial advisors must also regularly consult with their clients to ensure that they are making sufficient provision for their retirement and other financial needs.

Ultimately, confidence in the South African financial sector is built on a foundation of trust. As service providers, financial advisors must be properly accredited to provide sound advice. Properly skilled and accredited financial advisors can play a key role in changing the savings culture in South Africa by highlighting the importance of retirement savings and the preservation of retirement savings.