Social Security Fund: the concerns

National Treasury's proposals on social security and retirement reform will have a massive impact on the retirement fund industry. FAnews asked the role players in the industry to share their main concerns.

Current thinking is that people will have to contribute 15% of any income up to R60 000 per annum to a national scheme and any savings over and above this figure would be saved in a private sector vehicle, explains Grant Pote, General Manager of Old Mutual's Retirement Fund Reform project. "Therefore, all future savings from the R60 000 and below would disappear from the private sector."

Private sector market severely limited

Kenny Meiring, Marketing strategist at Metropolitan EB agrees. "The implications are that some 80% of the people currently covered by the retirement fund industry will be removed from it. This will have major implications in terms staffing and costs at those companies that currently look after these employees."

Danie van Zyl, Actuary at Sanlam comments, "We believe that there is sufficient reason to engage government on the issue of allowing members, who belong to well-managed private funds, not to have to contribute to a mandatory scheme. If not, many funds could face losing up to 60% of the members, some even more."

Wayne van Rensburg of Glenrand MIB adds "This will effectively mean that a portion of the financial services industry will be eradicated if there is not an option for these members to remain on the funds as an alternative."

Opting out

In the UK there is provision for opting out of the national fund. Opting out does not preclude people from compulsory retirement saving, it simply means that they can choose a private sector vehicle for all their retirement savings.
"Consider the position of those individuals that earn, say R70 000 a year," says Miering. "The first R60 000 will go to SST and the remaining R10 000 should go towards funding a pension fund. The costs of administering this R10 000 could be prohibitively high and, when seen holistically, people could be worse off in terms of costs."

Who will administer the fund ?

Michael Blain, CEO of Centriq says, "The big question is whether the state can do this more efficiently than the private sector. Past experience suggests that governments are hard pressed to deliver efficient services."

"The biggest challenge is either creating the administrative capability to handle such a large fund, or utilising the services of existing private administrators," says Sanlam. "It is doubtful that the government has the capability, and a public-private partnership seems the logical solution. It also seems likely that the execution may be delayed beyond the initial deadline of 2010."

Glenrand MIB's van Rensburg says, "It has been proposed that SARS will collect the contributions or tax and that the government department responsible for the payments of grants would deal with the payment of benefits. This could be a reasonable solution as both government areas have proven their ability to deal with large volumes of transactions successfully up to a point."

Blain disagrees, "Whilst SARS is one of the most effective organs of state, the question should be raised whether the collector of revenue should be responsible for the national social security fund."

Who will invest the assets ?

Blain highlights another widespread concern, "Will the individual contributions to the national Social Security Fund will be administered and appropriately invested in an efficient and transparent manner, appropriate to the individual member's needs?"

Metropolitan's Meiring asks, "If the investment is done by the PIC, what share of the country's assets will the PIC be looking after ? What are the economic implications for South Africa if this happens ?"

Danie van Zyl, Actuary at Sanlam EB shares their concerns, asking, "Would obtaining the highest long-term investment return be the main objective for the fund or will there be a focus on other considerations, such as socially responsible investing? This could have a major impact."

Existing funds

"If an existing fund is well run with costs being kept below an agreed level, should the members who earn below R60 000 be taken out and placed into the government fund or will the fund be approved by the government and allowed to continue?" asks Meiring. "I suspect a lot of funds will disappear as their membership will be too small once the lower earners have been removed."

Blain highlights another concern in this area, "Will members of existing pension funds will be required to transfer a portion of their accumulated funds to the national fund ? In this event, the capacity of the FSB to administer these transfers would be a matter of concern, if one considers the current delays in Section 14 transfers, as would be the costs of actuarial valuations and certifications, not to mention possible adverse CGT implications."

Consequences for the consumers

"Will the proposed changes negatively impact on the disposable income of employed persons earning above the minimum threshold?" asks Blain. "Many employees have committed to long-term retirement savings strategies based on the current tax dispensation."

Sanlam's Vav Zyl agrees, "The proposed cap on the amount of retirement savings which are tax free could also be problematic if this cap is set too low. This could even impact on middle income earners, causing them to either pay more tax or save less, and not just the very rich as intended. Furthermore, there needs to be clarity on any cross-subsidies between high income earners and low income earners in the fund."

Benefits and beneficiaries

There is no clarity on the treatment of benefits that will accrue up to the date of the implementation of the national scheme, says van Rensburg. "One would hope that there will be no reduction of these benefits up to that point, due to a change in the tax treatment of the benefits. This does seem unlikely especially in light of the recent announcement on the change in tax treatment of retirement benefits from 1 October 2007."
Beneficiaries

van Rensburg also asks whether those South Africans not in formal employment will have access to the fund - as the proposal stands it deals only with those in formal employment. Blain adds, "Will wage subsidies be paid to employers of domestic workers if these workers are obliged to contribute to the national fund ?"