The government has embarked on a full scale overhaul of the social security structure in South Africa, somewhat along the lines of that undertaken in other first world countries like the UK and Australia. It will only be those umbrella funds which secure for themselves the requisite accreditation, which will continue to thrive.
The perceived problems with the current social security system include the fact that, at the end of the day saving for retirement is voluntary, savings are not preserved when individuals change employment, there are high costs associated with long term savings and many believe there to be inequalities between provision for those who have been participating in retirement vehicles for many years and those who have not.
The main aims of reform are: reduction in poverty levels, ensuring an income in retirement, guaranteeing minimum benefit levels and consumer protection.
Five-pillar structure
In order to achieve these aims, the intention is to align the system with the World Bank's recommendation of a five-pillar structure.
The five pillars are likely to be:
Pillar Zero – the compulsory social old age pension with no means test, funded through general revenue.
Pillar One - A National Social Security Fund (NSSF) for earnings up to R75 000 per year with a compulsory 10 - 12% tax deductible contribution and a normal retirement age of between age 60 and 65.
Pillar Two - Compulsory contributions of 10 - 12% of income falling in the R75 000 to R700 000/R1 million per year band paid into approved retirement-funding arrangements. The authorities wish to see a drastic reduction in the number of funds in the industry (from the 16 000 existing funds down to 1 000). This implies that only very large existing funds will be apt to survive. The most likely funds to fall in this category will be retirement annuity funds and our trusty umbrella funds, each of which provides for large numbers of individuals.
Pillar Three – Additional voluntary contributions towards savings and insurance benefits.
Pillar Four – a community pillar.
Government, mainly National Treasury and the Department of Social Development, after considering input from the retirement and financial services industries, and other business, community and labour stakeholders, will ultimately decide on this new social security and retirement reform structure.
Place for umbrella funds
From this analysis it appears that the most likely home for umbrella funds in the future of retirement funding in South Africa will be in Pillar Two and possibly Pillar Three. It is unlikely that the government intends to destroy an entire industry, particularly one which is so lucrative to it, leading to the conclusion that in all probability umbrella funds under Pillar Two will indeed see the light of day.
Having said that, it will only be those umbrella funds which secure for themselves the requisite accreditation, which will continue to thrive. To gain accreditation these funds will need to have similar benefits to the NSSF, be operated within the principles of good governance and charge competitive rates. Should an umbrella fund meet these criteria, and given it is relatively large in terms of membership and asset value, it is very likely that it will be the primary method for employees earning between R75000 and R700 000 (or R1 million) per year to save for their retirement.
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