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Creative ideas for retirement funds in 2513

01 October 2013 John Williams, GCI Wealth Group

The modern pension fund system in our country can probably trace its roots back to the industrial revolution of the 1700s in Great Britain where various methods of paying retired and disabled staff a regular income, were introduced. It is recorded in the writings of Samuel Pepys, the famous English diarist, how his navy pay had a portion deducted to pay a pension to his predecessor and how he was sad when his salary increased following the death of his forbear. As the years passed, and retirement funding systems became more sophisticated, it eventually became apparent that legislation was required to police and govern pension fund administration.

In South Africa, the Pension Fund Act No 24 of 1956 became the predominant legislation governing the retirement funding industry. Today South Africa can boast of a well-developed, world class, retirement funding industry.

The problem is that a vast portion of our population still remains outside of the formal retirement funding arrangements. The solution to this problem probably lies in the hands of politically astute and motivated thinkers/philosophers, but the retirement funding industry may be able to offer assistance by creating new and practical methods of funding retirement incomes. This means not just producing revolutionary new products, but introducing new concepts. At present we may feel we have developed the industry to its ultimate state, but if we could project ourselves forward, say by 500 years to 2513, what would the industry look like?

A glimpse into the future

To produce a comprehensive treatise on brand new original retirement concepts may require much explanation, but we can at least get the creative ball rolling by suggesting a few novel ideas.

The fact that so many people remain outside of formal retirement vehicles indicates a problem of affordability. When we can see millions of Rands finding their way into the National Lotto pot, it indicates that enough money is probably available to adequately fund a new National Pension Fund. Maybe pension funds need to embrace the stimulus that attracts lotto monies.

Prepare yourself for the long haul

Currently, the South African State Pension Fund pays out to about 16 million citizens around R1 260 per month, depending on certain criteria. Apparently for some 800 000 people this is their sole source of income, which is a pretty flimsy financial life jacket. No wonder such benefits are often referred to as social grants.

Creative ideas

The following ideas are primarily aimed at a new state pension scheme in 2513, but some ideas could easily be applied to private schemes as well:
• Retirement age will be 70 or even 75.
• The retirement benefit will be a nominated livable percentage of the fund value amount.
• The funding concept will be a money purchase/living annuity arrangement.
• Every registered citizen will automatically become a Member at age 18.
• Funding will be via a special retirement tax plus there will be a compulsory purchase arrangement of retirement bonds, which will be similar to the Premium Bond scheme in the UK. A retirement funding tax similar to GST could also apply. Any unclaimed winnings from the bonds could be equally distributed among existing members. Otherwise winnings are added to the winning member’s Share of Fund,
• Pension income from the fund will be tax free.
• At the death of a member, their share of the fund will be allocated equally to remaining members, thus retaining valuable monies in the retirement pool. We suggest no tax at death of member.

There must now be many more creative ideas which could emerge. Let them be heard. In creative thinking, no judgment should be made on the idea. Let the ideas flow and judgment can happen later.
Quick Polls

QUESTION

What do you consider the most significant challenge in implementing the Two-Pot Retirement System?

ANSWER

Coping with new, unfinalised legislation, leading to uncertainty in implementation
Adapting to brand new claim types, requiring the development of digital, member-initiated claims capabilities
Addressing member education and awareness to correct misconceptions and ensure understanding of the system, including tax implications
All of the above
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