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Retirement Reform … alive and kicking?

01 November 2012 Daniel Acres, Prescient Life

Retirement reform has been on the agenda of the National Treasury for over a decade. Discussion papers in 2004 and 2007 were followed by a period of relative silence up to the 2012 Budget speech in which the Minister of Finance declared that “a series of discussion papers will be released this year on promoting household savings and reforming the retirement industry.”

The majority of these have been released and are open for public comment until middle and late November 2012.

The Reform Process

Traditionally, retirement reform has been discussed alongside a potential National Social Security Fund (NSSF), which appears to have become bogged down in red tape.

The 2012 papers have been positioned as discussions around reforming the current retirement fund industry while the broader process of national social security reform is underway. Proposals from the 2012 review are likely to be adopted in the medium term and will be implemented independently of any proposed NSSF.

The next steps are to receive public comment and engage with stakeholders, after which a series of draft proposals will be published. These are also likely to be open to public comment before translation into draft legislation and commencement of the parliamentary process.

The "Strengthening Retirement Savings” paper provides an overview of the key issues, including reducing retirement fund costs, reforming the annuities market, encouraging preservation and portability of accumulated savings between funds, harmonising retirement fund taxation, improving fund governance, extending pension fund laws to cover all public sector funds, and introducing a new medium-term tax-free savings instrument.

The paper on retirement fund costs is yet to be released but detailed commentary and proposals have been provided.

Annuities

Within the annuities market, the Treasury found that retirees purchase annuities on the basis of short-term income considerations. In 2011, only 14% of single premiums were used to purchase conventional annuities with the rest flowing into living annuities. A three tier system has been proposed, whereby one third of a retiree’s benefit may be taken as cash with the remaining two thirds used to purchase a product that contains some protection against longevity risk (subject to a minimum of R150k and a maximum of R1.5m).

Living annuities are also set to be reformed. They will likely be offered by management companies and retirement funds, not allow investment choice, be subject to age-dependent drawdown limits, prudential investment limits, and strictly limit fees payable to intermediaries.

Preservation and tax

In terms of preservation, it has been proposed that new contributions and investment growth be subject to a preservation requirement. Achieving this goal means aligning pension and provident fund rules so that a member’s ability to access their funds pre-retirement is limited.

Whilst a range of options regarding the degree of preservation have been provided, members’ accrued or vested rights under their existing schemes will be protected in the new regime. Auto-enrolment of employees into a retirement fund is seen as a complementary option to increase savings coverage. Forcing annuity purchases at retirement will help address leakage within the system.

Tax is addressed in the context of how retirement fund tax can be harmonised to reduce complexity and cost, and secondly, as a tool to encourage saving in a tax-efficient vehicle similar to the UK’s ISA (Individual Savings Account).

Prudential regulation

With the failings of the financial services market having been highlighted by the economic crisis, regulators around the globe have responded with a barrage of regulatory regimes. Locally, retirement reform is positioned to complement the proposed "twin peaks” approach to market conduct and prudential regulation. The Treasury sees retirement reform as vital to economic growth and social stability and the challenge is for the industry to respond and ensure that a sustainable solution is adopted.

At Prescient we believe that retirement fund members and retirees are ill-equipped to deal with the decisions which must be made regarding saving for and entering into retirement.

Human bias towards short-term consumption, coupled with high costs and poor product decisions, erode future income and have created an industry which has failed the majority of its retirees.

Intervention has become a necessity in our market. Retirement reform is alive and kicking … and the "ball” is in our court.

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