An update on Retirement Reform – OMAC Actuaries & Consultants

Approximately only 50% of employed South African’s belong to a retirement fund and the country has notoriously low savings rate. In response to this, the government has proposed a range of retirement reforms aimed at increasing the savings rate of the pop

This was the view presented by Craig Aitchison, General Manager of Corporate Customer Solutions, speaking at an OMAC breakfast discussion on retirement reform, held in Sandton last week.

“South Africa has a national savings rate of 16% of GDP, which is significantly lower than some of our BRICS counterparts (China 53%, India 34%, Russia 28%). Retirement reforms aimed at addressing this have become a priority for government and South Africans and the financial industry should prepare for these,” he says.

It’s clear from the results of the 2012 Old Mutual Retirement Monitor that general awareness of what the retirement reforms discussions entail is very limited. According to Aitchison, responses indicate, that although general awareness of a proposed state pension scheme is good, the majority (79%) of members have very little understanding of what entails or what means for them.

“A further 10% think it means that all working individuals must be a member of a fund, while 6% think that it will mean that all existing funds will join together and government will have central fund,” he says.

Aitchison explains that the retirement reform discussions are wide-ranging proposals to reform social security and retirement fund arrangements are under consideration. He says National Treasury is likely to focus on short to medium term retirement fund reforms that will complement the broader social security reforms.

As part of the broader social security reforms, government is proposing a compulsory savings scheme. “The current proposal is that all employed individuals should pay a contribution of their annual income, up to a cap of R150 000 per annum to a compulsory fund. The contribution will be directed toward funding retirement savings, as well as a death benefit and a disability benefit. Current thinking is that the level of contribution would be 10% of earnings,” says Aitchison.

This contribution would go into the National Social Security Fund. ‘The pension received from the NSSF would be at least 40% of the annual income of the individual before retirement. Following this, individuals could make further contributions (and receive tax deductions) into either their own retirement fund or a defined contribution section of the NSSF,” says Aitchison.

Aitchison points out that, for individuals who do not currently belong to a retirement fund, this represents an additional cost. However he says there are proposals being considered to provide a form of contribution subsidy to lower income individuals to assist and encourage the contributions to the NSSF

As part of the retirement reform proposals, Aitchison says National Treasury has proposed to that some level of preservation of retirement become a default option when . employees change jobs.

“Treasury is also proposing that the unemployed be given some access to their preserved retirement savings and that access will also be allowed in cases of demonstrated medical need. Further, the new preservation arrangements would not affect current retirement savings, which would still be available when an employee changes jobs.” says Aitchison.

Another very important part of retirement reform, according to Aitchison, is the proposed reforms of the annuity market. “The decision of which annuity to purchase at retirement is one of the most significant financial decisions a person can make. However, our research indicates that retirement funds do not offer sufficient support to members when they reach retirement and therefore, the decision between conventional and living annuity not necessarily made for the correct reasons,” says Aitchison.

Treasury has flagged the level of charges of some retirement savings products as an issue. For this reason, Aitchison says Treasury is expected to propose measures to standardised some products and encourage default solutions, which would not require financial advice.

Treasury are also seeking to simplify taxation of retirement savings. “Employer contributions will be included in employee’s remuneration as fringe benefit. Individuals will be permitted a deduction of up to 22.5% of income if under 45, and 27.5 if over 45 on all contributions made to pension, provident and retirement annuity funds. The maximum deduction will be greater than R20 000 and less than R250 000 (R300 000 over 45). While simplifying the taxation of these funds, the impact on most members is expected to be neutral. Some funds have a total current contribution higher than the proposed deductions and consideration is being given to a special arrangement in these circumstances,” he says.

According to Aitchison, following the paper on proposals for “Strengthening retirement savings”, which was released on 14 May 2012 by National Treasury released, five further papers are expected over the course of this year. Aitchison ended with a message for Trustees. “The most important response for Trustees is to become familiar with the proposals and then engage with Treasury to provide practical input and comment on how to best implement these reforms. As an industry we all have an opportunity to play a pro-active role in bringing about reform and ultimately encouraging better security in retirement for our members.”