Industry to move to single vehicle pleasure by 2015
While there is no doubt that the South African pension industry is one of the most sophisticated and functional industries in the world, the industry is still mired with challenges and if they are not resolved quickly, it will be in for a number of tough
While the Financial Services Board and National Treasury are working on a number of reforms which will hopefully facilitate meaningful improvement in the industry, ABSA Consultants and Actuaries, a division of ABSA, reports that financial advisors will need to come to terms with the fact that the most meaningful change will be the shift towards one retirement vehicle and that they will need to adjust their advice accordingly.
Coverage quagmire
Before we move onto the movement towards a single retirement vehicle and the benefits it can offer society, one must look at retirement coverage and the portion of the population that will actually benefit from the efforts of Treasury.
Treasury’s main aim is to see as much peopled covered in the country as possible. However, herein lays a significant problem. According to Cobus Strydom, head of consulting at ABSA Consultants and Actuaries, Treasury has a lot of ground to make up.
“There is a significant coverage problem in South Africa. Only 50% of the formal sector belongs to retirement vehicles. Of the 50% that does not belong, 80% are below the tax threshold which means that there is no real incentive to contribute towards a retirement vehicle. A further 70% are employer groups of 50 people or less which means that costs will not make it worthwhile to offer a retirement vehicle while the remaining 40% of the uncovered sector belong to the farming, domestic and construction sector where there not a strong relationship between employer and worker which is needed with a retirement vehicle,” he said.
Different strokes in one
Logistically, administrating the different rules governing different retirement vehicles is a nightmare. There is also the huge issue of leakage whereby workers that move from one job to another are allowed to draw their retirement savings and then are tempted to spend it before reinvesting it into another scheme.
This however is set to change in 2015.
“Come March 1 2015, annuitisation requirements of provident and pension funds will be aligned. A provident fund member will therefore have to convert at least two thirds of his benefit into an annuity on retirement. Vested rights of current provident fund members will be protected and annuitisation requirements will only apply to new contributions as well as growth on such contributions with effect from March 1 2015. Further, annuitisation requirements will not apply to individuals 55 years and older, provided they remain members of the same provident fund until retirement,” says Strydom.
Preservation Mandate
The main aim of this is to increase preservation. It will be easier for advisors to recommend preservation and it will be easier for government to enforce it. However, the public may not like the rulings.
“Government is still going to establish a ‘P-Day’ which will be in 2015. From an effective date, on or after P-Day, pension and provident funds will not be permitted to pay cash withdrawal benefits before retirement. Members must have their entire accrued benefits paid either into a default preservation fund, a sectional preservation fund, the fund of the new employer or a preservation fund they have chosen themselves,” says Strydom.
This doesn’t mean that members will not be able to draw any money out of the funds. Members will, at any time, be able to withdraw in cash portion of initial amount deposited by them on joining preservation fund to which vested rights apply. Preservation fund members will be able to withdraw each year greater of state old age grant limited at either R15120 or 10% of initial amount deposited by them on joining preservation fund, excluding any portion to which vested rights apply. Any unused withdrawals may be carried forward to following year, but to reduce administrative costs, members will be limited to one withdrawal per calendar year or part thereof.
“This again will open the door for administrative headaches. I feel that the 10% will be an easier benchmark to police than the R15000 and Treasury should be really concentrating on that,” says Strydom.
Editor’s Thoughts:
We all know, and have hopefully come to terms with, the administration problems that regulators face in the retirement industry. However, the truth of the matter is that one retirement vehicle will be easier to police and administer than multiple vehicles. But this puts pressure on financial advisors who need to consult with fund holders on a continuous basis in order to advise them on the best vehicle to acquire. How do you think this will impact the industry? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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