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Latest Retirement Reform proposals bodes well for South African Savings

16 May 2012 Old Mutual
Craig Aitchison, MD of OMAC Actuaries & Consultants

Craig Aitchison, MD of OMAC Actuaries & Consultants

Hugh Hacking, Head of Retirement Fund Solutions at Old Mutual Corporate

Hugh Hacking, Head of Retirement Fund Solutions at Old Mutual Corporate

Old Mutual says proposals to streamline the South African retirement system, which were outlined in a discussion document released by Finance Minister Pravin Gordhan yesterday, are encouraging from the perspective of ordinary South Africans.

“This is a very important initiative for South Africans and could go a long way to increasing the standard of living of South Africans,” says Craig Aitchison, Managing Director of OMAC Actuaries & Consultants.

“The need for South Africans to save and be prepared for retirement is crucial. We have always been concerned with the low rate of savings among South Africans so we find this progress very encouraging and continue to support efforts to reform the local retirement industry,” he says.

Aitchison says the discussion paper targets several areas that require reform in order to address this problem. He refers to proposals such as strengthening the preservation of retirement benefits as well as the introduction of a new tax incentivised savings vehicle.

“Non-preservation has been a leading cause of many people retiring with insufficient retirement savings and a social issue that Old Mutual has always expressed concern about. We are encouraged by the proposed intensified focus o­n preservation,” says Aitchison.

According to Aitchison, the proposed introduction of a mandatory statutory fund may have consequences for current retirement funds and Old Mutual will continue to assist its clients to manage any transition impacts. However, he says the focus will primarily be to increase coverage of people not previously covered by the formal retirement system.

“At this stage it’s too early to know what the implications of this fund will look like, however we are comfortable that we can continue to work with the regulator and industry bodies to ensure a smooth transition and integration of this fund into the current retirement system.”

Hugh Hacking, Head of Retirement Fund Solutions at Old Mutual Corporate, says proposed reforms o­n the harmonising of retirement fund taxation are promising developments as the current tax regulations are complex, add to costs and are confusing to individuals. However, Hacking stresses that any changes must be clearly communicated to members.

With regards to the proposed changes to the withdrawal rate o­n living annuities, which may be reduced to 0% from 2.5%, Hacking advises that although it is o­nly being indicated as being up for discussion - it could increase the attractiveness of these products. “It’s important that members understand the potential implication of this proposal and how it can be utilised to best suit their needs,” says Hacking.

Other proposals in the document suggest that the charges in umbrella funds are lower than RA's, but still high compared with large standalone funds. “In contrast, our analysis o­n some standalone funds that are considering moving to umbrella funds reveals that for the most part, umbrella funds offer better value for money. However, there will be cases to the contrary, so it is important to assess each fund individually. We believe standardised reduction in yield measures, which measure how much of the investment returns earned are used to pay for costs, and cost ratio measures, will go a long way in assisting us in this comparison as well as comparing product offerings from various providers,” says Hacking.

According to Hacking, the discussion document also highlights that members liabilities must be appropriately invested and in their best interest.

“This points again to the importance of member- friendly investment policy statements and communication. It is crucial that retirement fund communication helps members understand exactly what benefits are available and, given their needs and risk appetite, why certain investment portfolios are available o­n their funds.”

Hacking stresses that the governance and ethical management of retirement savings is an important priority. In reaction to the discussion paper he says Old Mutual remains committed to continue working with the regulator to ensure that the industry develops regulation, standards and codes that ensure the safety of member’s savings.

“We have always been a strong supporter of governance that protects individual retirement savings and promotes the ethical and proper management of retirement savings. We strongly support transparency and disclosure and believe the proposals in the discussion paper are in line with this.”

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The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025. What do you think about their ongoing efforts?

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