The 2009 Budget Review reinforced the government’s intention to ensure retirement fund members secure an adequate income in their old age. As part of the speech, the Minister commented that one option would be to phase out provident funds as a prelude to broader social security reforms. Currently, retirement funds can be pension funds or provident funds. Although there are tax differences, a key difference is the form of the benefit at retirement. In a provident fund a retiree can take their entire benefit in cash, while in a pension fund the retiree must use at least two-thirds of the benefit to purchase a pension. This means that members of pension funds are less likely to outlive their income or spend their hard-earned savings on things that will not improve their quality of life in old age.
For this reason, the state has once again questioned the future of provident funds. This may have significant implications for provident funds and their members. However, assurance has been given that extensive consultation will take place between stakeholders before any decisions regarding the future of provident funds is taken. As such, the changes are unlikely to be introduced this year.
The potential phasing out of provident funds could take any number of forms. Based on previous comments by the Minister of Finance, savings already in provident funds may be unaffected by any changes. Maintaining the existing savings in provident funds would be helpful for members relying on their retirement savings to pay off housing loans. However, this can create a cumbersome double membership situation which could increase administrative costs. The administration of tax could also prove burdensome.
The practical considerations involved in a transition to the new system and the communication to members will require careful consideration. Provident fund members, trustees and advisors should stay abreast of these developments. Given that changes are unlikely to be finalised soon and that existing rights will be recognised, members of provident funds need not be concerned about the safety of their retirement savings.