Retirement funds cringe at Government plans
While this is the time for the South African government to prove that it is ready to move forward with Nelson Mandela’s legacy and to implement laws which are in the best interest of the people, it seems that they are content with passing laws which cause
Reports in the industry show that government is revisiting a law, similar to those which were passed under the apartheid regime whereby it could force pension funds to invest in state owned entities such as Eskom, the SABC, SAA and Transnet. And should the law be passed, the financial security of retirement fund members could be negatively affected.
Retirees and the Mechanics
It is important to note that this law has not been passed yet. Windall Bekker, partner at Rezco Investment Company, told the FAnews if it is passed, the government could force fund managers to assign a certain portion of retirement assets that they manage to be invested in prescribed assets as designated by the heads state.
He adds that that this will have a big impact on retirement fund members saving up for their retirement.
“When a person typically saves up for retirement there are three factors which determine the strength of their financial security at retirements. The first is the member and employer contributions to the retirement fund. In order to get to a level where the pay-out would be as sufficient (as if no reliance on family members and the state is needed) then most retirement fund members generally need to contribute more towards the fund then is currently the case, and under current economic conditions not many South Africans can afford to do that. The second determining factor is the retirement age. Current retirement age in South Africa is 63, and if policy holders can’t afford to increase their contribution they will have to work longer. However many companies are not keen to extend employees retirement age unless they have special skill sets,” says Bekker.
Risky Business
The third factor is the investment return that the retirement fund members obtain over the lifetime of working. Retirement fund members want the greatest returns for the least amount of risk.
“If government passes this law, and retirement fund members find themselves in a position where they can’t meet the mitigation criteria’s for the first two determining factors (higher contributions and later retirement age) then they could be forced to take on more risk in their investments to compensate for the performance drag of the prescribed assets that they will have to invest in.” says Bekker.
Effects on the Market
We have already painted a pretty graphic picture of the mitigation measures that policy holders will have to undertake in order to secure the secure retirement they want. But there are other factors which need to be taken into account.
A similar plan of prescription of parastatal retirement assets was implemented in the 1980s, and it failed miserably.
“We expect the same result now if this prescribed investing is implemented. The perception of the state not honouring its citizen’s property rights will have significant effect on the country’s economy. We should expect further downgrades from the rating agencies on the back of such a policy and International investors will be reluctant to invest in South Africa because of government interference in the market system,” says Bekker.
This also means that prudent investors will be cognisant of the state’s prescription on how to invest their money and will seek better investment alternatives free of state interference. This could potentially result in more money being invested offshore putting further strain on the exchange rate.
Encouraging Poverty
When the ANC came into power in 1994, one of the promises that they made was that they would do their best to decrease poverty in the country. Yet, 19 years on the dependency ratio is increasing every year.
South Africa has one of the highest dependency ratios in the world. Current statistics estimate that this stands at close to eight dependents to every bread winner. If the government is making it difficult for its citizens to retire comfortably, they will have to depend on the good graces of family members. Thus increasing the country’s dependency ratio and widening the poverty gap.
Editor’s Thoughts
We have to face a few realities, South Africa is by no means a country full of very rich people and the average person on the street cannot afford to increase their contribution or take on more risk. They may be able to work past retirement age, however this will depend on the nature of the industry in which they work and the viewpoint of their employer. This means that the final scenario of increased dependency ratio’s seems very likely. What are your views? Do you feel government is doing enough to avoid this scenario? And if government passes the law, will advisers be compelled to tell investors that a portion of their investment will be property of the state? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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