Retirement reform in South Africa - An update

Importantly, this document tabulated a time line of the various phases of the reform process – in short, the draft regulations are to be in place by the end of 2015.

 

The key developmental areas are as follows;-

 

 

The voluntary nature of our retirement funding industry has been identified as one of the single biggest factors affecting inefficiencies in the retirement system. In a voluntary system such as our own, employers and individuals have to be persuaded to make retirement provision for themselves or for their employees. Treasury is hopeful that mandating retirement provision, provided that the process is efficient and well regulated, will resolve many of the problems. They do mention that special provision will have to be made for low-income and vulnerable workers.

 

 

We all know about this one – even where workers participate in the retirement system, too often benefits are withdrawn prior to retirement. Lack of pre-retirement preservation increases financial vulnerability and costs at and during retirement.

 

 

There is currently no prescribed disclosure methodology for charges relating to retirement funds. Standards of disclosure vary greatly. Collective Investment Schemes (unit trusts) use the Total Expense Ratio (TER) which is retrospective. Insurance policies use the Reduction in Yield (RiY) which is forward-looking. Government is concerned that costs within a retirement fund such as trustee remuneration, conferencing and workshops need to be scrutinised, regulated and perhaps banned outright. Treasury sincerely believes that disclosure of charges in the retirement industry has to be improved.

 

 

Based on international experience, it has been suggested that a major improvement in retirement incomes will result if the ‘default options’ are improved. The ‘default option’ is that result which occurs when an individual fails to exercise choice. This could be on retirement, on leaving employment or even whilst an active member of a retirement fund – for example portfolio choice. Many funds do not have ‘default options’ and where they do, outcomes are questionable.

 

 

There are currently over 3000 retirement funds registered in South Africa. Many of these are small, inefficient and lack corporate governance. This diversity of product also increases the need for financial advice and attendant cost. Consolidation of funds and standardisation of products is expected reduce costs which should enhance the financial position of the member.

 

Simplifying retirement savings products and making them portable between providers

Too many product providers and competition on the basis of complexities of product, rather than value-for-money are perceived by Treasury to be problematic. Although certain products may well enhance the position of certain customers by meeting their needs more effectively, Treasury believes that these products are a driver of higher costs. They envisage an industry based on simpler products, which are portable between employers. Portability between different product providers is essential in well-functioning market. Situations where consumers are locked into long term products and unable to move to more efficient products are problematic. Treasury believe that simpler products will increase competition to the benefit of the consumer.

 

 

That old chestnut – intermediary remuneration. Treasury considers that the manner in which intermediaries are remunerated for the sale of insurance policy type products, is an important factor in product design. High upfront costs, which are then recovered over the life of the policy leading to disappointing outcomes is of concern to government. Treasury is pursuing a model where intermediary remuneration does not create a conflict between their own interests and their obligation to their customers. Rebates paid by investment management companies to investment platforms are considered offensive as they complicate and obfuscate true costs.

 

 

Government is talking tough here. Lessons have been learnt from the Global Economic Crisis of 2008/2009. The last few years have seen a number of high profile cases concerning retirement funds where value has been lost or destroyed to the detriment of their members. New regulation will be tougher and more intrusive to be effective. Globally, we have seen increased regulation of the banking and insurance sectors and this is to be extended to the savings and retirement sectors in order to protect members and improve market conduct practices.