The impact of the delayed retirement reforms

Steven Nathan, Chief Executive of 10X Investments.

The retirement reforms, which were set to take effect on 1 March 2015, have been delayed by National Treasury for a possible year or two. According to Treasury, this comes after the labour constituency at NEDLAC requested that the implementation of these laws - enacted last year - be postponed until further consultations between Government and NEDLAC on social security reform have taken place.

Steven Nathan, Chief Executive of 10X Investments (10X), says that while some segments will welcome the delay, including the unions and high income earners in particular, Treasury's potential capitulation may undermine its entire reform initiative. "The key objective of these proposals (in their entirety) is to strengthen retirement savings. More specifically, Treasury wants to ensure that our retirement system serves the needs of South Africans better and more fairly than in the past, and as efficiently as possible, by providing more appropriate products."

Nathan adds that by delaying these initiatives, fund members will continue to suffer in a system that is not fair, does not serve their needs and does not provide appropriate products. "Treasury has already identified the numerous challenges that retirement fund members face, which includes; excessive choice, complicated products, conflicted advice, high fees and opaque reporting."

The impact of the delay

The delay is a result of unions, who have publicly opposed reforms and have stated that they have not been adequately consulted and educated on the reforms. They have indicated that they want clarity on social security reform before agreeing to any retirement reform proposals.

Nathan says that the delay in the retirement reforms will not affect members' retirement funds (Retirement Annuities, Pension Funds, or Provident Funds), which will continue to function exactly as they do now until the reforms become effective - either in March 2016 or 2017 respectively.

He says that the following reform proposals have been delayed:

a) No change in the tax deductibility of contributions, and no annual cap: The introduction of the 27.5% deduction limit, and the annual deduction cap of R350 000 is delayed

b) Employee provident fund contributions remain non-deductible for tax: Only employee pension fund contributions receive a tax benefit, up to 7.5% of pensionable salary.

c) No compulsory annuitisation of provident fund contributions from March 2015: Annuitisation will not apply to provident funds for any contributions made before 1 March 2016 or 2017 (depending on when the laws do take effect). Fund members will be able to cash out 100% of their provident fund balance at either 1 March 2016 or 2017, as well as the subsequent return on this balance.

d) Tax-free transfers from pension to provident fund: this will not be possible until the reforms have been passed. For now, such transfers will continue to be taxed.

e) The minimum amount that has to be annuitized increased to R150, 000: this will not take effect until the new laws come into effect. The minimum amount therefore stays at R75, 000.

Nathan says that it is important to note that compulsory preservation before retirement was not part of the current set of retirement reforms. "The biggest incorrect rumour about retirement reform was that Government was implementing compulsory preservation of pension and provident funds for members leaving their retirement fund before retiring.

Treasury had raised this as a proposal, but had not legislated this. Unfortunately, this rumour led some people to believe Government was nationalising their retirement fund and as a result they resigned from their jobs to access their pension or provident fund ahead of time," he says.

"The bottom line is that there is no certainty when the reforms will happen and in what form. We can be sure that the reforms will not legislate against any of the key principles established in the original discussion papers," he concludes.