Waiting for retirement fund reform
In 2004 the National Treasury published a discussion paper titled Retirement Fund Reform (RFR). The document proposes a variety of reforms to raise the standards of retirement fund governance and encourage individuals to make adequate retirement provisions.
Public comment was invited until 31 March 2005 and Treasury undertook to publish a second discussion paper in 2006. To date, the second discussion paper has not been released.
There is little doubt that RFR will be one of the major industry events impacting the investment industry in 2007 and beyond. With this in mind, heres a quick look at some of the proposed changes.
Structure of the current retirement system
The retirement system currently used in South Africa is represented by three pillars, and conforms to the standard model advocated by the World Bank.
Pillar 1: Social Old Age Pension (SOAP)
Our old age pension grant is R820 per month. It is paid to individuals with income of less than R1,502 per month. Estimates are that 75% of women over 60 and men over 65 rely on this grant to get by.
Pillar 2: Occupational retirement funds (pension and provident funds)
Pillar 3: Retirement annuity funds, collective investment schemes and insurance policies
Despite the retirement system being financially sound and well regulated, the consensus is that too many South Africans reach retirement age without adequate savings.
Retirement reforms will impact the investment industry
The FRF document makes a number of recommendations. It suggests that the current three pillar system is maintained, stresses that compulsory savings are not necessary and encourages compulsory preservation.
Treasury suggested that a national savings fund be established. This fund will provide for individuals employed in the informal sector, and those earning less than the tax threshold. Individuals will not be subject to means testing as is the case with SOAP. Major plusses for investors will be the cost efficiency of the fund and the fact that investments could be realised in the event of a life crisis.
Another major change relates to retirement annuities and other personal pension plans. A radical proposal is that intermediaries receive "no commissions or service fees" for inducing members to join a fund. This will obviously have a huge impact on the broker community as a whole - and impact the sales of retirement annuities too.
No changes till 2008
While companies active in the retirement market may begin positioning themselves to accommodate some of the recommendations already made, it is unlikely that any changes will be legislated before 2008.
In their 2006/2007 annual review, the Life Offices Association (LOA) sums the current situation as follows:
"It is apparent that considerable debate still has to take place on fundamental issues of retirement reform policy, including the extent of government involvement. It is likely that even after the revised discussion paper is circulated, there will be areas left for further development and discussion."
Editor's thoughts:
There is no doubt that the proposed changes will have a significant impact on the investment industry. Treasury needs to move quickly to finalise the legislative environment within which the industry operates.
