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Income specialist comments on looming retirement reforms

30 October 2012 Gareth Stokes

National Treasury has enjoyed a productive 2012. Its 14 May 2012 Strengthening Retirement Savings: An Overview of Proposals Announced in the 2012 Budget discussion paper triggered an avalanche of detailed documents to flesh out its retirement reform think

Simon Pearse, CEO of Marriott Income Specialists, is up to the challenge. Commenting on the raft of discussion papers he observes: “National Treasury is serious about its retirement industry reforms and is progressing the debate at breakneck speed… We do not think that their latest proposals will be allowed to drift for years – change is going to happen fast and hard”. He was presenting at the group’s 24 October 2012 Economic and Investment Update held at the Irene Country Lodge. Much of his discussion centred on possible regulatory interventions and the impact these measures would have on financial advisors and product providers.

National Treasury’s retirement reform ideas

Marriott’s views and fundamental concerns with Treasury’s proposals are informed by extensive and comprehensive research. “Treasury’s proposals have far-reaching implications for every element of this industry bearing in mind they only refer to compulsory savings such as pension funds, provident funds, retirement annuity funds, preservation funds and then ultimately where that money goes when a person retires, which is predominantly today into living annuities,” says Pearse. So the compulsory side of retirement funding and income provision are under the microscope. “The discretionary side you can still do whatever you like with, provided you adhere to tax rules,” he adds. What are Treasury’s gripes with the compulsory side of the industry?

There are three fundamental concerns. First – the retired individual’s dependence on the state. Government does not want aged people to be dependent on them in the future because there is simply not enough tax revenue to go around. An obvious requirement of their proposed intervention is therefore that retirement savers do not spend their savings prematurely or too quickly during retirement.

The second and third issues centre on the popular post-retirement income solution known as a living annuity. “Living annuities require choices that are too complex for the majority,” says Pearse. “It is complex for both advisor and client to understand what they are dealing with”. Treasury is serious about reducing this complexity by reducing choice. Another major problem is that living annuities allow clients to increase their current consumption without regard to future consumption. The “cut your suit according to your cloth” mantra goes out the window because individuals have the ability to set an annual withdrawal rate.

Can we fix it? And can we afford not to?

Treasury outlines a number of possible fixes in its discussion papers. One of these is the certification of a default retirement product by Trustees of retirement funds. “All retirement funds already look pretty much the same,” notes Pearse. “They all fall under the Pension Funds Act and are all under the control or management of a Board of Trustees”. These Trustees will have the power to define a default product that all member funds must be invested in. This proposal goes to the limiting of complex choice already discussed.

A second intervention is to impose strict guidelines on how retirees invest the mandatory two thirds of their retirement savings. Treasury would like retirees to invest the first R1.5 million of their pension or retirement annuity pay-out into a guaranteed annuity regardless of prevailing rates. “What this means is that nobody [or at least no retirement fund member with a reasonable capital accumulation] will be dependent on the state,” he says. He argues that R1.5 million, even with current low annuity rates, will ensure a better ‘package’ than the current State Old Age Grant (around R1200/month). This proposal could have a major impact on the industry and there is some concern among smaller product providers that Treasury will work with the big institution to find a suitable solution.

And finally – the balance of your retirement savings in excess of R1.5 million would be invested in a Retirement Investment Trust (RIT) with restricted or no investment choice. These funds would be invested along prudential guidelines… “What they are saying is that you start saving in a prudential (pension) fund and move into a prudential fund during the retirement stage,” observes Pearse. Essentially the retirement industry has come full circle, looking more and more like the defined contribution environment that was left for dead decades ago.

Beware the likely implications

Financial advisors would remain a necessary service provider to higher wealth individuals, largely in the discretionary space. “The higher wealth individual in the compulsory space might have areas where they can work with advisors too,” he says. Advisors will have to balance the threats and opportunities. One possibility is for advisors to work with corporates and perhaps become advisors to Trustees. As for commission it is expected that product brokers would receive once off commission for facilitate the post-retirement transaction.

The bad news for independent advisors is that organisations with extensive broker distribution networks are likely to enjoy a major competitive advantage going forward. The reason for this is that the majority of funds will go into default products chosen by fund Trustees. Trustees have a fiduciary responsibility to their members and will therefore choose the safest and easiest options by investing in large life companies with massive and efficient pooling of risk.

“We believe that Treasury is very serious about retirement reform,” concludes Pearse. “The reforms will unfold much faster than the industry anticipates, because Treasury has the bit between their teeth and really want reforms to take place”.

Editor’s thoughts: The advisors in attendance at the Marriott Income Specialists’ presentation were concerned that National Treasury is tackling the savings shortfall from the wrong angle. They say it does no help to regulate what happens to accumulated retirement savings when the problem is that too many people reach retirement without any savings at all… Should Treasury focus on the run up to retirement to ensure more South Africans make sufficient provision, should they regulate post-retirement income investments, or both? Please add your comment below, or send it to


Added by Nic, 13 Nov 2012
I am afraid that the regulations proposed will backfire due to unintended consequences. Fewer RA's will be sold because of the proposed constraints in investment choice. I, for one, will certainly stop advising clients to invest in new RA's. I have promoted RA's for 30 years and especially so when the prescribed investments were lifted about 20 years ago thus allowing unfettered investment in equity portfolios.
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Added by Joshua, 02 Nov 2012
I definitely agree with the attending advisors to the presentation, in regard that Treasury should not be focusing on limiting the ability of those who have prepared for retirement to realize their provisions to their best advantage, when the real problem is people reaching retirement age with little to no provisions. As any person with a Living Annuity may at any point replace such policy with a traditional garanteed anuity should the interest rates tend to fall, or wait for them to be better for a greater rate. Is it not the administrators' duty of the insurers, according to Practise Note RF/96, to ensure that the income level of the living annuity produces a life annuity at all times, and to reduce the rate the annuity is currently paid out should it not provide for such.
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Added by Platjie, 31 Oct 2012
There is 2 sides to this story that is very relevant. Firstly the clients should be made aware of saving for retirement. But the biggest issue is that most of the Advisors giving so called 'Investment advice' for retirerment investments,does not have a clue what they are talking about. Too many of them still tell the clients to invest in the 'old' 10 year guarantee term investment because they have not heard about an ILLA or now what the term means. Therefore too many clients lose out on proper advice and a better investment that would last them better and suit them better. I think Advisors should be allowed to give investment advice only after they are suitably qualified and screened that they will be able to assist the clients in the proper way.
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Added by Concerned, 31 Oct 2012
I have had a living annuity for a number of years and despite the 2008 crash still have more than my original capital investments both compulsory and voluntary. I do not draw down more than 10% and could not live on a fixed annuity. What concerns me is that this goeverment wants to get their dirty fingers on everyone's hard earned pennies. Any signs that they might want to interfer with pensioners existiting arrangements?
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Added by The Court Jester, 30 Oct 2012
The one aspect that has not been touched on yet (and this is actually a very big driving force for people to select Living Annuities) is WHAT IS GOING TO HAPPEN WITH THE Garanteed amount (and for the matter the rest) when the Guarantee period has expired and the Pensioner passes away... With a LA the Capitalk can be transferred, with a Guaranteed Annuity the capital is forfeited. And on any Guaranteed Period the Income, when calculated over the period, reflects exactly the Capital Amount. The risk is then taken that the Pensioner will live longer or not than the period. Traditional Guaranteed Annuities have filled the coffers of Insurance Companies over the years! I always wondered why this was never questioned as this technically is an Accumulated Surplus. Not once so far have I seen this question being addressed -what happens with the Capital after death!. So yes, advisers earn commission on LA's - but the clients are happy to pay this if the LA is managed correctly, grows in value and after death the Capital can be transferred to a Beneficiary, where as with GA it is lost at some point. A lot of work is required form Advisers to ensure that Capital grows and clients get advised correctly... Some how I get the Feeling that Government and Treasury have their eyes on cashing in the Capital of Retirees at some stage... Watch this space...
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Added by Mark , 30 Oct 2012
I agree with the editors thoughts in the last paragraph about lack of retirement provision, this is a far more important subject. Treasury have lost the plot once again, first it was National Retirement Fund and now this, what has happened to the latter, its almost as though they are just looking for something to do and wasting our taxes on all sorts of investigations and nothing comes of it, it is just job creation..................
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Added by humphrey, 30 Oct 2012
I must agree with the Court Jester - "Government and Treasury have their eyes on cashing in the Capital of Retirees" - in fact I have no doubt about this - our taxes are no longer sufficient to fund the corruption, maladministration, presidents wifesssssss and palaces
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Added by BIGGLES, 30 Oct 2012
The strict guidelines for investment in annuities would surely become unconstitutional as effectively our freedom of choice is legislated and removed. It would also seem to make RAs no longer an investment of choice as the tax rebates are being eroded by limited investment performance. My conclusion is there will be a mandatory savings obligation for retirement up to say 15k monthly salary earners after this the choice is for the individual and why bother with RAs etc -next probably will be a limitation of withdrawal reducing the 17.5%.Might as well aggressively invest in non regulated savings for retirement -at least then there is freedom of choice!!
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Added by Louis, 30 Oct 2012
I agree that there must be retirment reform. I am involved with a big orginisation and do most of their employees planning at retirement. Problem is that a lot of these people are forced to contibute to a retirement sheme without getting any tax relief ( small salaries) and have to pay tax once they retire on their income! These people must be under a different pre retirement dispensation. They are vulnerable and are the people who lose out. These are also the people and other who are less fortunate than them , who in the end will rely on government to look after them. This is the real problem.These people who fall under a certain income category are the people who are forced to take unrealistically high incomes under their LA's and who eventually run into trouble. These are the real problems of retirement planning. The rest of the population who are better educated and earn more cannot fit under the same umbrella! If I must earn more or less five percent on the first R1 500 000 of my retirement savings my whole retirement plan have to be revised. I cannot see who I and for that matter my higher income client's will keep on investing in retirement type of products even with the tax concessions , it does not make sense.Perhaps I am just stupid!
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Added by Ian, 30 Oct 2012
I agree with your comment that Treasury is tackling the savings issue from the wrong angle. Treasury seems to think that lower costs and lack of choice will solve the problem, but in fact what is needed is more skilled advisers seeing the people and getting clients to invest for retirement. In general people won't save enough unless they have someone beating the drum. Unfortunately Treasury's proposals may have the opposite effect by reducing the amount of advisers out there seeing the people long before retirement.
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Added by miffed, 30 Oct 2012
As always there is the 1 sided approach to dealing with this problem i.e. that living annuities and advisers are the main problem. What about the annuity rates themselves and the lack of transparency with respect to guaranteed (for life) annuities? For instance what do we know about the profit factor built into these annuity types? Why should we not see how much the assurers make on the deal in the same manner as you can with the living annuity? Let’s have that put on the table and also the question of mortality profits flowing to the underwriter on premature death of the annuitant. I see that's not up for discussion. Why not? Well who do you think has been speaking with treasury...! Also the retirees age is key factor in determining the resultant annuity (with a guaranteed annuity purchase) so will govt also legislate a minimum retirement age while they are at it? I think the whole question smacks of the old LOA clawing back the industry they once had (tied advisers and guaranteed annuities) and they are using the perilous state of the economy and nice cosy relationship with Treasury to do it. They will also use the latest add-ons coming soon via the FSB to squash independent advisers as has happened in Australia.
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Added by Cuban, 30 Oct 2012
All relevant comments. Perhaps the highly paid personnel at Treasury should focus on reducing the loss by the Fiscus due to corruption. If they could half the amount of money that is blown due to corruption and waste the government would afford to pay a lot of people, who are not making sufficient provision, a monthly pension for a long time. Interesting how little people save for retirement although there is an army of financial planners, brokers and agents trying to convince them. How much saving will happen if most of these troops opt-out and start different businesses or careers? Where will that leave the government then?
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