Income specialist comments on looming retirement reforms
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 [email protected]
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