Gold, silver and bronze in the social services race

There are going to be plenty of changes in the retirement savings industry as South Africa moves toward implementing a social security tax in coming years. If everything goes to plan, individual employees will notice a new deduction on their salary slips

Treasury has already completed preliminary discussions with the life industry - but is likely to consult the industry further following Trevor Manuels budget speech and the second paper on retirement reform (titled Social Security and Retirement Reform). We can expect a raft of additional discussion papers and proposals before the mechanics of the system are finalised.

In a recent press release, Ian Dodds of Fundamental Investments shared some of his company's views on who the winners and losers of the proposed social security tax would be. Based in Johannesburg, Fundamental Investments specialises in personalized, transparent financial planning services.

FAnews believes that if correctly implemented, everyone can walk away from the social security tax a winner. Weve chosen a gold, silver and bronze award winner, based on the content of the aforementioned press release.

Going for gold

The first group to step up to the podium will be individuals from the poorest sectors of society. The poor will emerge as definite winners as social security reforms are implemented. Government will probably have to contribute upwards of R20 billion per annum to subsidise social security contributions for low income earners.

This will ensure that those who earn less than R60, 000 per annum are not negatively impacted by the introduction of the social security tax. Their take home pay will remain intact.

Coming in a strong second

The silver medal will probably go to the consumer, who will benefit from the increased competition in the pension fund market. We expect the industry to be leaner and meaner after Treasury introduces the social security tax. Product providers competing for private business will have to provide better returns at reduced costs - which will mean the consumer emerges a winner in this area...

Dodds suggested that existing service providers would be forced to become more competitive, especially if the state was successful in setting new benchmarks in efficiency and low prices. 'This will be good for the consumers of these products,' he said.

And bronze

Wealthy individuals will continue to supplement their retirement savings - but it is unclear what level of tax relief they will benefit form. Early indications are they will receive tax relief up to a certain level, after which the tax benefit will fall away.

"The position of average-income earners and high income earners is unclear at this stage, but it is possible that those who were already contributing to private pension schemes may not have the resources to contribute to both the state and privately managed schemes," said Dodds.

In conclusion, he stated that "the monetary cap is likely to lead to a situation where middle class and wealthier South Africans are likely to save outside the pension fund environment, and maybe at reduced levels."

Big questions

A number of questions around the implementation of social security tax remain unanswered. How will government integrate the proposed social security pension with the existing pension industry? The task is likely to require some consolidation of South Africas large pool of private pension funds. To appreciate the magnitude of the task, consider that there are some 9,700 pension schemes currently operating in our country.

How will benefits be phased in? If the system is implemented in 2010 there will be a huge requirement for additional funding to pay benefits to those who never contributed to the system.

Clearly there are a number of important issues that still need to be finalised. Treasury and the retirement industry will have to consider the implications of their decisions thoroughly, or face the possibility of leaving South African citizens with another well intentioned 'white elephant'.

Editor's thoughts:
There will be plenty of discussion between Treasury and the pensions fund industry before a draft social security bill is produced. The goal of better retirement provision for all South Africans should not impact on the right of individuals to save privately in order to fund their desired standard of living in retirement. Send any comments for the Treasury to gareth@fanews.co.za.