One of the main recommendations in National Treasury's first paper on Retirement Fund Reforms was that contributions to a national savings fund should not be compulsory. Yet in the 2007 budget, the Finance Minister proposes that all South Africans will co
However, the budget did not provide enough details on the specifics of the proposed social security scheme. It could be these companies will be less happy when such structures become clearer.
Impact on the retirement industry
The proposal is that revenues for the social security scheme will be collected and administered by the South African Revenue Services (SARS). The most logical tax collection method is an additional tax withheld by the employer, in a similar manner to PAYE.
It is quite possible that one of the larger financial institutions will be contracted to administer the scheme on behalf of SARS. This would be particularly important given that individual contributions would be pooled in contributor accounts. The reward for operating this system will be small due to the importance of keeping costs low.
The question the retirement industry should be asking is, given the new proposals, what will the impact be on new funds coming into the retirement industry?
If tax exemptions on retirement annuity contributions are scrapped to make way for the social security tax, the impact could be sizeable. Further to this, consumer behaviour might change significantly under the blanket protection offered by a social security scheme. The incentive to save for retirement will be substantially reduced if the consumer believes this need is taken care of by way of a deduction from his salary.
The industry's best protection will probably be to continue to focus on educating consumers on the importance of saving for retirement- and to take more steps to bolster confidence in the industry, such as those outlined in the recent Statement of Intent.
Unemployment problems and lack of contributions
Another issue that will need to be addressed is the sheer size of the unemployment problem in South Africa. The intention is to provide a basic pension for all South African's and remove the limiting 'means' test to qualify for this pension. However, if there are not enough contributors to the fund, the government may have to step in with huge amounts of additional funds of its own.
The cash pressures on the fund will be further exacerbated by the intention to provide an income subsidy to low income earners. Will the number of contributors to this scheme really be able to receive benefits in line with their contributions given the funds obvious intention as a redistributive tool? This remains to be seen.
Careful administration will be required to avoid a repeat of the Road Accident Fund, which was recently on the brink of collapse due to inadequate funding and an overloaded administrative system.
More details on the proposed social security scheme will be revealed in Treasury's discussion paper on Social Security and Retirement Fund Reform being released today. We believe the contents of this document will be important to the life industry, so Fanews Online will provide more comment on this paper in our newsletter on Monday.
Editor's thoughts:
Manuel announced that the second paper on Retirement Fund Reform would be available today. The paper is a broad based starting point for discussion with industry. We'd love to hear your first comments on this paper. Please send them to gareth@fanews.co.za.
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