Retirement Annuities and Pension commentary
Rowan Burger, Head of Investment Strategy at Liberty Retail SA
Introduction of Contribution bands
Limiting the extent to which contributions are tax deductible makes sense from governments perspective as beyond a certain savings level it is clear an individual will not be dependent on the state in old age. There is a second order effect in that reducing the likely contributions to funds may reduce the number of policies and assets within the system. The same infrastructure must then service this smaller pool, leading to inevitably higher costs per Rand invested.
Allowing a floor level for low paid worker who need to save more than (the traditional 15% plus member 7.5%) and now 22.5% is welcomed as it allows them to catch up for past retirement savings spent.
Removal of Provident Funds
We have for a long time advocated that the distinction between pension and provident funds added confusion and further cost to the retirement savings landscape. The key is recognising that legacy provident fund rights must be protected which is acknowledged. This means that people should not panic now and try to cash in their provident funds as all rights are protected. In time funds should merge and create more cost efficient vehicles for their members.
Competition in Living Annuity Space
The proposals are that collective investment schemes should be able to provide living annuities to clients. These do not offer the same protection to their pensioners that life companies could, however the delivery mechanism is relatively simple. My concern here is the focus on living annuities implies that this is the optimal solution for a pensioner. Given significant health improvements worldwide, these vehicles do not protect pensioners from living longer than their money lasts.
State Old Age Grants
It is important to provide inflation protection to all grants. This increase while being higher than CPI inflation, is far more reflective of the inflationary pressures which this group will feel as food and petrol price increases start to have an effect. The grants are significantly underappreciated in terms of their poverty alleviation.
It is a great pity that instead of removing the means test, an additional rebate was given to more elderly pensioners. The means test is a disincentive for existing savers.
Social Security Focus
It is far more important and efficient to improve employment than pay out unemployment benefits and improve health than pay out death and orphans benefits. The focuses of the budget on these key policy priorities will have the second order effect of making our social security system more affordable.
Regulation 28 Changes
We welcome the updating of Regulation 28 and the introduction and recognition of new asset classes. Having regulation 28 apply at a member level provides further protection for retirement fund members. Recognising that it is difficult to change existing individual policies, it is welcomed these get extended grandfathering.
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