Treasury toughens cash-in rules

2012-09-22 11:24

Department releases proposals to legislate compulsory savings among free-spending South Africans

The National Treasury wants to make it more laborious for South Africans to access involuntary funds pre-retirement, but this could pose a challenge for companies currently not providing a retirement fund.

The Treasury on Friday released proposals which, among other things, consider making membership to a retirement fund an automatic default for all those in formal employment.

If this were to be legislated, it may present a challenge for companies who do not presently offer company retirement funds.

However, this could be provided for by cost-effective retirement annuity funds.

The Treasury released the first two in a series of technical discussion papers for public consultation on promoting household savings and reforming the retirement industry.

This follows the discussion document “Strengthening Retirement Savings: Overview of the 2012 Budget Proposals”, which was released in May.

Although there are few surprises in the latest discussion papers, which focus on post-retirement income and preservation of retirement funds, the Treasury has made proposals to significantly increase the use of default options to encourage individuals to preserve their retirement funds.

Apart from encouraging positive behaviour, the discussion paper has also made some suggestions around compulsory preservation.

However, the Treasury is considering a three to five-year monitoring period to analyse the response of individuals to new default arrangements to see if
this is sufficient to increase preservation without enforcement. If there is no improvement in preservation rates, the issue could be revisited.

The discussion paper is quick to highlight that “whatever final policy is chosen, accrued or vested, rights will be protected”.

This means that any legislative changes around compulsory preservation will not affect the funds already accrued in a retirement vehicle prior to
the new legislation.

It is estimated that about 70% of people changing jobs and 90% of people who are retrenched cash in their retirement funds.

One of the concerns is that it is often easier for an individual to opt for a cash payout than to undertake the complex process of deciding where to preserve their funds. This process usually requires the use of a financial adviser and often has high costs associated.

The Treasury recommends that all existing retirement funds create a preservation-fund section where a member’s retirement funds will be transferred to and preserved
when they leave their employment.

Rather than the current situation where a member needs to seek advice to preserve funds, the member would have to obtain advice if they request to have the funds paid out as cash.

This will make it far easier for members to preserve their retirement funds and more onerous to withdraw them.

The discussion paper also recommends that retirement funds select a default retirement-income product.

On retirement, at least two-thirds of a member’s retirement fund would be transferred into this default product automatically which would provide them an income in retirement.

Individuals may opt out of the default into other qualifying products if they wish.

This strategy has worked well for mining-union fund Sentinel Retirement Fund, which experiences a 90% preservation rate by providing a default preservation and post-retirement income fund for its members.

This high level of preservation is also a consequence of the free financial advice available to members leaving the employer.

A higher preservation rate would also drive down the cost of retirement products especially for employees of large corporates who are able to provide lower cost access.

Research by Anton Gildenhuys, the head of Sanlam Personal Finance actuarial, has shown that compulsory preservation could significantly reduce the costs of retirement funding as the longer the funds are invested, the more time the company has to recoup the fees which would result in a lower reduction in yield.

There are currently two proposals for compulsory preservation.

The first is for the preservation of two-thirds of new contributions and growth on the investment after the legislation is introduced.

This will be accompanied with a substantial increase in the tax payable on any withdrawal of the one-third before retirement, which can only be accessed as a monthly income.

This proposal could possibly allay union concerns around access to retirement funds for emergencies while discouraging such behaviour as resigning from an employer, or even getting divorced, to access one’s retirement fund.

The second proposal, which is unlikely to please the unions, is that government insists on full preservation of new contributions and growth after the legislation date.

Either of these changes would mean that the retirement funds of new members joining after the implementation of the legislation would be fully subjected to the new rules while existing members would still be able to withdraw up to the value of their retirement fund prior to implementation.

The Treasury says a withdrawal mechanism could still apply to retrenched individuals, who will be allowed to withdraw sufficient funds.

This provision could be extended to pre-retirement access to savings in retirement annuity and preservation funds.

Currently, members of retirement annuities are not able to access their retirement funds even in the case of retrenchment.

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