On Wednesday, the National Treasury released a document – A safer financial sector to serve SA better - which contained a number policy priorities aimed at strengthening financial regulation, particularly in banking, in the aftermath of the global crisis.
But the policy document also contained some potentially explosive proposals for the pension fund industry.
It basically presents a full review of retirement funding in South Africa, reckons Peter Dempsey, deputy chief executive of the Association for Savings and Investment SA (Asisa).
While the announcement of the latest far-reaching proposals came as surprise to the retirement industry, Dempsey says the actual proposals have been under discussion for the past five years and form part of a long push from government for changes in the pension industry.
While retirement reform started in 2006, the process has taken longer than initially anticipated, Treasury said in the document. A number of urgent interventions have therefore been considered to protect members of pension or retirement annuity funds.
One of the key proposals will be the introduction of mandatory preservation of retirement savings. In a survey conducted in 2009 and 2010, only 10.2% of retrenched workers preserved their pensions, while 89.8% took a cash payout. The Treasury says it is critical for this to be stopped.
Enforcing preservation will have a tremendous impact on the level of retirement benefits enjoyed by pensioners, as well as savings levels in the retirement industry, says Raymond Berelowitz, executive general manager: product solutions at Old Mutual.
"I think the tougher challenge is growing the culture of voluntary savings, where people voluntarily prefer to save rather than consume. It is very hard to legislate or regulate attitude."
The policy document also suggests measures that will level the playing field for all products. Provident funds, for example, will be treated equally with other products in terms of benefits. "We will need to do away with the ability to have a provident fund paying out a lump sum of the entire benefit at retirement."
The document attacks the "poor disclosure, which can contribute to high charges and harmful inertia" in the retirement industry. Some proposals have been put forward to address this, including that every pension fund be compelled to provide statements to its members twice a year.
These statements, however, can't contain too much detailed information – which, according to the experience in other countries, will put members off reading the documents. Only an "optimal amount" of information – including how much money you have saved and what your pension payout will be – will be allowed.
In its budget review, also released on Wednesday, Treasury said it would consult with pension fund industry bodies this year to draft a code of ethics and address concerns over fees.
Dempsey expects this may lead to an alignment in the disclosure as well as the breakdown of fees, through either regulation or guidelines.
The Treasury announced a specific review of retirement annuity products - which are "characterised by a reputation for high costs and consumer abuses".
New-look RAs a far better option
Gregg Sneddon, a financial adviser from financial planning firm The Financial Coach, has welcomed the review. He thinks some of the big financial institutions - which still sell contractual annuities that will hit you with penalties if you stop contributing - are living "in the dark ages".
Already the industry has seen the emergence of "new generation" retirement annuities, some of which have removed many of the costs and penalties associated with old-style products. These are on offer from unit trust companies as well as life companies.
In these times of job insecurity, there can no question that the new products are by far the better option for consumers, Sneddon says.
Treasury wants to bring down retirement annuity prices by ramping up competition, offering companies without a long-term insurance licence the chance to offer living annuities (which don't guarantee a specific income). "This will open the market and foster competition."
Dempsey says that removing the requirement of a long-term insurance licence won't achieve much, because unit trust companies still need to be registered and comply with stringent regulations as well as meet prudential capital requirements.
Lowering capital adequacy requirements also goes against the global trend of stricter obligations to ensure security. "Clients want the guarantee that an institution will still be there in 25 years' time," says Dempsey.
Treasury said that the RSA Retail Bonds government programme may also be allowed to issue annuities. Sneddon is concerned about that, given that the bonds may not offer good enough growth. An investment of R1m in these bonds – at the current five-year yield of 8% and with a draw-down rate of 5% per year - would last only 27 years, according to his calculations. A new 20-year bond will obviously have to be launched, he says.
A better way to reduce costs is to remove some of the onerous restrictions on retirement annuities, Dempsey thinks. Currently retirement annuities have to comply with the Pension Fund Act (PFA), which was originally meant for large occupational funds. Some of the costly administrative procedures – like the approval process to get benefits paid out after the death of a member – could be changed.
Asisa recently introduced a new code of conduct for living annuities, which Sneddon thinks should be applied to the more traditional life annuities offered by insurance companies.
Research shows that 90% of life annuities are sold without any inflation linked escalation on the income. While the initial income might be attractive, investors will still be receiving the same amount in 30 years' time - which is criminal, says Sneddon.
The review could also result in increased rights for those who work for the government. Currently all the state sector pension funds – including those of Eskom and the municipalities – are exempted from complying with the PFA.
This means that if a member has a problem with his fund, he can't get recourse through the Pension Fund Adjudicator. Treasury is looking at the possibility of bringing all public sector funds into the same regulatory framework as private pension funds, the document says.
There will also be a push to reduce the number of pension funds to allow for cost efficiencies for members. Dempsey reckons the current 3 200 funds can be consolidated into half or two-thirds of the number.
"A legal threshold can be set at which a fund will be registered by the Financial Services Board. Further, smaller employers should be encouraged or required to join umbrella funds," Treasury said.