Retirement system not broken, just cracked

Cape Town - South Africa's retirement system is not broken, but it has cracks which must be dealt with by means of reforms, Olano Makhubela, chief director of financial investments and savings at National Treasury said on Monday.

The primary aim of the proposals for retirement reforms is to encourage household savings and ensure that individuals are not vulnerable to poverty while working and in retirement, according to Makhubela.

In 2013 the gross savings rate in South Africa was 13.5%, while that in China was 51%, in India 30% and in Brazil just slightly above that of SA, Makhubela said at a retirement fund conference hosted by 10X Investments at the Crystal Towers Hotel in Cape Town on Monday.

"Savings and investments lead to economic growth. The South African economy has been largely driven by consumption which has unfortunately lead to debt," said Makhubela.

That is why the aim of retirement reforms would be to improve SA's savings rate.

Key policy proposals include attempts to encourage the preservation and portability of retirement savings, especially during job changes, the enhancement of governance of pension funds and the simplifying of taxation regarding retirement contributions.

Policy reforms should also encourage annuitising at retirement en encourage non-retirement saving through tax free saving plans, according to Makhubela.

Currently members of provident funds are not compelled to annuitise at retirement, so they can take their entire retirement savings as a cash lump sum and Makhubela said many spend it quickly.

"Many members are also reluctant to annuitise since they lose the old age grand if the annuity is larger than the grant," he said.

"Reforms are needed to make the annuities market function better for low-income workers and standard annuity rules are required as part of tax harmonisation."

Good value

Good value retirement products and services, also in terms of costs, is another important aspect to him.

Currently employees are allowed to cash in their retirement savings upon job changes and therefore many do not preserve these savings. Research by Old Mutual showed that at least 90% of those who withdrew from their retirement funds, cashed it in.

Makhubela emphasised that about 6% of South Africans currently working will struggle to replace their incomes fully in retirement.

A key proposal - which Makhubela stressed are not yet legislation and is not an attempt to nationalise funds - is to create a default whereby an employee's retirement savings, upon leaving an employer's service, will automatically be retained in the ex-employer's fund until the departing employee chooses to transfer it to a preservation fund of the employee's choice of to a new employer's fund.

"Retirement savings accumulated up to the date of the new rules coming into effect - including growth on these accumulated savings - will not be affected by the new rules," said Makhubela.

"Vested rights are fully protected. Existing members who are 55 years old and above on March 1 2015 will not be required to annuitise, to avoid disrupting their retirement plans. Members below 55 years on March 1 2015 will be required to annuitise only new contributions and growth on them after the date of the new rules."

Provident fund members are also to enjoy the same tax benefits as pension fund members, he said.

Another propsal is for the Financial Services Board (FSB) to monitor the appointment of trustees of retirement funds to ensure that they are "fit and proper" for the task.

- Fin24

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