Getting in line with reality

Confusion over the future of pension and provident funds remains. The budget did not make that any easier to understand

With personal taxes up and an increase in dividend withholding tax from 15% to 20%, the tax breaks from retirement funds continue to get more valuable.

There is still confusion about the future of pension and provident funds, and the budget did not make that easier to understand. There is a stalemate over plans to force provident fund members to take pensions instead of lump sums at retirement. Treasury had planned to introduce this in the 2016 financial year, but the budget document says nothing will be introduced until there is consensus at the National Economic Development & Labour Council.

Arno Loots, head of Liberty’s umbrella funds unit, says that the only stick treasury has deployed is to indicate that provident fund contributions will lose their recently gained tax-free status unless the parties agree to accept forced pensions (or compulsory annuitisation).

Loots says that an interesting suggestion in the budget documents is that treasury and the retirement industry should look at developing a new kind of annuity product for the lower- and middle-income market, given that traditional pensions are unpopular in these markets.

The current topical discussion in the pensions world is the default regulations, which were published in December 2016 and for which industry comment is due by next week. These set out what will be permitted for retirement fund members who do not want to choose. In the first draft, performance fees and smooth bonus funds were not permitted; in the second draft they were allowed.

“My heart skipped a beat when I read that concerns on these topics might be reviewed in the final paper,” says Malusi Ndlovu, head of Old Mutual Corporate Consultants. Ndlovu has a vested interest in supporting the highly profitable smooth bonus funds that Old Mutual uses as its main default. But many of these products are unlikely to get over the tight cost ceiling treasury is likely to implement.

Regulations will soon be in line with reality, as parliament is finally expected to recognise the status of umbrella funds officially. When the Pension Funds Act was written in 1956, umbrellas — which allow for multiple employers and are usually offered by life offices — had not been invented. And treasury is certainly ambitious as it hopes to solve the problem of the billions in unclaimed benefits sitting in retirement funds.

Arno Loots, head of Liberty’s umbrella funds unit