Col­lapse or merge

Pro­posed so­cial se­cu­rity tax could have im­pli­ca­tions for smaller funds

Finweek English Edition - - Employee benefits -

WHILE THE DE­TAILS SUR­ROUND­ING the pro­posed so­cial se­cu­rity tax are still sketchy, it’s cer­tain to have some ef­fect on the re­tire­ment fund in­dus­try as well as the con­tri­bu­tions of mem­bers them­selves.

Shan­tha Pa­day­achee, act­ing CEO and di­rec­tor of the In­sti­tute for Re­tire­ment Funds (IRF), says that smaller re­tire­ment funds are likely be af­fected most se­verely by the pro­posed so­cial se­cu­rity tax.

“The most likely ef­fect on the in­dus­try is that smaller funds that may al­ready be in fi­nan­cial dif­fi­culty would prob­a­bly end up col­laps­ing into the cen­tralised so­cial se­cu­rity sys­tem,” she says.

Pa­day­achee says that of the roughly 13 500 re­tire­ment funds in ex­is­tence around 5 000 are deemed “small” and have lim­ited cost ef­fec­tive­ness. “It may ben­e­fit them to merge with the so­cial se­cu­rity fund as they would en­joy the po­ten­tial ben­e­fits of greater economies of scale,” she says. “Ad­min­is­tra­tion costs make up a smaller per­cent­age of a large pool of funds and there­fore eat up less

of their prof­its. Run­ning ex­penses are lower and be­cause there’s a greater pool of mone­tary con­tri­bu­tions, one can ne­go­ti­ate much more favourable pre­mi­ums and ben­e­fits with risk providers. Th­ese rea­sons would prob­a­bly make it at­trac­tive for smaller funds to merge with what will in all like­li­hood de­velop into a mono­lithic cen­tral so­cial se­cu­rity sys­tem.”

How­ever, Pa­day­achee says the ef­fect on larger private funds is likely to be min­i­mal.

“Whether the so­cial se­cu­rity fund will dis­si­pate the broader in­dus­try is ques­tion­able as the re­turns from so­cial se­cu­rity funds the world over are gen­er­ally not as high as those from private funds,” she says. “As such I doubt that mem­bers of larger funds will ag­i­tate to move into a Gov­ern­men­tad­min­is­tered so­cial se­cu­rity fund. The so­cial se­cu­rity fund may have to es­tab­lish its track record first.”

One con­cern though is that if the manda­tory so­cial se­cu­rity tax is set at a high rate, it could pos­si­bly per­suade in­di­vid­u­als to lower their per­sonal con­tri­bu­tions to their ex­ist­ing em­ployer-based re­tire­ment funds in an at­tempt to pre­serve their monthly dis­pos­able in­comes.

“To some ex­tent it could de­pend on what per­cent­age the manda­tory tax is go­ing to be levied at,” says Pa­day­achee. “If it lessens your abil­ity to con­trib­ute to say a re­tire­ment an­nu­ity, then it could end up af­fect­ing the private in­dus­try to some ex­tent. If the so­cial se­cu­rity tax is coun­ter­bal­anced by a re­duc­tion in the rate of per­sonal in­come tax for higher in­come earn­ers, then the ef­fect may be less dras­tic.”

How­ever, Ish­mail Momo­niat, deputy di­rec­tor gen­eral of Fis­cal Reg­u­la­tion and Tax pol­icy at the Na­tional Trea­sury, as­sured Fin­week that Gov­ern­ment does not in­tend to dis­rupt the in­dus­try.

“We see the private re­tire­ment in­dus­try as a part­ner in this and we’re not go­ing to im­pose any dra­co­nian mea­sures that are go­ing to af­fect peo­ple’s dis­pos­able in­come or desta­bilise the re­tire­ment in­dus­try,” he says. “Al­though it’s still a pro­posal, it’s also likely that the so­cial se­cu­rity tax will be phased in grad­u­ally for peo­ple who are al­ready mem­bers of private re­tire­ment funds.”

Colin Bullen, head of spe­cialised con­sult­ing at Lekana Em­ployee Ben­e­fit So­lu­tions, says the so­cial se­cu­rity tax should be wel­comed as it will boost the en­tire coun­try’s sav­ings rate and en­sure that more South Africans reach old age with more than a mea­gre State-pro­vided stipend.

The ef­fect on larger private funds is likely to be min­i­mal. Shan­tha Pa­day­achee

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