Collapse or merge
Proposed social security tax could have implications for smaller funds
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