Re­tire­ment re­forms to cul­ti­vate a cul­ture of sav­ing

Fail­ure to ad­e­quately save for re­tire­ment puts strain on gov­ern­ment’s bud­get as more pen­sion­ers be­come re­liant on state pen­sion and so­cial grants. In or­der to en­cour­age em­ploy­ees not only to save, but to en­sure they have enough for a com­fort­able re­tire­men

Finweek English Edition - - MONEY - BY BUHLE NDWENI

The Na­tional Trea­sury re­cently took the f irst steps to­wards im­ple­ment­ing pol­icy pro­pos­als that would lower charges of sav­ing to­wards re­tire­ment while im­prov­ing in­dus­try con­duct to serve the best in­ter­est of re­tire­ment fund mem­bers.

These re­forms will en­sure t hat em­ploy­ers pro­vide good value-for-money re­tire­ment sav­ings plans in em­ployee con­tracts, and that em­ploy­ees be­long­ing to a re­tire­ment fund are treated fairly and their money is man­aged well by the re­tire­ment fund’s board of trustees.

Spea k i ng at t he An­nual 10X Re­tire­ment Fund Con­fer­ence i n Johannesburg in July, Olano Makhubela, chief di­rec­tor of fi­nan­cial in­vest­ments and sav­ings at the Na­tional Trea­sury, said the draft de­fault reg­u­la­tions aim to en­cour­age sav­ings and en­sure peo­ple are not vul­ner­a­ble to poverty while work­ing and in re­tire­ment. “This en­cour­ages em­ploy­ees to pre­serve their sav­ings when they change jobs, while giv­ing them the right to opt out,” said Makhubela. “It doesn’t serve to try and help peo­ple save and ac­cu­mu­late dur­ing their work­ing lives only for them to have a lump sum at the end, spend it quickly and be im­pov­er­ished later. The idea is to see how best we can en­cour­age peo­ple to an­nu­a­tise, rather than take their en­tire ben­e­fits through cash lump sums.”

An­nu­a­tised i nvest­ments re­fer to in­come pay­ments made to a ben­e­fi­ciary pe­ri­od­i­cally. Such in­vest­ments, depend­ing on the an­nu­ity pol­icy, are not com­pletely paid out to the ben­e­fi­ciary. au­to­mat­i­cally fall into, and pro­vide value for money for their in­vest­ments lead­ing to re­tire­ment. But fund mem­bers can opt out of the de­fault.

Fund boards, ac­cord­ing to t he de­fault draft reg ula­tion, must be able to demon­strate to the reg­is­trar that, among other things, the de­fault in­vest­ment port­fo­lios are ap­pro­pri­ate for mem­bers who are au­to­mat­i­cally en­rolled. Fur­ther­more, the ob­jec­tive com­po­si­tion and per­for­mance of these port­fo­lios must be ad­e­quately com­mu­ni­cated to mem­bers; must be good value for money; all fees and charges and their im­pact on mem­bers’ ben­e­fits must be dis­closed ac­cu­rately and regularly; per­for­mance fees are not to be al­lowed, and mem­bers aren’t to be locked into the de­fault in­vest­ment strat­egy.

Makhubela said de­sign­ing good de­fault prod­ucts and sys­tems is likely to yield pos­i­tive out­comes. In­di­vid­u­als tend to stick with the de­fault rather than ex­it­ing, although that right will al­ways be avail­able to them.

“We think this will take us a long way in start­ing to es­tab­lish a sys­tem with prod­ucts that are sim­ple, ef­fec­tive, trans­par­ent and en­ables re­tirees to un­der­stand and be in touch with their re­tire­ments dur­ing ac­cu­mu­la­tion and up to re­tire­ment,” he said.

Ac­cord­ing to di­rec­tor of re­tire­ment funds at the Trea­sury, Alv­inah Thela, the de­fault reg­u­la­tions aim to en­cour­age the in­dus­try to act in the best in­ter­est of the cus­tomers, and not only to profit.

Cur­rently, when peo­ple exit jobs, they re­ceive a cash lump sum with­out be­ing ad­vised re­gard­ing their op­tions. “If a mem­ber leaves the fund, they should have the op­tion of be­ing a de­ferred pen­sioner or a paid-up mem­ber. Op­tions are to with­draw, leave it there or take it into a preser­va­tion fund or move it with them to a prospec­tive em­ployer’s fund,” said Thela.

There should be a drive in the in­dus­try to ad­vise mem­bers or cus­tomers that should they with­draw, tax­a­tion will sig­nif­i­cantly re­duce the fund amount re­flect­ing on their state­ment, she said.

When t rans­fer­ring f unds i nto a preser­va­tion fund, the per­son needs to be ad­vised that they will only have one with­drawal in the life­time of that ben­e­fit, ac­cord­ing to Thela. Also, if they move it into a re­tire­ment an­nu­ity fund, they will not be able to with­draw it.

The Trea­sury hopes the Tax­a­tion Law Amend­ment Act leg­is­la­tion will be ef­fec­tive as of 1 March 2016. It is cur­rently in the con­sul­ta­tion phase of the de­fault draft reg­u­la­tion and sub­mis­sions can be di­rected to Thela at re­tire­­form@ trea­ by 30 Septem­ber.

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