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
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 retirement.reform@ treasury.gov.za by 30 September.