Proposals to boost your savings

National Treasury says there are numerous ways to bring down the cost of saving for retirement, which would result in you receiving a better pension.

Treasury has put forward the following proposals for discussion:

Fund consolidation. Most retirement funds do not have the necessary membership and asset size to achieve sufficient economies of scale, which leads to higher costs and lower benefits for members.

Improved fund governance. This includes putting a stop to conflicts of interest where, for example, a service provider encourages a fund to use a particular service, because it would unfairly make a profit at the expense of the fund and ultimately its members.

Stronger regulation. A strong and effective regulator is essential to ensure a wellfunctioning retirement system. The regulator needs to have the power to monitor all aspects of the retirement-funding system, including costs, and to intervene when necessary to protect the interests of members.

Workplace retirement provision. With the higher costs associated with individually distributed retirement vehicles, such as retirement annuities (RAs), and employees’ low level of financial literacy, Treasury recommends that the workplace remains the primary arena where retirement savings products are distributed.

Simplified products. To increase competition based on price, Treasury proposes that retirement products be simplified significantly before they can qualify for tax exemptions for members.

This may imply a standardisation of permitted charging structures, a requirement that all members are charged on the same basis, and a restriction on the investment options, if any, that funds may offer their members to those that comply with prescribed standards.

Retirement funds that grant their members a choice of investment portfolios may have to provide default portfolios that meet more stringent requirements, including an outright ban on any exit penalties for early retirement or loyalty bonuses and, possibly, a cap on recurring charges, to prevent product and service providers from shifting from one form of charge to another.

Effective selling. The need to sell products and provide consumers with advice may be compromised by high costs and remuneration structures that result in conflicts of interest. Work is under way in the retail space to explore ways in which the incentives offered to intermediaries may be better aligned with serving consumers’ needs.

Various aspects of linked-investment services provider (lisp) platforms, including the payment of rebates by investment managers to lisps, are to be investigated.

Compulsory fund membership for all employees. Employers may automatically have to enroll their employees in a retirement fund, which may be a stand-alone pension fund, an umbrella fund or an RA fund.

The creation of a retirement fund exchange or clearing house. To ensure costeffective compulsory fund membership, an exchange could be created that would enable smaller employers and their employees to compare different retirement plans easily and to choose one that meets their needs without requiring financial advice.

Funds that satisfy certain criteria, including economies of scale, design, efficiency and simplicity, will be permitted to list on the exchange.

Default funds. Default funds could be provided on the retirement fund exchange for employers who do not specify a fund for use by their employees. Default funds could also be used to facilitate the preservation of savings before retirement and to ensure that unclaimed retirement benefits are managed effectively.