State wary of legislating about inadequate saving for retirement

Treasury to release discussion paper on pension concerns as citizens are living longer but not saving enough, writes Phakamisa Ndzamela

THE lack of adequate provision by individuals for their retirement is one headache the South African government and others globally have to bear, as many citizens tend to be heavily reliant on the state, thus increasing governments’ costs of looking after them as they get older.

In some instances this is caused by the trend to greater longevity — certainly in developed countries, with people now living longer than their retirement savings can cover.

Added to this is the problem of individuals not preserving their retirement savings when changing jobs, putting pressure on the state to cover the shortfall. When employees move from one company to another, too many cash in all their pension money— which is often spent on paying down debt, or purchasing assets — as they are of the view that a new employer will offer them new retirement benefits providing similar returns.

But it takes time for pensions to accumulate adequate capital for retirement. As a result, people who change jobs and cash in pension savings can find that when they reach retirement age they have not saved enough.

One disturbing figure released last week at the 2012 Sanlam Benchmark Survey sym-

When employees move from one company to another, too many cash in all their pension money

posium was that 24% of funds surveyed reported that people resigned in order to access their retirement savings. In some cases, when a couple divorces, the pension is withdrawn as part of the settlement.

Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions, says the proceeds of retirement savings, after being hammered by tax, will often be used to pay off shortterm debt.

But this can lead to shortterm debt growing again after such savings are used to pay it down. “It should not be as easy as it is for members to access retirement cash,” Mr van Zyl says. “If someone resigns, they must go to an adviser and be advised of the consequences.”

However, it can cause some panic when governments implement reforms to ensure citizens have adequate retirement savings and that pre-retirement savings leakage is reduced.

But some reform is needed if citizens want their taxes to go to better use than looking after those who did not adequately save for retirement.

To this end, the Treasury will soon release a paper based on extensive industry consultations to look at how individuals can best transfer their retirement savings from one employer to another without squandering them. But government is also treading carefully to avoid fears about any changes to legislation governing pension savings.

The aim, according to a Treasury presentation at the Sanlam symposium, is to “address preretirement leakage caused by payments to members leaving pension and provident funds

If someone resigns, they must go to an adviser and be advised of the consequences

upon job changes, (and) nonmembers in cases of divorce order settlements.”

“While the stated intention is to protect retirement funding through preservation and portability (a mechanism allowing employers to accumulate pensions under any employer), there might be a need to allow access to the retirement benefits in some limited instances,” the Treasury paper reads.

One proposal being considered is to allow individuals who are temporarily unemployed, or need to undergo life-saving medical treatment, to withdraw some of their retirement savings.

There is discussion in this regard of allowing individuals to withdraw up to one-third of accumulated benefits.

But there are also mechanisms available to increase the required amount of longevity protection. One such mechanism, which is not suggested in the Treasury presentation, is longevity insurance. This has been used in developed countries to minimise the risk of people retiring without adequate savings, as a result of living longer.

However, one of the proposed short- to medium-term reforms the Treasury is mulling is the creation of a uniform approach to taxing retirement funds, while also improving fund governance and legislation around the role of trustees. It is also discussing measures to reduce the costs of retirement products, while introducing tax incentives to promote retirement savings and the use of other investment products.

Discussion papers on these matters will be issued this year, the Treasury says.