New legislation that will effectively scrap provident retirement funds and restrict access to retirement savings before retirement could be on the books by the end of the year or early next year, Olano Makhubela, the National Treasury’s chief director of financial investments and savings, says.
Makhubela, who was speaking at the convention of the Association for Savings & Investment SA (Asisa), says the move is part of the government’s reform of retirement savings structures.
He says that these two issues, which are contained in the soon to be published third version of the government’s retirement reform proposals, need to be fast-tracked.
They make up a section of the proposals dealing with private sector funds entitled “The approved fund framework”.
The legislation will make it much tougher for you or anyone else to access the cash in your retirement savings when you leave your job or get divorced before retirement; and when you reach retirement at least two-thirds of all your retirement savings, be they from a provident or pension fund, will have to be used to buy a pension for life.
Makhubela says the “leakage” of retirement funds savings as a result of money being withdrawn before retirement is the main reason so many people do not retire financially secure.
“Before we start talking about increasing retirement savings, we have to talk about preserving savings,” he says.
The proposed legislation will strictly limit the amount that may be withdrawn in cash from a retirement fund before retirement and then it will only be permissible in life-crisis situations.
The legislation will also provide for the portability of retirement savings. This will allow members to transfer their savings from one fund to another in cases where another fund offers better conditions, such as lower costs. When fund members change jobs, they will be able to leave their savings in an existing fund or transfer their savings to an occupational retirement fund offered by their new employer.
The envisaged legislation will also prevent non-member former spouses from being paid out their share of a member’s retirement savings in cash following a court-approved divorce settlement for the division of the retirement savings. The non-member former spouse will have to retain the money as retirement savings to be used to provide a pension at retirement age.
There has been increasing evidence that some people:
* Use “fictitious” divorces merely to get their hands on retirement savings, with settlements in favour of non-member spouses being as high as 100 percent of savings; and
* Resign from their jobs to gain access to the cash in their fund.
Makhubela says the Treasury is currently working on different scenarios as to how much and under what conditions money may be withdrawn before retirement. The new provisions could include some overall limits, but would take into account how much money you have saved, your age, and your future ability to top up your savings.
He says it is a reality that people do have life-crisis situations, such as when they lose their jobs, and they need access to cash. But all too often all of the money is withdrawn from a fund to spend on non-life-crisis demands.
At the same time, the government may loosen the current very strict conditions on withdrawals from retirement annuity (RA) funds, – at present, under most circumstances, no withdrawals are allowed before the age of 55.
Makhubela says the Treasury receives a large number of complaints from RA members in life-crisis situations about their inability to access their savings.
He says the aim of the government is to ensure that those people who can afford to save for retirement do so and that they keep those savings so that they do not fall back on the state social old age grant. This will allow the government to concentrate its limited resources on the truly destitute aged.
The proposed legislation will effectively destine provident funds to history.
The main proposed change to provident funds is the scrapping of the right of members to take their retirement savings as a cash lump sum at retirement. The legislation will aim at bringing provident funds in line with pension funds where members are required to use two-thirds of their accumulated retirement savings to purchase a pension that will pay out for life.
This will also mean changes to the tax structure because currently contributions to provident funds are made with after-tax money whereas contributions to pension funds can, within limits, be deducted from taxable income.
The main problem with provident funds is that members take the cash at retirement, spend it and then fall back on the government social old age grant for financial survival, placing further strains on government resources.
Makhubela, however, gave a guarantee that existing rights will be respected. He says various options are being considered, such as allowing those provident fund members who will be age 50 when the legislation is promulgated to take their money as a lump sum.
He says the Treasury still has to consult widely with the various interest groups on the proposed legislation.
ASISA PROPOSES LOW-COST ‘GAP’ PRODUCT
The Association for Savings & Investment SA (Asisa) has proposed a low-cost life assurance product as a potential alternative to the government’s plans to establish a National Security Savings Fund (NSSF), which if approved, could be a compulsory initial retirement savings vehicle for all employed South Africans.
The Asisa proposal for what it currently calls the “Gap Fund” goes further than providing for a basic level of retirement savings. Asisa says its product will also be available to people who have irregular employment and could provide a longer-term savings vehicle for other needs, such as housing.
It will also provide low-cost group risk assurance to cover for the death or disability of a member.
However, in an interview, Olano Makhubela, the National Treasury chief director of financial investments and savings, says the Treasury is aware of the Asisa initiative but there has been no formal proposal to government as yet.
However, the government is unlikely to pull back on its own proposal for the NSSF.
Makhubela says the Asisa proposal makes sense as one option for anyone who wants to make additional savings over and above the contributions they will be obliged to make to the NSSF to ensure a financially secure retirement, and also for people with intermittent employment who would not be expected to contribute to the NSSF.
He says there will be a need for savings vehicles, such as occupational retirement funds and retirement annuity funds, to provide for people who want to supplement their retirement savings beyond what they contribute to the NSSF.
The current NSSF proposals also do not cater for the armies of South African domestic and farm workers.
There is little reason for low-income earners to save for retirement as they do not receive any tax incentives for doing so. Most also do not have enough money to save.
In terms of current proposals, the aim of the NSSF will be to provide a retirement income of about 40 percent of your last pay cheque. Most occupational retirement funds aim at providing between 70 and 80 percent of your last pay cheque after 40 years of membership.
Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, who is the convenor of the Asisa retirement reform committee, says that the features of the Asisa gap product include:
* The product will not be branded to any company. It will be generic and provided across the industry, with administration being provided by various companies with spare capacity. The aim is to provide the savings product on a non-profit basis.
* There will be no investment choice, and your money will be invested primarily in government inflation-linked bonds.
* Employers concerned about the retirement years of their employees will be able to contribute to their employees’ retirement savings.
* Life assurance risk and disability benefits will be provided, with benefits based on annual contributions as well as age. The assured benefits will be far higher when members are young and have contributed little to their retirement savings, but benefits will be scaled down as members get older and accumulate more in savings. The life assurance cover would be provided by a range of life companies but would also not have a company branding. Koekemoer says that by linking the assurance benefits to your annual retirement savings contributions there will be an incentive for you to save as much as possible to ensure the maximum risk benefits.
* Flexible design. Unlike many current products where fund members are committed to contributing a fixed amount or a percentage of income, members will be able to change and even stop paying contributions without penalty. The Gap Fund, because of its low cost structure, will be able to accommodate much lower minimum contributions.
* At retirement, members will be paid a pension and not a cash lump sum. However, if the fund is used as a savings vehicle for such things as buying a house, a lump sum would be paid.
Koekemoer says the Asisa proposal should not be seen as a defence mechanism to protect its own interests but as a genuine attempt to create a low-cost option for lower-income people and people with intermittent employment.
LOWER EARNERS IN IT FOR THE RISK COVER
Access to life assurance group products providing cover for death or disability are often the main reason why low-income employees favour membership of occupational retirement funds, according to prominent pension fund lawyer Jonathan Mort.
Mort, who was speaking at the Association for Savings & Investment SA convention, was appointed by the Financial Services Board last year to take over the running of the troubled private security sector umbrella retirement fund. It is obligatory for most private security firms to enrol their employees as members of this fund.
Mort says that the 120 000 members of the fund earn an annual average salary of R35 000 and receive a death benefit of 2.5 times their annual salary. Because of their low earnings very little goes towards actual retirement savings but the big attraction of the fund for members is the life assurance cover.