Ethel Hazelhurst
Job-changing South Africans will no longer be free to tap their retirement savings, if proposed reforms from the Treasury are implemented.
Finance Minister Pravin Gordhan, who plans a series of changes to the country’s R2.4 trillion retirement savings industry, released a discussion document yesterday on proposals to streamline the system.
And preservation and portability of pensions – measures designed to stem leakages from the system as people change jobs – are high on the agenda.
Traditionally South Africans have used pension fund payouts for short-term needs, such as a deposit on a house, a trip abroad or to survive if they find themselves unemployed. As a result, people retire with inadequate provision and the country has one of the lowest savings rates globally, 16 percent of gross domestic product. Treasury points out this is well below the 53 percent savings rate of China and the 35 percent rate in India.
As to households, their savings ratio is negative on a net basis, in other words they borrow more than they save. The Treasury said this was due to an increased access to credit since the late 1990s.
At least one of the proposals could become a political “hot potato”, according to Leon Campher, the chief executive of the Association for Savings and Investment SA. It will affect provident funds, which traditionally pay out lump sums on retirement.
If the proposals go through, provident fund members would only be able to take one third as a lump sum, while the rest would go towards buying an annuity – a monthly income.
This is likely to be opposed by unions, whose members prefer to receive a lump sum.
Campher, who praised the Treasury for its engagement with the private sector during the process, agreed the industry was not cost effective because there were too many funds.
On the other hand, Campher was opposed to one national savings scheme as suggested initially in 2004.
He said the Treasury was now taking a “stratified” approach. This would mean that everyone would contribute a small amount to a central scheme, but people who could afford to make additional provision would be free to do so.
While an important objective of the changes is to enhance the quality of life of households, particularly of retirees, Gordhan noted the broader consequences to the economy.
“In the long term, lower savings lead to lower growth and higher taxes, as taxpayers fund those who do not provide sufficiently for their retirement.”
Most of the burden is borne by households earning between R150 000 and R400 000 a year, which account for about 44 percent of taxable income.
Gordhan said a paper on comprehensive social security would be published later in the year. Yesterday’s proposals “give effect to more urgent reforms”.
The “overview document opens a public consultation process with trade unions, employers, retirement funds and the broader public to strengthen the retirement system for all South Africans”. The deadline for comment is July 31.
The document also outlines other issues that need to be tackled.
Existing pension laws are to be extended to public pension funds. The annuities market is to be reformed.
Tax incentives are to be introduced to encourage savings.
The governance of funds is to be improved and the role of trustees enhanced.
And high fees and charges are to be addressed.