The draft retirement reform regulations could be out in the next week or two. The much-anticipated regulations will address the structural, economic and market conduct factors that are driving up retirement saving charges.
They will also take into account public comments on the optimal balance between retirement savings preservation and withdrawal. “So it’s not 100 percent preservation, but neither should people take out everything that they put in a retirement fund,” Treasury deputy director-general of tax and financial sector policy Ismail Momoniat, said this week.
He said the Treasury believed short-term savings products might be more appropriate for those who wanted to make withdrawals before retirement.
Finance Minister Pravin Gordhan said the Treasury realised that it was not always possible for employees to leave their savings untouched until retirement, as most employed people had extended family responsibilities.
Regarding the charges on saving instruments, Gordhan said the Association for Savings and Investment SA (Asisa) had agreed “in principle” to move in the direction of reducing industry fees.
“We’ve had long discussions with Asisa. They have given us a written commitment that they are prepared to work with us on reducing charges.”
Momoniat said the “high level” discussions the Treasury held where this “in principle agreement” was reached, also included businesses in the life insurance industry and unions. But he said “the devil is in the detail” on how this agreement would be put into effect.
The draft regulations “will be put out for comment and will deal with issues like what type of defaults do we want in place. We’ve got the ‘in principle’ agreement, but it’s the regulations themselves that will drive these changes.”
The Treasury and Asisa reached consensus that structural and economic factors contributed to the high administration costs of retirement products, in addition to poor market conduct.
Structural factors included the fact that the more people contribute to retirement and the more members each fund has, the more the costs will go down because of economies of scale.
“If you have a more compulsory system where all employed workers are in a pension fund, the costs are going to go down for all. The second factor is preservation… The third one is there are too many funds and many small funds are not viable. So, at a high level there is that kind of agreement that these structural issues drive up costs,” Momoniat said.
Gordhan said the British government was moving towards similar proposals in legislating the costs in the retirement savings system, because excessive charges meant that the benefits accrued by the retiree or saver of that money were less optimal than they should be.
In his Budget speech on Wednesday, Gordhan reiterated the Treasury’s intention to encourage retirement savings. About 6 million workers do not have employer-sponsored retirement benefits.
Momoniat said while the government was working towards mandatory savings, this would take time as there had to be co-operation between the stakeholders.