Government wants to revitalise the annuity (pension) market and reverse the trend towards high-cost, high-risk investment-linked living annuities (illas), where pensioners take the risk that they will receive a sustainable pension for life.
Also on the list of proposals that National Treasury wants to discuss with the pension fund industry is a change to the structure of traditional guaranteed pensions, which favour the wealthy and disadvantage the poor.
Currently, with guaranteed annuities, the only differentiations made between pensioners are based on:
However, the rich also live for longer than lower-income earners, because they can afford healthy lifestyles and top-end medical care, which promote longevity.
Lower-income people tend to die at a younger age, because they cannot afford to lead healthy lifestyles and good medical care. By dying earlier than wealthier pensioners, they in effect subsidise the rich, because the poor receive pensions for far shorter periods.
Ismail Momoniat, deputy director-general of the National Treasury, says the discussions with the pension fund industry will include giving consideration to individually risk-rated annuities – the risk-assessment system used when you buy a life assurance policy.
With a life assurance policy that pays out on death, the life company takes into account numerous factors, such as your health and your lifestyle, to assess your chances of dying prematurely. If the company regards you as high risk, you pay a higher premium.
The individual risk-rating of guaranteed pensions could result in those who are at risk of dying prematurely receiving a higher pension.
National Treasury says it is also concerned about:
Treasury is concerned that too many pensioners are selecting illas instead of traditional guaranteed pensions.
It says illas are complicated products, involving complex trade-offs and requiring substantial financial advice. Any errors in the investment strategy or drawdown rates may become apparent only years after the product has been taken out, by which time it is not possible to rectify them, which may have serious consequences.
National Treasury says less than 10 percent by value of pensions being bought are traditional annuities, which guarantee a pension for life. Most pensioners are opting for illas, exposing themselves to:
In other words, when you reach retirement, you will, at little cost, simply have your retirement savings transferred to the default option chosen by your retirement fund trustees; or you can withdraw your savings and buy a pension of your choice.
The massive shift from defined benefit pension funds to defined contribution funds over the past 20 years has resulted in retirees having to decide on and purchase their own pensions at retirement, with costs reducing their potential pension.
With defined benefit pension funds, the fund normally provides the pension, with the result that there is a cost-free transition for retirement fund members when they enter retirement.
The pension benefits are also defined, normally as a percentage of final salary and based on the number of years of fund membership. The fund trustees award pension increases depending on the strength of the assets held by the fund. Historically, these increases have tended to average 75 percent of inflation.
DISCUSSION DOCUMENT ON SOCIAL SECURITY DUE OUT SOON
Government intends to unveil its long-awaited second discussion document on broad-based social security reform within two months. This was announced by Finance Minister Pravin Gordhan this week on releasing a general discussion document on strengthening saving by South Africans, particularly saving for retirement.
Gordhan says the document, which, among other things, seeks to create a National Social Security Savings Fund (NSSSF), is subject to final cabinet discussions.
Proposals already on the table include establishing a national retirement fund that will provide a pension, as well as assurance against death and disability prior to retirement, and the consolidation of other social assistance programmes.
Gordhan says that wide discussions with all interested parties will take place before the final decisions are made.
The reform of the private sector savings industry, including the retirement industry, is being undertaken in parallel with the reform of the social security system.
The discussion document released this week will be followed by a number of technical papers providing more details than those contained in this week’s document.
The schedule for the release of the discussion papers is: