Fast little loans
A massive swing to the use of investment-linked living annuities (illas) from guaranteed annuities is causing headaches for government.
Ismail Momoniat, deputy director-general of the National Treasury, told Parliament’s Standing Committee on Finance this week that retirees are often being wrongly advised to put their money into illas because of commissions paid to advisers and then, as pensioners, they run short of money after a few years.
Momoniat says more has to be done to standardise retirement products and ensure that more people used their retirement savings to purchase a pension that would last for their lifetime.
Momoniat says Treasury is pushing ahead with the reform of the existing private-sector retirement fund industry in parallel with overall retirement reform because of its concerns about problems such as the high costs of retirement savings, which are “scandalous”.
He told Parliament that the delayed series of reform discussion papers, including one on annuities, will be released shortly and that the overall retirement reform proposals are currently before Cabinet.
He repeatedly gave the assurance that, although the intention is to change retirement structures to ensure people use their retirement savings for a pension, no existing rights to access retirement savings as cash will be removed.
But he says more has to be done to preserve retirement savings for retirement.
Consideration is being given to changing the default option for employees leaving their jobs. Currently, it is easier to get your hands on your retirement savings than to arrange to preserve your savings.
He says the default should be the easy preservation of your savings, while making you jump through a lot more hoops to get the cash.
Momoniat says one of the problems is that employers’ human resources departments find it easier simply to tell members to take their retirement savings as cash when they leave a company.
He says there are still indications that retirement fund members are resigning from their jobs and even getting divorced to get their hands on their retirement savings. He says there is no need for such extreme and dangerous measures, because government will not remove your existing rights.
On the issue of annuities, Momoniat pointed out that since 2002 the number of guaranteed annuities as a proportion of all pensions sold by the industry had dropped from about 50 percent to less than 20 percent, while in rand terms the values had dropped from almost 70 percent to almost 20 percent over five years.
He warned that illas are complex products, requiring sound financial advice and regular reviews.
Against this, “conventional annuities protect against longevity and investment risk”.
He says lower-income earners are disadvantaged by taking guaranteed annuities, because they have shorter expected life spans than high-income earners, meaning they should receive higher guaranteed annuities than richer pensioners.
Momoniat confirmed that government is considering enforcing standardised conventional guaranteed annuities and/or illas.
The massive trend to illas was confirmed this week by the Association for Savings & Investment SA (Asisa). Peter Dempsey, deputy chief executive of Asisa, says that in the first six months of this year, illas alone attracted R13.7 billion. Traditional guaranteed annuities attracted only R2.5 billion.
Dempsey says the flow to illas “comes as no surprise, since traditional guaranteed annuities are generally seen as less attractive when interest rates are low”.
But Dempsey says this perception is not always true, especially for older pensioners, because as people age and their life expectancy shortens, the pension a life assurance company is prepared to guarantee increases.
Research done by Alexander Forbes has shown conclusively that pensioners over the age of 70 should consider moving to guaranteed annuities because the no-risk pensions they receive are likely to exceed what they get from an illa while removing the often high investment risk of illas.
Dempsey says the industry has “to do more to educate consumers on the role of living annuities versus guaranteed annuities. If used wisely, sometimes even in combination, both types of annuities can provide pensioners with solid income-producing options.”
‘High costs decimating savings’
The “scandalous” high costs of retirement savings products – among the highest in the world – are discouraging South Africans from saving for retirement, Ismail Momoniat, deputy director-general of the National Treasury, told parliament’s finance committee this week.
He says the costs can reduce final pension benefits by more than 40 percent.
About the only people who escape the high costs are those who save through larger employer- sponsored occupational retirement funds, as the trustees of these funds can negotiate lower costs with service providers.
He says Treasury is scheduled to release a discussion paper on savings and retirement costs next month, and that “hard” discussions are going to take place with the financial services industry.
The life assurance industry, however, continues aggressively to sell its high-cost retirement annuities (RAs), which come with inflexible contractual conditions that can see your losing up to 20 percent of your savings if you reduce your contributions.
Peter Dempsey, deputy chief executive of the Association for Savings & Investment SA, in reporting on the half-yearly figures for the life assurance industry, says life assurance RAs attracted new monthly premiums worth R822 million in the first half of 2012 – up by 16 percent on the first half of last year and three percent more than in the second half of last year.
Dempsey says it is encouraging that consumers continue to recognise the benefits of investing in RAs – a disciplined retirement savings vehicle.
Questions about FSB’s scam control
The Financial Services Board (FSB) could soon find itself being grilled by Parliament for not being more effective in curtailing scams that recur with alarming regularity, with losses of billions of rands of the savings of consumers, including retirement fund members and pensioners, who fall prey to the schemes.
And National Treasury concedes that the FSB is not doing enough to protect you.
The latest scam to hit the headlines was the high-drama collapse of a Ponzi scheme masquerading as a hedge fund, the Relative Value Arbitrage Fund (RVAF).
The scamster, Herman Pretorius, shot his business associate, Julian Williams, during an altercation, before turning the gun on himself following a belated FSB raid more than a year after the scam was first reported to it.
The roughly 3 000 investors in RVAF, most of whom are from the Western Cape, invested about R2 billion in the scheme. Once again, many are pensioners, who now face destitution because their money went into a high-return, extremely high-risk, unregulated “investment”.
Personal Finance asked the FSB to investigate the scheme in May last year, and the FSB merely accepted replies given to it as fact, allowing what amounted to a gigantic Ponzi scheme to continue operating under its nose. (A Ponzi scheme uses the capital of the most recent investors to pay out high returns to earlier investors, who, in turn, spread the word about the “fantastic” returns.)
After the bubble burst, the FSB attempted to justify its laxness by making a claim to the effect that Pretorius was virtually exempt from FSB action because the product he was flogging was not subject to regulatory oversight.
Cope MP Nick Koornhof raised the issue at parliament’s finance committee meeting this week, asking how the FSB will be transformed in line with government’s twin-peak policy where all market conduct of financial institutions will be placed under the control of the FSB.
“How long must we wait for it? There have been so many tragedies since Fidentia. How long must we wait for real action, for the FSB to have all the teeth it needs?” he asked.
Koornhof told Personal Finance that he will raise the issue again next week with the committee and ask for a special meeting to call the FSB to account.
His concerns were echoed by Ismail Momoniat, deputy director-general of the National Treasury, who told the committee he believed the FSB has sufficient legislative teeth. The problem, he said, is how the teeth are used.
He candidly admitted that the FSB should have picked up on some of the attacks on retirement funds and other scams.
However, Momoniat says, ways have to be found of dealing with campaigns to vilify the FSB and others by parties such as Arthur Brown, who faces criminal charges relating to the implosion of Fidentia, and Simon Nash, who is facing criminal charges arising from the alleged illegal removal of pension fund surpluses in the 1990s.