Retirement overhaul has extensive implications

The substantive industry response to the government’s latest proposal on retirement reform is indicative of its scale and depth, signifying both opportunities and threats to the retirement industry.

The objectives of the retirement reform proposals share common fundamentals with those of the industry and collaboration is key if we are to make retirement comfortable for all South Africans. These objectives include:

n Improving inadequate lifetime savings.

n Addressing South Africa’s low levels of preservation and improving portability of savings when members change jobs or retire.

n Addressing high fees and charges, which have a significant impact on the value of savings.

n Addressing low levels of annuitisation post-retirement, which is a significant factor contributing to members outliving their retirement savings.

The government’s latest proposal zones in on three key priorities.

n Addressing sustainability issues, which are primarily meant to ensure that the country’s post-retirement situation improves. The focus is on sound fund management, preservation of retirement benefits and greater levels of protection in a post-retirement scenario.

n Reducing fund costs and charges through price governance and product standardisation.

n Improving coverage to ensure that more South Africans are brought into the retirement savings net.

The government has stated its intention to broaden access to financial services, which will expand formal banking and credit systems to previously disadvantaged households.

Another positive for the industry is that the government intends to phase in a preservation requirement (over time to protect vested rights), which will increase asset retention.

To balance the impact on individuals, the government is leaning towards partially waiving preservation requirements to allow for the unemployed who have exhausted their Unemployment Insurance Fund benefits to access up to one-third of accumulated funds, as well as promoting access on demonstrated medical need.

Finally, the proposed uniform retirement contribution taxation model and the proposed rationalisation of South Africa’s large number of retirement funds could result in increased inflows into umbrella funds. Umbrella funds have a demonstrated ability to keep costs down.

While I believe the biggest threat to the retirement industry lies in accepting piecemeal changes, without full insight into the proposed end state, there are several proposals by the government which require more detailed explanation in order to understand the full impact.

The National Treasury has indicated that it will soon release more specific proposals, which could address some of the concerns, such as:

n What are the plans for coverage of the informal sector? It may be beneficial to all stakeholders if both the formal and informal sector coverage plans are mapped out, even if implementation timing differs.

n What is the role of the government in the reform process? Is it simply to facilitate the introduction of and access to simpler and cheaper products or will they become yet another competitor?

It is clear the proposals have a positive intent, however given the serious nature of various impacts, a consensus approach to implementation will only be achieved through meaningful consultation.

Etienne de Waal is the chief executive of Momentum Employee Benefits.