What the retirement fund reforms mean for you
WORDS ON WEALTH:
The 2021 Budget speech by the Minister of Finance, Tito Mboweni, highlighted two issues concerning retirement funds that warrant exploration: changes to regulation 28 of the Pension Funds Act to allow for increased investment in national infrastructure projects, and the introduction of auto-enrolment for all employed workers.
The Pension Funds Act guarantees a high degree of protection for your savings in a retirement fund – far higher than in any other type of investment. It stipulates that your savings must be managed prudently with due attention to risk, and that this fiduciary responsibility lies with the fund’s board of trustees.
Regulation 28 ensures that your investment is diversified and is not overly concentrated in a single asset or asset class – so that, for example, the bulk of your savings cannot land up being invested in the company for which you are working, as happened in the Robert Maxwell pension scandal in the UK 30 years ago.
The main limits set by regulation 28 are that not more than 75% of the fund can be invested in the equity market, not more than 40% can be invested offshore (30% outside Africa and another 10% in Africa outside South Africa) and not more than 25% can be invested in listed property. It also limits investment in private equity and hedge funds to 10% of the portfolio.
The announcement by the minister that regulation 28 would be changed to allow for increased investment in infrastructure was followed later last week by the publication of draft amendments to the regulation to allow for this.
Until now “infrastructure” has not been defined under regulation 28, which has concerned itself with broad asset classes. The draft amendment does not introduce infrastructure as a new asset class but allows for infrastructure investments to be recognised and recorded within asset classes – they may take the form of listed equities (companies listed on the JSE focusing on infrastructure projects), government or corporate bonds (many infrastructure projects are funded through bonds) or private equity (unlisted companies specialising in infrastructure). Across these asset classes, the proposal is that infrastructure investment be limited to 45% of the portfolio.
Although that may seem a high percentage, it is probable that your retirement fund already invests upwards of 25% in infrastructure through government bonds.
Don’t forget, this is merely a limit. Nothing is being prescribed. The retirement fund still has the freedom to invest anything between 0% and 45% in infrastructure. The overriding criterion will always be whether or not a particular investment is prudent, after its risks have been properly assessed.
It’s likely most in the retirement fund industry will welcome the amendments. Many infrastructure projects provide solid investment returns at a relatively low level of risk.
South Africa has been grappling for a while with the idea of a centralised, possibly government-run, retirement fund for low-income workers who don’t save for retirement.
The idea has been on the backburner for several years, but resurfaced in the Medium Term Budget Policy Statement in October and again in last week’s Budget speech.
In essence, the minister has said that the constituents of the National Economic Development and Labour Council – government, labour, business and community organisations – have made progress in formulating a plan for “auto-enrolment for all employed workers and the establishment of a fund to cater for workers currently excluded from pension coverage”.
Many countries have mandatory retirement-savings schemes for their citizens. We have never had one in South Africa, although larger employers have traditionally made it a mandatory condition of employment and have enjoyed tax incentives for contributing to their employees’ savings.
Although the tradition of contributing to retirement funds has been strong, that of preserving savings until retirement has not. So the issue of a broader contribution base cannot be discussed without also addressing the thorny issue of preservation.
Malusi Ndlovu, director of large enterprises market at Old Mutual Corporate, believes auto-enrolment is “a meaningful step towards better retirement outcomes for a greater number of people” and he sees it as the beginning of an incremental approach to establishing a comprehensive social security system, “by solving one problem at a time”.
One stumbling block was compulsory preservation, which the labour unions have opposed. Ndlovu says it appears a balance has been reached, possibly spurred by the Covid-19 crisis: preservation will be compulsory on changing jobs, but retirement fund members will have access to their retirement savings for emergency use.
Currently, about 50% of formally employed workers contribute to retirement funds. “The new scheme would target employees of smaller companies that don’t have the infrastructure to provide employee benefits and workers with irregular income and a low level of job security,” he says.
Ndlovu says many more details will be needed to properly evaluate the impact on retirement outcomes – there are questions around to what extent the private sector will be involved, whether individuals would be able actively opt out, the level of contributions required for both employer and employee, possible state subsidies, and the impact on take-home pay.
Ndlovu favours the inclusion of the private sector. Although a large central fund would provide economies of scale, competition among privatesector providers to establish their own funds may also drive down costs.