National Treasury held a workshop on Retirement Reforms, giving background on retirement and savings funds before moving on to government proposals for retirement reform. This covered initiatives to boost household savings, key problems in the system, the retirement reform policy proposals, and progress with these proposals.
The retirement reform policy proposals were to encourage preservation, to improve fund governance by trustees, to encourage annuitisation by insisting that all funds have a default annuity for members on retirement, to simplify the taxation of retirement contributions, to encourage discretionary non retirement savings, to improve the annuities market and to reduce costs.
Key problems within the system were high fund costs which could erode up to 40% of retirement savings, weak governance by trustees, the lack of preservation of pension funds and the lack of annuitisation.
The presentation ended with a look at current problems and risks in the form of unclaimed benefits and resignations from funds to access the pay-outs. Due to time constraints the topics of Twin Peaks and retirement reform as well as default regulations in the presentation were not covered.
Treasury was working hard to publish the social security reforms in the current year and government wanted to universalise the old age grant to assist in promoting retirement savings. It wanted the default condition to be that pension monies be kept in the system. At present most people did not know that there was an alternative to cashing in their savings and that it could be preserved. However the biggest underlying problem to retirement savings was SA’s high unemployment and high indebtedness. The IMF had flagged these as a risk to the country. Treasury said resignations to get at one’s retirement benefits was a Government Employees Pension Fund (GEPF) problem and was as a result of the high indebtedness of the public sector.
Treasury had had 33 meetings with NEDLAC since 2012. At these meetings trade unions had professed many reservations and some people in NEDLAC were not interested in retirement reforms until social reforms were finalised. Treasury said that the social security reforms were delaying the retirement reforms but the latter would be consistent with the former. People’s indebtedness and municipal pension funds were issues that had not been discussed in the presentation and it was mooted whether Treasury should do more than just ‘nudge’ people to save for retirement.
Members raised the plethora of municipal pension funds and that the Committee should invite SALGA to discuss municipal pension funds in the first quarter of 2016. Members challenged the description of unions as accepting defined contribution funds, saying workers were coerced to accept this and most workers had preferred a hybrid scheme. Members wanted more information on having one Act for all funds. Members asked whether there were any reforms envisaged for the defined benefit and defined contribution funds and what would the impact of defined benefit and defined contribution funds be on the financial instability in developing countries. Members felt that the lack of savings in SA was because of crass materialism and conspicuous consumption. Members felt SA was not investing enough in promoting a culture of savings and that social grants were trapping people in poverty. What was SA doing to encourage savings? Members contested that black people had no culture of savings or entrepreneurship, arguing that townships had stokvels and burial societies and successful micro businesses which allowed them to provide for their families. Members suggested that piggy banks should be distributed by Treasury to promote savings from a young age and government needed to have programmes to get people away from grants. Members felt that the Committee should submit a report to the National Assembly by the second quarter of 2016. Departments that would be interested would be Treasury, the Department of Trade and Industry and the Department of Small Business. Members said there needed to be government and civil society support for advancing an entrepreneurial culture. Members proposed that the Committee engage with the Financial Services Board (FSB) on governance issues. The Committee would also be meeting with GEPF before the end of the year.
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy at National Treasury, noted the figures in the presentation came from different sources and hence might not be comparable. He gave a background to retirement funds in South Africa. Retirement funds totalled R3.77 trillion and comprised of R1.5 trillion in official funds like the Government Employees Pension Fund (GEPF), R1.1 trillion in private self administered funds and R1 trillion in underwritten private pension funds. Total number of fund members were 15.3m of which 10.4m were active members. SA’s non retirement savings figure was small. He said the Provident Fund arose from the history of the labour struggles in SA. There were currently 5 144 funds, but this had to be seen in the context that a few years before there were 13 000 funds. Most of the funds were dormant funds. Most funds were covered by the Pensions Act, but some like the government funds were not and had their own Act. Treasury was looking at whether all funds could fall under one Act.
Mr David McCarthy, retirement reform consultant to Treasury, then spoke on defined benefit and defined contribution funds. Defined benefit funds pooled their assets which were then divided amongst the members. Historically black workers received less because their life expectancy was lower, effectively transferring wealth from poor to rich workers. This lead to unions being against defined benefit funds. It also lent itself to transferring costs to future generations. In defined contribution funds, the benefits were unknown but no costs were passed on to future generations.
Ms M Khoza (ANC) said care was needed in describing the advantages and disadvantages because it was a highly contested area. It was not true that unions accepted defined contribution funds, workers were coerced to accept it and most workers had preferred a hybrid scheme.
The Chairperson suggested that Ms Khoza do a two page memorandum on the issue she had raised.
Mr D Van Rooyen (ANC) wanted more information on having one Act for all funds. He asked whether there were any reforms envisaged for the defined benefit and defined contribution funds and what impact would defined benefit and defined contribution funds have on the financial instability in developing countries.
Mr A Lees (DA) said that he had worked at a company in the past where the workers were offered a pension fund but they declined that in favour of a provident fund.
Mr Momoniat said that in the 80s, the employer/employee contributions were split 50/50 and employees did not want employers to have control over that fund. He said the funds could do more to trace beneficiaries and the Treasury should push the Financial Services Board (FSB) in this regard.
The Chairperson said that SALGA would be invited to meet with the Committee in the first quarter of 2016 on municipal pension funds.
Mr Momoniat said SA was placed high in an Organisation for Economic Co-operation and Development (OECD) table of pension assets to GDP, with R174.8b in total annual contributions in 2013.
Mr Chris Axelson, Director: Personal Income Tax and Savings at National Treasury, said that 2.2m people received tax deductions for pension contributions and 1.4m for retirement annuity contributions based on SARS tax returns. These figures excluded provident fund contributions and those who did not file a return or did not receive a deduction. There was very little data on employer contributions. The trends in savings and retirement funding was that too few people had sufficient retirement funds and that there were too few households that saved for retirement. In the last few years savings had become negative, being indicative of debt. Real savings was in the corporate sector.
Mr Momoniat said government had announced social security reform proposals in 2008 during the time of Minister Manuel and Treasury was working hard to publish the social security reforms in the current year. It was important for households to save as this allowed households to deal with income shocks in their lifetime.
Mr McCarthy said that if people were dependant on their children, poverty would be transferred between generations.
Mr Momoniat said government wanted to universalise the old age grant. It wanted the default condition to be that pension monies be kept in the system and so if it was put in a preservation fund then it would not, for example, be taxed. It did not want the default condition to be that pensioners were kicked out of the system and paid out on retirement. However the biggest underlying problem was SA’s high unemployment and high indebtedness.
Ms Tobias said she disagreed with this statement, saying the problem was crass materialism, conspicuous consumption and cultural belief systems.
Ms Khoza said the conspicuous consumption was because people had emerged from an oppressed environment where all things that were taboo were now available. SA did not invest enough in promoting a particular value system. The social grants were trapping people in poverty. Like the Americans had the American dream, what was SA’s value system or dream? What was SA doing to encourage savings?
The Chairperson said that perhaps it was because a certain strata of society became rich overnight, however at the same time SA had huge structural inequalities.
Ms Tobias said she wanted to contest the issue that black people had no culture of savings or entrepreneurship. She said the townships had stokvels and burial societies and provided for their families through micro businesses. Piggy banks should be distributed by Treasury. Government needed to have programmes to get people away from grants. Big business, through co option, was excluding entrepreneurship.
The Chairperson felt that the Committee should submit a report to the House by the second quarter of 2016 and interested departments would be Treasury, the Department of Trade and Industry and the Department of Small Business. He said there needed to be government and civil society support for advancing an entrepreneurial culture.
Ms Khoza said Treasury should look at the definition of financial inclusion as it tended to have unintended consequences. Banks were now offering funeral cover and stokvels resulting in burial societies and stokvels in the townships being destroyed and consequently township economies were not stimulated.
The Chairperson asked whether savings was discussed in Life Orientation at schools.
Mr Momoniat said that the points raised were covered but perhaps not pushed hard enough. He said countries like China, India and Japan had high levels of savings.
Ms Alvinah Thela, Director: Retirement Funds at National Treasury, said the focus of the savings was on retirement savings so the proposals focussed on the ‘preservation’ of pension monies without forcing people to do this. It sought to enhance the governance of pension funds, to simplify taxation and capping the tax incentive structure at 27.5% and encourage non retirement savings through tax free saving plans. She pointed to the various papers on retirement reform that had been released in the period 2012-2014.
Mr Momoniat said the 2013/14 papers had been circulated and Treasury had had 33 meetings with NEDLAC since 2012. At these meetings trade unions had professed many reservations. He said that 90% of people who changed jobs cashed in their retirement savings.
Mr McCarthy said most people did not know that there was an alternative to cashing in their retirement savings and that these could be preserved.
Mr Momoniat said Treasury was trying to nudge people into saving because the problem in the system was that vultures surrounded people when they retired or ended a job. Some people in NEDLAC were not interested in retirement reforms until social reforms were finalised. He said the problem of cashing out of pension funds was mainly a GEPF problem. Key issues were costs, where fees could erode retirement savings and products that were too complex. There were issues with trustees’ governance. The tax incentives were not effective for those below the tax threshold.
Ms Khoza said she was concerned over the number of retirement funds in the market and the number of people these retirement funds served. For example, municipalities had over 80 retirement funds yet only 300 000 members. Something needed to be done about this. She asked if Treasury could explain the latest tax regime for retirement funds.
Ms Tobias asked if Treasury had tried the consolidation of debts prior to promoting the preservation of pension funds as people were using these funds to get out of debt. In the short term it was a quick solution but in the long term it was not an efficient decision. Unions felt the reforms were ‘unrevolutionary’. On the high costs incurred, she questioned the benefit when one had to pay almost half of the returns to companies in costs.
Mr Momoniat said that the issue was perhaps the way the proposals had been communicated at NEDLAC. He said some countries used incentives to get people to stay on and not cash out their pension. One of the biggest challenges was indebtedness which the IMF noted was a risk to the country.
On the progress of retirement reform proposals, he said the issue of governance was very important because trustees were not doing their work, the work was being done by service providers and lots of conflicts of interest existed. Treasury had told FSB to do governance on this issue even it was not perfect.
On the question of how pension funds were invested, he said trustees should be asked this question, not service providers who carried on as if they owned the fund. Treasury only spoke to the trustees not the service providers. The investments should be for the long term.
Mr McCarthy said provident fund members were paid out a cash lump sum but that after a few years all the money would likely be spent. Pension fund members were compelled to use two thirds to take out an annuity. He said the means test on old age pensions grant discouraged people from saving and annuitising. The rules had to be simple and not complex and there was a need for a better annuity for the low income group.
He noted that there were living annuities and life annuities. Living annuities were very complex, could invest in anything, having around 2 000 options. Life annuities were simple but were not popular because people did not trust insurance companies and because one could not bequeath the benefits to one’s children. Even low income people were taking out living annuities. Key proposals for improving the annuities market were that all funds had to have a default annuity for members. Trustees would be responsible for guiding members beyond retirement into the annuity period.
Mr Axelson spoke to simplifying the taxation of retirement contributions through a uniform retirement contribution model. In the treatment of contributions there would be exemption of up to 27.5% of taxable income up to an amount of R350 000 and in the treatment of benefits there would be a phase-in of the annuitisation of two thirds of provident fund benefits from 1 March 2016. Until this date, funds can be taken as a lump sum. From 1 March 2016, if the growth in the fund does not exceed R150 000 it will not be taxed. Members older than 55 at 1 March 2016 would not be required to annuitise while members younger than 55 would be required to annuitise only new contributions and the growth on those contributions. He said there were tax free savings products to encourage discretionary non retirement savings.
Mr McCarthy said work had been done on changes in SA funds and why their costs were high and how to decrease these. Factors influencing the high costs were that SA had a voluntary system, there were too many funds and funds should have approximately 50 000 members to be viable, there were no standard rules, there was a low preservation rate where a high rate would lower costs, people contributed to more than one retirement fund and there was poor governance. One could judge how well a pension fund was run by looking at the charges and costs. High costs were a signal of poor governance.
Mr Momoniat said costs could be reduced if there was auto enrolment, improving preservation, consolidating the plethora of funds, improving product simplicity and improving fund disclosure, especially of charges.
Due to time constraints he then jumped to slide 47 dealing with current problems and risks where he said unclaimed benefits amounted to R15.8b in 2013. He said resignations in order to get hold of one’s retirement benefits was a GEPF problem and was because of the high indebtedness of the public sector. It was not a widespread phenomenon.
In conclusion, he said the social security reforms were delaying the retirement reforms but the latter would be consistent with the former. He said people’s indebtedness and municipal pension funds were issues that had not been discussed in the presentation and mooted whether Treasury should do more than just ‘nudging’ people to save.
Ms Khoza proposed that the Committee engage with the FSB on governance issues as there were issues of administrators also being the chairperson of a fund, of trustees who were handpicked, of collusion between the principal official and the administrator. People were not saving because the governance issues of funds were being taken note of.
The Chairperson said that the Committee would be meeting with GEPF before the end of the year.
The meeting was adjourned.
- Retirement Reform in South Africa: National Treasury presentation
- 2013 Retirement reform proposals for further consultation
- Statement on the Impact of the Proposed Retirement Reforms
- Draft default regulations press release
- Charges in South African Retirement Funds
- Budget Update on Retirement Reforms