Pension Funds Amendment Bill: public hearings

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Finance Standing Committee

19 May 2021
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Video: Standing Committee on Finance 

The Standing Committee on Finance held a public hearing on a virtual platform to hear oral submissions on the Pension Funds Amendment Bill, a Private Member’s Bill drafted by DA MP Dion George. Six stakeholders made presentations, two of whom joined in a single presentation and at least two more stakeholders submitted written comments but did not make an oral presentation.

National Treasury informed the Committee that Treasury had long been working on improving the situation with regards to retirement savings and that its proposed amendments to the current retirement legislation were currently under discussion as part of the National Economic Development and Labour Council (NEDLAC) process. Treasury’s main concern was that South Africans did not save enough, although Treasury acknowledged that it was difficult for many people to save. Treasury could not support the Pension Funds Amendment Bill because it went against the policy of encouraging savings, especially retirement savings. The use of pension funds as security for loans was open to abuse and the Bill did not deal with consequent indebtedness. The Bill could not be enacted on its own and required a Money Bill which only the Minister of Finance could introduce. Treasury believed that Parliament should wait for the Bill that Treasury was working on.

COSATU welcomed the Bill and believed that it was a positive response to the call made by COSATU in 2020 to allow workers limited access to borrowing against their pensions during the worst economic crisis in a century. However, COSATU did agree with National Treasury that much work was needed on the Bill. COSATU was prepared to wait for Treasury’s Bill but only if Treasury could guarantee that such a Bill would be in Parliament before the end of the current year. If not, it would support amendments to the Private Member’s Bill.

The Association for Savings and Investments South Africa, whose members were service providers to pension fund holders, appreciated the good intentions of the Bill but did not support the Bill as the Association did not believe that it was going to be able to fulfil its intention. The success would be very limited as a result of the restrictions imposed by the National Credit Act.

The CEO of Batseta Council of Retirement Funds presented on behalf of Batseta and the Institute of Retirement Funds Africa, neither of which supported the proposed requirement that pension fund members might access pension-backed loans from financial institutions. Thirteen reasons were provided for rejecting the Bill, beginning with concerns over the lack of detail in the Bill and the purpose of retirement funds.

The South African Institute of Chartered Accountants acknowledged the financial hardship that COVID-19 had caused on many households in the country. SAICA fully appreciated the purpose of the Bill and the balancing act that it was trying to achieve by enabling saving of assets and livelihoods while maintaining retirement savings. The two main issues concerning SAICA were the treatment of a default of a loan and taxes on the withdrawal of funds.

Members applauded the initiative in the drafting of the Bill but noted the need for significant improvement. Was the drafter in a position to incorporate the recommended inputs and tweak his Bill? Could National Treasury not change its points from opposition points into proposals to amend the Bill? Could Treasury suggest how the inadequate focus on the National Credit Act and indebtedness could be addressed? How could the Bill address concerns that guarantees could create substantial contingency challenges for pension funds? Did National Treasury have a suggestion as to how the implications of tax on the pension funds could be addressed?

Meeting report

Opening remarks
The Chairperson delayed the opening for a few minutes as Members were called to attend the meeting despite the several plenary sessions taking place.

When a quorum was reached, the Chairperson welcomed everyone, stressing the fact that there was a tight agenda and that presenters should adhere strictly to the 15 minutes allocated to each presenter.

National Treasury would be the first to present and the Chairperson requested that he did not delay with introductions of his team members but focus on the presentation.

Presentation by National Treasury
Mr Ismail Momoniat, Head: Tax & Financial Sector Policy, National Treasury, stated that several comrades were present with him in the virtual meeting. He stated that National Treasury had long been working on improving the situation with regards to retirement savings. The primary aim of the 2012 retirement savings proposals had been to encourage household savings. Retirement reforms were essential because people in the country were not saving funds. This was particularly so as SA had a very small middle class and with unemployment and low paid jobs, it was difficult for many people to save. He provided the figures regarding savings in SA, noting that the percentage savings was fundamentally inadequate.

In respect of the Bill on the table, he noted that no socio-economic or financial impact study had been provided to support the Bill and the claims to motivate it. That was a concern when it related to pensions about which there should not be frequent changes. He added that, despite it being motivated as Covid-19 relief, the Bill was not essentially about Covid-19.

National Treasury was against the use of any pension funds as security for loans as the scope for abuse was very high. He also believed that the Bill would not stop people from withdrawing pensions when they changed jobs, etc. The Bill was likely to cause people to save less, rather than more. It enabled borrowing but did not say how it would work or how it would deal with indebtedness, which National Treasury thought would become worse. It would create substantial contingency liabilities against pension funds and it would be very costly for all pension holders as long-term investment would be difficult. Furthermore, the Bill could not stand alone and needed a suite of Bills, including a Money Bill. National Treasury was working on comprehensive long-term legislation to improve the retirement legislation.

Mr Momoniat concluded that the Bill was not supported by National Treasury because it worked against the macro perspective of saving. Treasury rejected the Bill and believed Parliament should wait for National Treasury which was working on and which was currently under discussion as part of the National Economic Development and Labour Council (NEDLAC) process.

(See Presentation)

Presentation by the Congress of South African Trade Unions (COSATU)
Mr Matthew Parks, Parliamentary Liaison Officer, COSATU, began by thanking the Committee for the opportunity to give input on the Bill.

COSATU welcomed the Bill and believed that it was a positive response to the call made by COSATU in 2020 to allow workers limited access to borrowing against their pensions during the worst economic crisis in a century. However, COSATU did agree with National Treasury that much work was needed on the Bill.

Mr Parks noted that millions of workers had lost their wages over the past year. They could gain access to their pension funds if they lost their jobs, but workers who lost their wages had no access to their savings which led to workers resigning from their jobs to gain access to their pension funds. That created the worst of both scenarios.

COSATU believed that it was necessary to get the balance correct. The 75% limit on withdrawals was too high and COSATU proposed that 30% or R30 000 should be the limit. Secondly, workers needed to be able to withdraw funds as they could not afford to incur additional debt. Thirdly, the number of times such a withdrawal could be made had to be limited in time and there should be a requirement that one had to prove need. Fourthly, tax exemptions should be considered on funds withdrawn.

COSATU believed that the Bill largely met the needs of workers, although COSATU believed that there should be space for further engagement on the Bill. A Bill needed to be processed by the end of the year and if National Treasury could produce an alternative Bill by the end of the year, COSATU would welcome that but, due to the financial crisis, if National Treasury could not produce a Bill by the end of the year, COSATU would support the current Bill, with the necessary amendments.

COSATU welcomed the Bill because it was progressive and in line with COSATU’s own proposals. There should be space for engagements on the Bill with all role players, including National Treasury and Labour, but a Bill should move forward within the next few months. COSATU could not afford to reject a Bill that could assist millions of workers.

(See Presentation)

Presentation by Association for Savings and Investments South Africa (ASISA)
Ms Rose Lightbody, Senior Policy Advisor, ASISA, explained that ASISA members were service providers to pension fund holders. ASISA was an industry association. Members understood the human elements and were sympathetic to the human element and the financial pressure that households were under.

ASISA appreciated the good intentions of the Bill but did not support the Bill as the Association did not believe that it was going to be able to fulfil its intention. The success would be very limited as a result of the restrictions imposed by the National Credit Act. Furthermore, very, very few pension members were able to borrow from the funds in terms of the National Credit Act.

ASISA members believe that the draft Bill was well-intended as it sought to assist those who had not lost their jobs and were still employed, but had financial problems. It might give partial short-term relief for a small portion of members – but ultimately in a destructive manner. Legislative changes and implementation would take time as it was not a quick fix. Time and costs could be better spent working on a long-term, sustainable solution. ASISA accepted that the implementation of a long-term solution would not assist the current crisis, but it would, at least, be in place for future emergency situations.

ASISA members supported the concept alluded to by National Treasury in the 2021 Budget Speech that part of a savings build-up in retirement funds be accessible for short-term needs at any stage and the rest be permanently reserved for retirement, but that had to go hand-in-hand with the preservation of the reserved
portion until retirement because a significant reason for low savings of most fund members was that members took out all their retirement savings in cash when leaving the retirement fund on changing jobs. Legislative changes and much work by funds and their administrators would be required, but that would be constructive work and an investment in the long-term financial security of South Africans. Such a solution would allow limited access for emergencies while still ensuring reasonable retirement savings and long-term, stable savings pool for long-term investments by retirement funds.

(See Presentation)

Presentation by Institute of Retirement Funds Africa (IRFA) and Batseta Council of Retirement Funds for South Africa
Anne-Marie D’Alton, CEO, Batseta, presented on behalf of IRFA and Batseta, neither of which supported the proposed requirement that pension fund members might access pension-backed loans from financial institutions. Thirteen reasons were provided for rejecting the Bill, beginning with concerns over the lack of detail in the Bill and the purpose of retirement funds.

In addition, she stated that the 75% limit did not take into consideration that if the security was called
up, it was a taxable benefit. The retirement commutation threshold for members of a pension fund and provident fund member would also have to be taken into account. Payment terms, including time periods and proposed interest rates, would have to be clearly set out. The definition of a retirement fund would have to legally change and lastly, Ms D’Alton cautioned that the Bill would only advantage members who met the National Credit Act lending criteria, thus causing further inequity.

(See Presentation)

Presentation by South African Institute of Chartered Accountants (SAICA)
Dr Sharon Smulders, Project Director: Tax Advocacy, SAICA, stated that SAICA understood and acknowledged the financial hardship that COVID-19 had caused on many households in the country. SAICA fully appreciated the purpose of the Bill and the balancing act that it was trying to achieve by enabling saving of assets and livelihoods while maintaining retirement savings.

The proposal to extend the purpose of a loan beyond just immoveable property created a higher risk of default.         In terms of the Bill, the taxpayer could get a guarantee for 75% of their share in the value of the fund. However, the Bill did not seem to consider tax payable on the withdrawal of the funds should the taxpayer default on the loan and the amount needed to be paid to the lender.

Dr Smulders stated that the Bill should provide clarity on how the tax payable on the occurrence of a withdrawal event when the creditor executed against the guarantee, would be treated.

SAICA agreed with many of the other commentators and did not waste time repeating issues. The two main issues concerning SAICA were the treatment of a default of a loan and tax on withdrawal of funds.

(See Presentation)

Response by the Member sponsoring the Bill
Dr D George (DA) responded briefly to each presentation. He thanked National Treasury for the explanation of the retirement legislation. One of his main objectives was to ensure that the issue remained at the front of the Parliament and government’s agenda. That objective had been met and progress was being made. NEDLAC moved extremely slowly and that process required pressure for progress to be made. He was of the view that National Treasury had taken an extreme view of the behaviour of retirement fund members. The Bill was actually very easy to understand. The fund trustees would decide if a fund would make a loan facility available. The members would remain subject to the National Credit Act which would determine whether a person could procure a loan or not. Given that the industry had evolved from defined benefits to defined contributions where the risk passed to members and then individual member choice was introduced,
the concept of members taking the risk and making investment decisions was thus well established.
A further evolution to members deciding how best to leverage their own money, for example in the form of a loan, was certainly not an impossible development and should form part of a wider reform.

Dr George thanked COSATU for its input and insights and noted that the DA and COSATU were on the same side in that particular issue because the focus was on the members and that urgent relief was needed for those members. He agreed that the matter could not be dragged out and declared that he was open to making changes to the Bill.

Responding to ASISA, Dr George agreed that the Bill would have limited success, but he was confident that it would have some success and that was the crucial point. He accepted that there were technical issues should people default. However, he could not make the assumption that everyone would default. He was pleased that ASISA had applied its mind as his proposal did potentially have a serious impact and the intention in proposing the Bill was to shake up and accelerate the debate and the reform process, which it had done and he was pleased at that outcome. He did like the alternative proposal and the fact that the association had made its position clear.

Turning to BATSETA and the IRFA, he appreciated the insight into the difficulties in administration. It would be useful to bear that in mind when the loan component was included in the overall retirement package. His had proposed 75% as an upper ceiling but it would be unlikely that a fund would set a facility at that upper ceiling. The questions that Ms D’Arcy had raised would be very useful to bear in mind in the design of a loan component of a reformed facility.

Dr George assured SAICA that there would be no erosion, given that the loan would be repaid, but he did understand SAICA’s concern about erosion in the event of default and those processes would have to be clarified.

Dr George was pleased to receive the input. His Bill was simple to understand and he was pleased that there had been no major difficulties in that regard. His view was that if one wanted to strawman an argument, one took an extreme view and argued it from there, i.e. that everyone would default. The fact was that not everyone would default. He understood the issues and that it was a complex matter and it would not be beneficial if the lawmakers did not consider the impact but he believed that Parliament was moving in the right direction and he was grateful for the inputs.

Discussion
Mr G Hill-Lewis (DA) thanked Dr George for his work in drafting the Bill and for the responses that he had given. He recalled an emotional phone call from someone during lockdown who was crying on the phone, saying he had been furloughed and had a sizeable amount of money in his retirement fund but had no way of accessing the funds in that time of real difficulty. Many people had found themselves in such difficulties - some people were still in severe difficulties, especially in the hospitality and tourism industries. It was essential to try and help people. It should be applauded that Dr George had gone out of his way to write that Bill in order to help those people. He was pleased that it had support across the aisle because he believed that many of his colleagues in Parliament had had similar phone calls over the past year. Parliament had to try and find a way to help those people. He believed that with the assistance of the very sensible inputs, a way could be found to help those people, and soon.

Mr Hill-Lewis stated that he could not agree with COSATU as there were many credible inputs on the table and the process should not wait for months for another Bill. There was a Bill on the table and the Committee could amend the current Bill as it saw fit. The Committee could not wait many months for another Bill as there were a lot of people in the economy that did not have many, many months to wait for assistance.

Ms P Abraham (ANC) applauded Dr George for his initiative but the presenters had put forward some significant areas for improvement. Was Dr George in a position to incorporate the recommended inputs and tweak his Bill? She wondered whether Mr Momoniat could not change National Treasury’s points from opposition points into proposals to amend the Bill.

She suggested that the Bill on the table could be modified, especially as it was to the benefit of the majority of people in the country. She explained that she was asking Dr George whether he could re-work the Bill and she was asking National Treasury whether it was possible to change its input into proposals.

Mr K Morolong (ANC) concurred with the Whip and suggested her approach be supported. He believed that a meeting of the minds could be beneficial to the Bill as it stood to benefit the majority of South Africans, many of whom were the poorest of the poor in the country, generally black and female. He wanted National Treasury to specifically speak to the three aspects that had cropped up in the discussion: inadequate focus on the National Credit Act and indebtedness and how those concerns could be addressed; secondly, the concern that guarantees could create substantial contingency challenges for pension funds; thirdly, tax implications. To what extent was National Treasury able to suggest interventions in respect of those issues and how a balance could be created? Did National Treasury have a suggestion as to how the implications of tax on the pension funds could be addressed?

In response, Dr George stated that as parliamentarians their job was to consider difficulties faced by the people and find better ways to do things. He was very much keen, willing and able to make the changes and he was prepared to work as hard as necessary to get it done.

The Chairperson requested National Treasury to comment.

Mr Momoniat stated that the message that Treasury was putting forward was that there was no benefit in the Bill at all and, in fact, it was totally contradictory. In most instances in the world, people did not save for retirement. If his own employer had not deducted from his salary for his retirement fund over the past decades, he would not have a retirement fund, and he was not one of the poor. That was why Treasury used quite a lot of behavioural theory and had a lot of interactions internationally to develop mechanisms which, together with the tax mechanism, would get people to save. The problem was worse in SA in that people did not save. Only rich households could afford to save. They saved in retirement annuity funds and in other ways. Once one talked of withdrawal, it went directly against the intention to provide for retirement.

He said that getting money into the pension space had huge benefits for the country. The magic of pension funds was that if one saved over 30 to 40 years, through compound interest and growth in the markets, one should have a massive amount.  Withdrawing gave one less time to accumulate money. A lot of jurisdictions allowed zero withdrawals. The Bill might appear to be a short-term solution but it was not the answer to the problem.

He said that ASISA had showed that most people had less than R50 000 that they could withdraw. If one were to close the gap allowing people to withdraw pension funds on resigning, that would make a huge difference to pensions. He said that after the Government Employees Pension Fund, the Metal Workers’ Union had one of the most massive pension and provident funds in SA. 90% of NUM workers were in the provident fund and only 10% in the pension fund but the reality was that 10% of workers who had pension funds had 90% of the funds because they had kept their money in the bank.

The fact was that in the 1980s many workers were given provident funds which were now unclaimed because they did not know they had had provident funds and the funds were registered to the workers, but without identity numbers and often without even their surnames. Those funds would never be paid out to those who had contributed to the funds.

Mr Momoniat stated that Treasury was trying to find a solution.  It had to be a tool that could only be used by a small number of workers. The Bill could not be salvaged because it did not look at the hard questions.  Dr George stated that his intention was to stir and he admired that intention. He would be happy to talk to Dr George about retirement funds because it was a big issue. The Bill could now be withdrawn as it had got people talking. Also a Money Bill would be necessary and only the Minister of Finance could table a Money Bill. NEDLAC was engaged in looking at a policy change and he would be pleased to open up that debate.

National Treasury objected to the view that the withdrawal intention would resolve the problem. It was wrong to break the rule because of a few people experiencing real hardship. He felt for them but one could not jeopardise the process of poorer South Africans saving and building up their asset wealth because they would be very vulnerable when they retired, which was why Treasury encouraged people to annuitise and not to take out lump sums.

Mr Momoniat stated that Dr George had achieved his objective and everyone was talking about the issue but he did not believe that South Africans should be allowed to decimate their savings. The state gave generous tax reductions to encourage people to save and it would be wrong to jeopardise that. He did not use words like “decimate” lightly. People would rush to withdraw their money. He did not believe that the Bill could be saved.

Treasury could not agree to a change to the tax regime either. The point was that if one paid tax while saving and annuitised on retirement, there was no tax on growth of funds. Withdrawal would undermine the objective of tax incentives to get people to save so the most Treasury could even consider would be very limited withdrawals, and restrictions would have to be in place and that would be very difficult to write into that Bill. He did not see how Treasury could support the Bill.

Dr George agreed with National Treasury that one of the objectives of the Bill was to stir the debate and it had done so, but the primary motivation was to find a solution for the people in financial distress.

He knew it was not simple and he had not said that it was a sliver bullet but COSATU and his colleagues across the aisle agreed that there was a real problem and that progress had not been sufficient. He really understood the subject because his doctoral thesis had been on conversions from defined benefits to defined contributions and he had a real doctorate so he was knowledgeable on the subject.

Dr George believed that National Treasury was being insensitive to the plight of the people. He was not saying that one should throw open the door and forget about saving, but one had to understand the complexities of the country and the history of the country. There were vested interests but as parliamentarians, Members had to hear the people and they heard the people all the time. The solution was not to wait until sometime in the future. That was not an answer to the problem. The process at NEDLAC was very slow as there was lots of lobbying going on but it was just taking too long.

He reiterated that the intention was not just to create a stir and if it was the Committee’s view that he should try to find a short-term solution, he was not prepared to withdraw the Bill but would find a way to make it work. How long had Parliament been waiting for a Bill since the process towards defined benefits to defined contributions had started in the 1980s? The progress was slow and gentle but it was necessary to break a few shells to make progress – and SA did that very well. He was not prepared to withdraw the Bill, although he did understand the complexities. He was prepared to work as hard as need be and to apply all his expertise, and that of other people, to make the Bill work. It was insensitive to say that one understood the financial difficulties but could not do more.

The Chairperson stated that participatory democracy was encouraged and so he would give each presenter two minutes to respond to Dr George’s comments.

COSATU
Mr Parks stated that workers were facing huge challenges and there were funds available so it was necessary to find ways of allowing them to access or leverage those funds and so prevent people from being forced to cash in their pension funds as that was a worst-case situation. In the end, it was the workers’ funds. The corporate world could not just provide crocodile tears and reject the Bill because they had an eye on their profits, albeit that was their entire motive for being in business. There had to be a movement from saying that nothing could be done to asking what could be done.

The experience of COSATU was that government took at least five years to draft a Bill. An example of workers who could benefit were the workers at Denel who were receiving 10% of their salary but had funds in their pensions that they could not access.

COSATU supported the Members’ Bill because it was much faster than government Bills. The solution had to be quick. COSATU had first raised the issue in May 2020 and there had been little progress. The country could not afford to kick the can down the road. It had to be done that year. COSATU had received many, many calls from workers who were in need but had savings in retirement funds. There were too many processes involved for a government Bill to be processed in less than a year but if Treasury could do it within the year, COSATU would support such a Bill. However, COSATU was not going to wait for years for relief. The workers were not irresponsible, naughty children who had to be taught a lesson.

SAICA
Dr Smulders agreed with COSATU that more time could not be wasted. She acknowledged Dr George’s efforts in bringing the Bill to Parliament and believed that there was consensus across the board that a solution had to be found. The presenters had highlighted the areas of concern and now it was a case of sitting down and working on those specific areas. A working team could be set up to work on the Bill, to amend the Bill and to find a balance that provided relief but did not put the retirement funds in jeopardy.

All the stakeholders should get together and help to fix the Bill, or another Bill if there was another one. She did not doubt that it would be a difficult job, but no one could sit back while people were suffering without putting the country at risk.

ASISA
Ms Lightbody made the point that ASISA was not crying crocodile tears when administrators stated that it understood the crisis facing many of their clients and so the input did not come from a position of vested interests. It was difficult when everything her association said was seen to come from vested interests but she could assure everyone that members of ASISA and their staff felt very empathetic towards those who had suffered financial hardship, which was why ASISA was seeking a workable long-term solution. After Covid-19, there would be other emergencies. The reality was that it was not a quick fix. Loans could not be available within a couple of months. The legislation had to be finalised, rules would have to be amended, administrative systems had to be changed and staff would have to be trained. Spending that time, effort and money on something that was not sustainable was not wise. She believed that a solution lay along the lines of retirement funds building up a pocket of funds that could be accessed, while members were not given the opportunity to withdraw funds when changing jobs, or for any other reason,

Responding to ASISA, Dr George stated that everyone agreed that it was not the ideal solution but it could be fixed. ASISA said that time and effort was required to do the job properly. He suggested that the time was then and stakeholders should be willing to spend that time and effort immediately to find a good solution. They should set a deadline because the process was alive and it was the time to make the changes.

Concluding remarks
The Chairperson stated that the Committee had also received written inputs and those would be considered in compiling the report. He was aware of written submissions from Banking Association South Africa (BASA) and from the Federation of Unions of South Africa (FEDUSA) which would be added to those submitted by stakeholders in the meeting. There could be more submissions.

The Chairperson reminded Treasury that the matter relating to the former Venda Pension Fund was still dragging on. It had to be resolved. The case had been taken to the Public Protector. The issue raised by Treasury regarding the need for a Money Bill had to be given serious consideration.

He said that the evidence would have to be carefully weighed. The parliamentary staff would have to assist with research. He informed the stakeholders that the Bill would be taken to the next step which was a discussion in the Committee and a report to the National Assembly.

The Secretary informed the Members that the Tuesday meeting of the following week would deal with the Fiscal Responsibility Bill (Mr Lewis’ Private Member’s Bill) and on the Wednesday National Treasury would respond to the submissions made in the public hearings on the Financial Sector Laws Amendment Bill of the previous day.

The Chairperson thanked everyone and declared the meeting closed.

The meeting was adjourned.
 

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