Retirement reform: Full blown collywobbles

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Retirement reform – kicking the can down the road

Since a recent blog HERE, where I tried to decode the facts, rumours and proposals in the retirement reform arena, the whole thing has been turned on its head. In a nutshell, Cosatu – in response to employee resignations in order to get their hands on retirement funds – threw down the gauntlet. They have indicated that until the full paper on retirement reform has been presented to Nedlac to discuss and obtain comment on, then all retirement reform must be halted. ‘Or else’. Government, not wanting a repeat of the eToll fiasco, capitulated.

Sort of.

If you want to see the wording of the announcement you can go HERE

Some of those ‘facts’ in my original blog have now become proposals, and the rumours have taken on a life of their own. Nobody should be surprised that Cosatu is digging in their heels. They threatened this back in 2012, (SEE HERE) and are making good on their promise.

Fact : The retirement reform proposals announced in the 2013 budget, due to be implemented on 1/3/2015, have now been pushed out to 2017. Cosatu have always wanted them indefinitely postponed until the National Social Security Fund proposals had been implemented – they haven’t won that battle yet. In my opinion, fairly minor retirement reform proposals ( from an employee perspective) are being held hostage to an agenda that is probably a decade or more away from being implemented.

National Social Security Fund : The NSSF fund proposes a hybrid structure between defined benefit and defined contribution, with some life cover thrown in. The National Health Reform act (2011) is part of this broader reform, and fraught with its own problems – basically, it is unaffordable. The proposed contribution is a hefty 10%, split 50/50 between employer and employee. I might be wrong, but imposing that sort of contribution on employees is going to be extremely difficult, making this minor backlash on changes to future contributions to provident funds pale into insignificance.  Sometimes a slow change is easier to digest than great big ones all at once. There is always the danger if it imposed all at once, that it will be rejected in it’s entirety, throwing the good out with the unpopular.

Retirement reform :

The retirement reform can has just been kicked down the road. At first glance the proposals looked fairly harmless, and tried to encourage savings. Few of us can argue that a culture of low savings is not a massive problem in South Africa. Statistics show that less than 6% of South Africans can retire comfortably, and the average employee is going to retire on some 28% of their current earnings. The government pension is currently R1350 – hardly a living wage!

Providers and employers have all been working overtime to implement systems around the 1/3/2015 proposals, so no doubt are going to be miffed that this deadline has been pushed out 2 years. The changes to the systems are significant and can’t be put in place in a week. Because the new tax system will only be imposed on new contributions, all provident funds have to effectively be split in two. Before and after. I doubt these changes will be wasted, they will just have to be shelved until they are eventually implemented.

Some of the proposals are controversial – like making all pension payouts annuitised – but this is only one of the proposals and doesn’t appear to be the driving force behind the proposals. Cosatu have however, focussed in on this one proposal, and behaving as if it is about to be implemented. Clearly something has to be done, but shoving it down employees throats, like eTolls, isn’t going to work.

Rumour: These have taken on a life of their own, and in my opinion highlights the crux of the problem: Poor communication and understanding of this highly complex industry. This has been a major concern of mine, and was the topic of a recent blog you can read HERE

Even in Costatu’s statement, they imply that the government is moving to insist that the entire fund be used to buy and annuity, scrapping the 1/3 lumpsum 2/3 annuity that is currently in place.  The Treasury announcement on 9/7/2014 made it clear that only a portion of the retirement funds were proposed to be annuitised. If you want to see the full statement, go  HERE. This  sort of information doesn’t help stop the rumours. Employees resigning just to cash out their pension or provident funds isn’t new. This has been rife since 2008, as employees face reduced disposable income, retrenchment, unemployment. Without sounding insensitive, some of the resignations purported to be in fear of government nationalising and confiscating retirement funds, are probably for financial reasons. The biggest danger is that once an employee resigns, the company is under no obligation to re-employ them. Hundreds of employees have found this out the hard way. For a company that is under its own financial pressures, voluntary resignation is way cheaper and less problematic than retrenchment. If an employee is rehired, it is unusually via a third party, aka, labour broker. Forcing the preservation of retirement funds is still a way off – and a far bigger potato than the changes proposed for next year. Over 90% of retirement funds are cashed out when an employee changes jobs.

Reality: Putting all retirement funds on an equal tax footing makes a lot of sense. To summarise: It is proposed that all the retirement funding vehicles ( Pension, Provident, Retirement Annuity) be treated the same. The contributions to all of them will be lumped together from a tax perspective, and the maximum deduction increased to 27.5% (with a cap of R350 000 pa). On retirement the 1/3 lumpsum and 2/3 annuity will apply to all. At the moment, employee contributions are deducted after tax. Explaining the tax implications on withdrawal from a provident fund isn’t a one minute conversation. The advisor has to find out the employer versus employee contributions, previous withdrawals, and then apply the lumpsum rules. It is much easier just to take it all out and turn a blind eye to how much tax has been deducted. Not all employees have access to a financial advisor as they become reluctant to engage ‘small’ clients because of the time and compliance required for every client, irrespective of size.

 

If you’ve been a sensible saver and have your own Retirement Annuity, but you’re also contributing to a pension fund, then working out your deductions needs fancy footwork – most employees just submit it to SARS and hope they get something back. Hope is not a financial strategy. If you’ve been locked into an RA with penalties on the insurance platform, then you can’t stop paying either. The penalty aspect of these insurance platform RAs (and endowments) hasn’t really been touched since 2007. It forms part of the Retail distribution proposals, but due to the sheer size and lobbying force of the big insurers, is going to be a battle royal.

Although Cosatu are dead against the ‘piecemeal’ implementation of the retirement reforms, there are some changes needed that will not affect their members that perhaps should not be kicked down the road. For example, the underlying fees of umbrella funds are still far too opaque. Collective investments have had to disclose the Total Expense Ratio (TER) for years, but this isn’t necessarily the case on retirement funds. There are often layers of fees: performance fees, asset managers, asset consultants, platform fees, administration fees – all of which erode the funds. It is only when one does a fairly complicated Internal Rate of Return calculation, that one determines what the true costs are. Consolidation of small funds into the larger funds has been happening for years, and will bring about the economies of scale. If the experience with the insurance industry around the penalties levied on RAs is anything to go by, change is going to have to be legislated.
Author Dawn Ridler 

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