David Warneke, tax technical director at BDO South Africa said that this document - which focuses on local costs of asset management that are amongst the highest in the world - was a continuation and an expansion on issues raised in an overview document on retirement reform (Strengthening Retirement Savings: Overview of the 2012 Budget Proposals) that was released in May 2012. This was followed by five technical discussion papers.
Warneke said that this process highlighted government's recognition of the importance of retirement savings and therefore the need to identify and remedy shortcomings in order to draw more South Africans into retirement saving. Currently it is estimated that around half of the population provide for retirement.
"In the 2012 budget, it was announced that changes would be introduced from 1 March 2014. The latest proposals put the date out to 1 March 2015. Employers' contributions to pension, provident and retirement annuity funds will be deemed a taxable benefit. Employees will be allowed a deduction of up to 27.5% of the higher of employment or taxable income with annual deductions limited to R350,000. Excess contributions would be allowed to be carried forward and would be exempt on withdrawal whether as a lump sum or an annuity," he explained.
Another key issue pinpointed last year was compulsory annuitisation of provident funds which aimed to harmonise the treatment of retirement funds and stipulated that members will only be able to take up to one third as a lump sum on retirement, with the balance becoming subject to compulsory annuitisation. "It is however proposed that vested interests, including future growth thereon, will be protected - in other words, not be made subject to compulsory annuitisation. Compulsory annuitisation will only apply to future contributions after the agreed implementation date and the proposal will also not apply to members over 55 at implementation date. Defined benefit pension plans will be subject to specific provisions, to be introduced after current consultation with the industry," said Warneke.
Changes proposed by the National Treasury cover key areas such as consolidation, governance and greater regulation, simplification of an extremely complex sector and portfolio of products, disclosure and easier enrolment of individuals into funds.
This latest paper highlights how factors such as high unemployment, the lack of compulsion and low rates of preservation - most people who leave funds take their balance out with them in cash and do not save it for their retirement - reduce economies of scale and ultimately lead to higher costs.
In addition, it shows how high fees erode savings. According to the National Treasury, charges significantly reduce benefits to members, and could reduce retirement income by more than 50%. If charges could be reduced from 3.5% per annum to 0.5% per annum, members would derive the same benefit as they would from contributions that are around half as large.
The paper has also been harsh about the roles played by retirement fund investment consultants, pointing to selection of products and favouring of active management over passive management. "Because our retirement system is voluntary, intermediaries play a crucial role in distributing retirement savings products to customers. Yet intermediary remuneration may introduce conflicts of interest between them, product providers and customers, increasing the complexity of products and raising charges," the paper notes.
The paper also explores the idea of requiring employers to enrol employees into retirement funds automatically. It stipulates that, to be effective, mandation may require an exchange or clearing house, possibly integrated with the SARS tax collection system. This would allow smaller employers and employees to compare plans easily and select one for their workplace. Private providers, regulated under the Pension Funds Act (PFA), would be listed on the exchange if they meet certain conditions e.g. design, scale, charges. An exchange could standardise administration processes, for example, transfers between funds. A default fund or funds, established under the PFA, could provide a default for employers and workers who make no selection, to facilitate preservation and unclaimed benefits.
For more information, go to www.bdo.co.za.
