Treasury developing paper on retirement costs

This report would follow the discussion document aimed at streamlining retirement reform that was released by the Treasury in May.

"It will be an important paper. But we must be careful how we compare‚" said Ismail Momoniat‚ the tax and financial sector policy deputy director-general at the National Treasury.

He said‚ for example‚ that while banking charges were a hot topic‚ especially after a report of very high ATM charges was recently published‚ it needed to be kept in mind that if you have free banking‚ then banks will gamble on toxic products "and then everyone's savings are in danger".

"High charges are always a topic‚ with retirement in particular. There are incidences of high fees and transparency is a problem. The paper will deal with that and be used to engage and come up with solutions‚" he said.

Progress is possible

Dr Johan Van Zyl‚ chairman of the Association for Savings and Investment SA and group chief executive of Sanlam‚ said while recent discussions between government and the industry had made significant progress on the issue of costs‚ it was largely in areas of lesser concern to government. He said the problem was at the lower end of the market‚ which was government's major concern‚ yet this area was costly to service as it often required cross-subsidisation.

However, he said progress could be achieved - the willingness was there but the first step was moving away from the opaqueness around costs currently evident in the industry.

"Many products are so complex and we will have to simplify‚" said Van Zyl.

National Treasury fleshed out some ideas mentioned in the Budget in its May document‚ like a move to a tax-incentivised savings vehicle and improving preservation and costs‚ but did not give much detail on the mandatory statutory fund‚ a key measure to extend savings to a broader section of the population.

Mandatory funds

An initial retirement reform policy document was issued by National Treasury in 2004. In that document it spoke of the risks of social security taxes raising employment costs and pay-as-you go arrangements ie polled social security funds managed on a pay-as-you-go basis as carrying "inherent fiscal and financial risks".

Over the past two decades a number of countries have opted for mandatory privately managed retirement funds‚ adapted for those with irregular incomes or who are self-employed.

In 2007 the Department of Social Development released a report calling for a mandatory pay-as-you-go system‚ supported by compulsory contributions by all South Africans‚ a mandatory individual account system channelled into a publicly managed fund‚ but with an opt-out possibility to an accredited private sector provider and voluntary additional contributions paid into any vehicle selected by the saver.

Retirement savings constitute nearly 60% of SA household savings. However, there are more than 2700 funds in SA‚ leading to confusion for investors and lack of transparency. Treasury says in its discussion document that an opportunity has been missed to pool risks between funds. The document says only about 10% of south Africans can maintain their pre-retirement level of consumption after retirement despite all the funds in existence. Treasury says the changes it is now proposing to incentivise savings‚ reduce the fragmented nature of the industry and lower costs must be consistent with broader social security reform.

SA offerings 'more expensive'

The Treasury document notes that umbrella funds and retirement annuities in SA "appear to be more expensive than their retail equivalents in some other countries".

The establishment of a "market conduct supervisor" is expected to improve transparency‚ says the Treasury. It wants to prevent the cross-subsidisation of services to give consumers sufficient price information to make informed choices and discourage direct payments from providers to intermediaries.

Options being explored include standardised products‚ where members are automatically placed by funds when they retire‚ without requiring financial advice. Another option would be to default members into new types of annuity products that share risks between providers and members‚ making annuity provision (seen as far too expensive) more cost effective and attractive.

Then Treasury says higher income retirees must also be given the choice of about additional retirement savings.

SA is also moving to a system of uniform tax treatment of retirement contributions and benefits‚ and government is also considering increasing funding support to savings initiatives‚ especially if the savings go towards education initiatives.

SA is moving to a new "twin peaks" model of regulation‚ which covers the protection of depositor funds and then also the market conduct of participants.