National Treasury is considering establishing a retirement fund “exchange” to lower retirement funding costs and increase participation in the private retirement fund system. If accepted, employers will pay contributions, channelled through the South African Revenue Service (SARS), to a strictly controlled list of private sector retirement funds or a default government fund.
This new proposal formed part of a presentation by Treasury to senior executives of the retirement fund industry last week at a closed-door meeting between the Minister of Finance, Pravin Gordhan, and the industry. The presentation, which was obtained by Personal Finance, focused on retirement funding costs. Some aspects of Treasury’s work on costs have also been presented to trade unions.
Treasury said in a statement earlier this week that it will release a paper on the costs of retirement funding “shortly” and will give all stakeholders an opportunity to comment on and discuss the proposals.
The proposals will give members of funds provided by the retirement industry, particularly umbrella funds, more protection and choice as to how they would like their retirement savings invested.
The new proposed structure is modelled on KiwiSaver, the voluntary top-up scheme sponsored by the New Zealand government that sees contributions channelled through the office of the tax collector and then distributed to private sector asset managers chosen by members (see “The Kiwi savings model” below).
The South African version, if implemented, would see the establishment of a “retirement exchange” under the auspices of SARS, to which your retirement fund contributions would be paid by your employer, together with your pay-as-you-earn (PAYE) tax. Your retirement savings will then be directed to a product provider.
The document does not state how the provider would be chosen, but in New Zealand employers can choose a default provider, and individual employees can opt out if they choose. However, the product provider will have to be listed on the exchange and will need to meet strict standards set by government before being listed.
A big advantage of a system involving SARS is that it will make it difficult for employers to avoid handing over your retirement contributions to your fund – an ongoing problem with many umbrella funds, such as the Private Security Services Provident Fund.
The structure could also reduce the significant amounts paid as a percentage of contributions and/or accumulated assets to financial advisers who facilitate membership of retirement funds, particularly umbrella funds. Strict product rules would protect consumers against complex products, which serve the interests of providers rather than members.
There is no indication in the presentation document of how the proposals will affect existing occupational funds, be they stand-alone funds, umbrella funds or retirement annuity funds.
The proposals suggest a default option could be a government-provided defined contribution fund for those who cannot decide on a product provider. The default option will be registered and managed by government in terms of the Pension Funds Act. Treasury also proposes that the default option could be a home for billions of rands of unclaimed retirement fund benefits.
The proposed exchange structure is seen by Treasury as a possible way “to ease the process of making it mandatory for employers to provide employees with retirement savings vehicles”.
The exchange may operate alongside a compulsory government scheme, as in New Zealand, or it may be used to facilitate mandatory membership of a private retirement scheme, as is the case in many countries across the world.
The proposals are likely to be included in a retirement fund discussion document titled “Charges in South African Retirement Schemes”, which is due to be released by Treasury within the next few weeks. This is the fifth and last of five Treasury papers dealing with the reform of private sector retirement funding.
The other four discussion papers covered subjects ranging from tax to the preservation of retirement savings for retirement.
THE KIWI SAVING MODEL
The most significant difference between New Zealand’s KiwiSaver retirement exchange and the proposed South African structure is that New Zealanders make voluntary contributions, while it is proposed that South Africans will make compulsory contributions.
According to the KiwiSaver website, KiwiSaver is a voluntary, work-based savings initiative that is designed to be hassle-free, so it's easy to maintain a regular savings pattern.
There are a range of membership benefits to encourage members to save. They include a kickstart amount of NZ$1 000, regular contributions from employers and an annual tax credit for members.
KiwiSaver schemes are managed by private sector companies called KiwiSaver providers. Members can choose which KiwiSaver provider to use to invest their money.
There are no government guarantees on savings – members make their own investment choices at their own risk.
KiwiSaver savings are made up of contributions by employees and employers to individual accounts in the names of members, plus or minus investment returns, minus any withdrawals, fees and taxes. However, they can also be used by self-employed people.
All KiwiSaver schemes are regulated by the New Zealand Financial Markets Authority. Additional measures are in place to make sure the schemes are competitive and members’ best interests are looked after.
New Zealand’s tax authority, Inland Revenue, administers members’ contributions, mainly through the pay- as-you-earn (PAYE) tax system. Inland Revenue’s main responsibilities under KiwiSaver are to: provide employers with information packs to pass on to employees, receive member and employer contributions, transfer contributions to the right KiwiSaver scheme provider for investment, allocate people who don’t make a choice to default schemes, administer requests for opt-outs and contribution holidays, and help build public awareness of the KiwiSaver initiative.
Members are able, under certain conditions, to make an early withdrawal of part (or all) of their savings if they are: buying their first home, moving overseas permanently, suffering significant financial hardship, or seriously ill.
GOVERNMENT’S PLANS TO BRING DOWN THE COST OF YOUR RETIREMENT INVESTMENTS
National Treasury is determined to bring down the costs of saving for retirement, which, with some individual life assurance products, are among the highest in the world.
While not wanting to actually regulate how much may be charged by providers, it wants cost structures to be simplified, with limits on what charges can be applied.
Treasury wants to ban things such as:
* Loyalty bonuses that are paid but only if you stay invested for long periods. The loyalty bonuses come from high administration charges which are partly “refunded” to policyholders and retirement annuity members who remain invested for long periods.
* Penalties that the life assurance company levies if you reduce or stop paying your contributions.
* Fixed-rand monthly charges, such as policy fees.
* Confusing asset manager performance fees, which are often charged on top of annual asset management fees and result in asset managers collecting fees simply as a result of market movements.
Treasury also wants to remove the confusion surrounding costs that make it almost impossible for anyone to compare the costs of one retirement savings product with those of another.
It wants all costs, including those charged on different investment layers, to be standardised, and it wants the Financial Services Board to keep a close check on the charging structures.
In the presentation this week to representatives of the financial services industry, Treasury said other draft proposals included:
* Improvements in the governance of umbrella retirement funds. These funds, provided by the financial services industry, aim to provide cost-effective occupational retirement savings facilities for the employees of smaller employers by allowing numerous employers (participating employers) and their employees to contribute to the same fund.
Among the changes Treasury is recommending are:
- The formation of employer-level management committees on which both employers and employees would be represented to give employees a greater say in the management of their retirement savings; and
- The banning of umbrella fund rules that make it compulsory for the fund to use the services of a particular service provider. The rules of many funds insist the fund uses the services of its sponsoring financial services company. These typically include the provision of group life assurance and asset management services.
* Obligatory default investment options for all retirement funds but with the condition that the defaults cannot be high-cost, complex products that impose significant exit penalties if you wish to switch to a cheaper, or better, option.
* Retirement industry funds will be required to have standardised investment mandates and publish performance figures to encourage competition.
* A halt to the practice of rebates and kickbacks being paid between various service providers, such as between linked investment service provider (Lisp) administration platforms and collective investment schemes, and between Lisps and financial advisers.
* Greater use of lower-cost index-tracking asset management instead high-cost active management.