The government is to embark on a major reform of the private sector retirement industry so that you are better protected.
The government wants to preserve and improve the current well-developed retirement system, which will be used to top up the savings of its proposed state retirement fund, to which every employed person will have to contribute.
In its overhaul of the retirement system, the government wants:
- You to be offered cheaper savings vehicles;
- To ensure that your money is better protected; and
- To prevent criminals from stealing your savings.
The government has grown impatient with the continued plundering of retirement savings in the private sector. This looting has taken the form of:
- Fund administrators helping unscrupulous employers to strip funds of their pension surpluses;
- Administrators making secret profits and not acting in the best interests of fund members; and
- Life assurance companies levying costs on their products that exceed those on comparable products in other countries.
Measures already taken or proposed to improve the protection of your savings include:
- Finance Minister Trevor Manuel last year slapped an effective R3-billion fine on the life assurance industry, forcing it to repay a large proportion of the confiscatory penalties it had levied on policyholders who had been unable to maintain their contributions.
- A tough warning from Manuel in his Budget speech this week that he has instructed the Financial Services Board (FSB), the Financial Intelligence Centre and the South African Revenue Service to co-operate with the police and the justice system to take action against individuals and companies that plunder retirement savings.
The first results of this combined action will be seen on Monday, when 26 individuals and companies will face a wide range of charges, from fraud to racketeering, arising from alleged illegal surplus-stripping through the Lifecare Fund. In the dock will be Alexander Forbes, the country's largest retirement fund administrator, and some of its senior former employees, as well as the owners and executives of some of South Africa's better-known companies.
- New regulations are to be published shortly that will restructure how commissions are paid to financial advisers to ensure their interests are aligned with yours. The main aim is to move to a system in which commissions are paid only when you pay your contributions.
- New legislation will be submitted to Parliament shortly to increase the powers of the Registrar of Retirement Funds at the FSB to deal with problem areas. These powers will include being able to take control of retirement funds without first applying to the High Court.
- New legislation to overcome the conflicts of interest that abound between retirement funds and their service providers. These conflicts of interest contributed to the secret profits scandal that Personal Finance exposed last year.
The government is particularly concerned about conflicts of interests that arise when financial services companies:
* Provide retirement products, such as umbrella retirements funds and retirement annuity funds, and also appoint these funds' trustees, who are often employees or former employees of the company that sponsors the fund; and
* Offer a one-stop-shop service to occupational retirement funds in which a single company advises the fund's trustees and provides all the fund's products.
- A wide range of proposals aimed at increasing competition in the retirement industry in order to reduce the high cost of retirement products. These proposals include:
* Insisting that product providers give you more information about their products, including the costs.
* Allowing more product providers to enter the market. These providers could include banks and unit trust management companies.
* Allowing fund members to transfer between product providers without incurring severe penalties.
* Improving the standard of fund governance, with the focus on trustee training and the observance of codes of conduct.
- Measures are being considered to ensure that occupational retirement funds provide a minimum level of retirement savings before contributions can be allocated to topping up death and disability benefits provided by the government's proposed compulsory retirement fund, as well as to other benefits, such as funeral assurance and provision for post-retirement medical scheme subsidies.
- Proposals to limit the withdrawal benefits if you resign, are retrenched or are fired. It will be compulsory to preserve most of your retirement savings. Your accumulated savings will be transferred to the fund of your new employer, a fund provided by the financial services industry or possibly to the national social security fund.
- Provident funds, which currently allow you to take all your benefits as a lump sum at retirement, will be phased out. While the government accepts that you need a cash lump sum at retirement to do things such as pay off debt, it says the purpose of retirement savings is to provide you with a pension until you die.
- The introduction of regulations that will require a minimum amount of your retirement savings at retirement to be used to provide a conventional guaranteed annuity (pension). The minimum level will be "a multiple of the social old- age pension".
You will be able to purchase a living annuity, where you take the investment risk, with any amount above the minimum level of a conventional annuity.
It is proposed that measures are introduced to ensure that there is proper competition between the life assurance companies that provide conventional pensions in order to keep down costs.
- The possible expansion of the jurisdiction of the Pension Funds Adjudicator so that he can hear complaints on all retirement funds, including the Government Employees Pension Fund (the largest fund in the country), bargaining council funds and parastatal funds, such as the Transnet funds, all of which are currently excluded from the ambit of the adjudicator.
- The improvement of the management of retirement fund investments. These improvements will include redefining the limits on how much may be invested in certain asset classes, the proportion that must be invested in socially responsible investments and ensuring that people with appropriate expertise manage a fund's assets.
Tax incentives to save will stay
Tax incentives to save for retirement are to be maintained but will be capped for high-income earners.
The government also plans to streamline the taxation of retirement funds, making all funds' contributions and benefits subject to the same tax regime.
The National Treasury, in its latest retirement reform discussion document, says that even where membership of retirement funds is compulsory, tax incentives to stimulate retirement savings should be maintained as they encourage people to save more for retirement than the basic compulsory minimum.
The treasury is proposing:
- The adoption of what is called an exempt exempt taxed (EET) system. In terms of EET:
* Your contributions will not be taxed (within limits);
* The returns on your retirement savings will not be taxed (the retirement fund tax of nine percent, was scrapped this week); and
* Your benefits at retirement will be taxed, but there will be some tax-free elements.
- Contributions to the basic savings element (the national social security fund) will receive favourable tax treatment. Limited tax encouragement will be given to the supplementary component, and there will be no special tax treatment above a pre-determined ceiling.
- Moving from the current system of allowing contributions, up to a certain percentage of your income, to be deducted from your taxable income (for example, 7.5 percent of pensionable income), to a system of tax credits.
Low-income individuals would receive a supplementary credit, while no credits would apply for the contributions that exceed the lower of a certain percentage of gross income or a fixed monetary cap.
- The retention at retirement of a limited tax-free lump sum, but on a simplified basis. The tax-free lump sum, which has remained at a maximum of about R120 000 for many years, may increase.
- Your pension will continue to be taxed at your marginal rate of tax.
New controls mooted for umbrella trusts
The government intends to slam the door on any future exploitation of the dependants of deceased members of retirement funds by phasing out umbrella trusts.
This follows the Fidentia debacle in which the Financial Services Board (FSB) found that widows and orphans' benefits placed in the Living Hands umbrella trust had been misused and mismanaged.
The curators of Fidentia Asset Management (FAM) are struggling to find cash resources in the Fidentia group of companies to maintain the benefit payments. In all, about R1.4 billion in benefits for widows and orphans was placed under the control of FAM, which used the funds for Fidentia's operational expenses and placed the money in a range of investments - some good and some bad - beyond the investment mandate it had from the FSB.
The government, in its latest retirement reform discussion document, says that it is concerned about the level of oversight of umbrella trust funds, particularly how funds are invested and managed.
The government is proposing that enhanced protection for the benefits of dependants of deceased retirement fund members could include establishing dedicated "caretaker funds" regulated by the FSB, rather than the current system of trusts regulated by the Master of the High Court.