Move to enforce pension savings

Actuarial Society of SA public policy actuary Niel Fourie says the new measures are necessary as South Africans generally put retirement savings at the bottom of their financial priority lists.

"In partnership with our industry‚ National Treasury is working on several tough measures to force people to preserve retirement benefits when leaving a pension or provident fund. One of these will force employers to pay the retirement benefit into a preservation fund when an employee resigns or is dismissed‚" Fourie said in a statement.

As it now stands employees can take their retirement benefit as a cash lump sum or transfer the money into a preservation fund after resigning. National Treasury announced some retirement reform proposals in the national budget in February.

"Individuals will be well served by the intentions and general substance of the proposals. But there will be major changes in the roles of advisers in the fiendishly complex and rich investment and savings value chain to help meet this objective. However‚ it all starts with individuals taking responsibility to save‚" said Investment Solutions' managing director Derrick Msibi.

Msibi said the "sad reality" was that existing contribution levels were too low to provide adequate post-retirement nest eggs.

"Interest rates are lower than ever and returns from asset classes are expected to be muted. Actuaries estimate people should be saving over 25% of their income rather than the current 12% to 15%‚" he said.

Transfer members' benefits

In terms of the proposals made in the budget‚ all retirement funds will be required to transfer members' balances into a preservation fund when members withdraw from the fund before retirement. Payments from divorces will also have to be paid into preservation funds rather than be paid out in cash.

Fourie said not all the National Treasury's proposals were tough - one of them would provide access to a preservation fund once a year.

As it now stands‚ an individual can only make one withdrawal from a preservation fund before retirement‚ irrespective of whether it is a full or partial withdrawal.

Fourie said the system of allowing only one withdrawal had been encouraging people to take all their retirement savings in one year.

By allowing one withdrawal a year‚ the government hopes consumers will preserve most of their savings and dip into them only in times of need.

To make sure that consumers are not forced into expensive debt in times of financial emergencies‚ the National Treasury recommends that unused withdrawals in any year may be carried forward to future years.

Grim lack of savings picture

Referring to the 2012 Alexander Forbes Member Watch Survey‚ Fourie said that on average less than 6% of employees between the ages of 20 and 25 preserved their retirement savings when changing jobs. Less than 10% in the 30 to 40 age group tended to preserve their retirement benefits.

"These statistics paint a grim picture given that the later you start saving for your retirement the more you need to put away to make up for years of lost contributions‚" said Fourie.

"Every time you dip into your existing savings you increase the amount that you have to save in order to make up for the lost amount and the growth you would have received had this amount remained invested‚" he said.

Critics of the government's retirement plan proposals argue that the new regulations seemed to only cater for the employed‚ and would not be of benefit to people working in the informal sector.

Msibi said another proposal being considered by National Treasury was the provision of tax-efficient non-retirement savings vehicles. He said this proposal would allow individuals to top up their potential retirement lump sum using the "generous" tax incentives provided by the fiscus.

iTransact chairman and well known economist Iraj Abedian said last week the high costs associated with retirement products were the biggest culprit for retirees not having enough money to enjoy a comfortable retirement.

Speaking at the launch of a low-cost retirement annuity product with administration and investment costs of less than 1%‚ he said costs of 3% on a retirement product could erode retirement capital by 31%‚ while costs of 5% could erode potential capital by 61%.

"Such costs are particularly consequential for the middle-income and lower middle-income markets‚" Abedian said in a statement.

Source: Business Day via I-Net Bridge