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Retirement Planning
Tuesday, May 1, 2007
All round solution

Too many South Africans reach retirement age with little or no retirement provision. The state ends up looking after these people through the social old age grant and by looking after their health through state medical facilities.

Comments Wilhelm van Zyl, CE of Metropolitan Employee Benefits, “There are around 3,5 million retired South Africans.” The state currently pays old age pensions to just over two million of them. A number of factors brought about the current situation.
He says that too many South Africans cash in their retirement savings when they change jobs. Industry figures indicate that in excess of R30 billion is withdrawn from retirement funds each year. “A small percentage of this finds its way back in the form of preservation funds and other retirement vehicles but the bulk is used to clear debt or to fund a lifestyle.”
There are around 14 000 pension schemes in South Africa, catering for some 10 million members. He adds, “While the 50 biggest account for more than 20% of the membership, the real problem is that many of the remaining 80% of funds are simply too small to be run cost-effectively.”
The way the means test is structured acts as a disincentive for people to save. If a pensioner receives a private pension of more than R1 686 a month, he will not qualify for the R870 a month government old age grant.  The proposed significant raising of the threshold will encourage more people to save for their retirement.

The government has adopted an holistic approach towards this issue and has proposed a mandatory, earnings-related social security scheme to provide:
• Unemployment insurance
• Disability benefits
• Death benefits
• Retirement savings

Mr van Zyl says this will be funded by a social security tax. The proposed level of this tax is between 13% and 18% of earnings. This will be collected as part of SITE and allocated to each individual.
The challenge will lie in getting adequate coverage of the employed and, in particular the self-employed and irregularly employed. The creation of a structure that is affordable, sustainable and which works will be a challenge. A great deal of capacity building will be needed to implement this proposal by 2010.

Key issues to be addressed in a retirement fund solution will be:
Cost. Probably the most effective way of reducing the running costs of retirement funds is to have fewer and larger funds to benefit from economies of scale.
Governance. It is crucial that the funds are governed in a transparent way by trustees who act in the best interest of the fund rather than in the interests of the employer, union, broker or product supplier.
Competent administration. The administration of retirement funds is not a simple matter. At the end of the day, a retired person is dependent on getting a pension in order to live. We need to ensure that the administration of any fund is of the highest order.
Data quality. A pension system is only as good as the raw data it uses. For any system with a wide reach, taking steps to ensure the quality of the member data is correct will be a major challenge.
Access. The pension system must be accessible throughout the country, making it easy for people to join as well as providing the facility for people to be paid their pensions.
Providing all this at a low per member cost will be the challenge.

Copyright © Insurance Times and Investments® Vol:20.4 1st May, 2007
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