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Thursday, January 1, 2009
Much to be done

"The introduction of a national savings fund represents the single most significant retirement fund industry event since the introduction of the Pension Funds Act in 1956 and will have a profound impact on the existing retirement fund industry," says Verwey Wiese, Director- Financial Services, PricewaterhouseCoopers.

Wiese, in his article in the recent PwC Southern Africa Financial Services Journal, explains the new structure. Simply put, it would comprise of two funds:
• a tier one compulsory defined benefit fund for employed, self-employed, informal, domestic and seasonal workers, where contributions are capped at an earnings level of between R75 000 and R150,000; and,
• a tier two defined contribution fund with 'member individual accounts' for contributions on earnings between the first tier and R750 000 per annum. Here, membership would be voluntary for individuals belonging to existing retirement funds, on condition that those funds first apply to "contract out" i.e. members of large occupational and bargaining council funds would qualify for exemption from joining the second-tier national saving scheme if those funds comply with minimum prescribed standards, and these funds must be accredited by government.

SARS is earmarked to do the collection of contributions using the existing tax collection infrastructure.
Wiese says a clear consequence of the proposed national savings plan will be a large reduction in the number of existing retirement funds. All current stand-alone funds would need to "contract out" if they wished to continue to exist independently, and an application with the Financial Services Board, complying with certain minimum standards, would have to be lodged. A target of approximately 1 000 remaining funds has been mentioned (there are currently between 9 000 and 13 000 active funds), indicating that the criteria would be set high in the new accreditation framework. The result is that small funds would be forced into joining the national fund or another accredited fund.
All funds would outright lose all their members earning below the proposed first-tier fund level of (between R75 000 and R150,000)  and those funds with a high proportion of lower income members are at high risk of closing down. Certain large funds could find a large exodus of members who join the second-tier national fund on a voluntary basis, thereby reducing them to small funds that no longer meet the contracting out criteria.
A second consequence is the impact on human resources. Companies would need to explain the options in such a manner that employees can make an informed decision based on accurate comparisons of benefits and contribution rates. Lower "take home pay" will affect staff moral and future demands for wage increases. There is also the question of whether conditions of employment should be adjusted or maintained – for example, the changing of retirement ages or taking extra risk cover over and above the national savings fund. Contractors need to be catered for and will be more expensive to employ, as they would be scoped in as contributing members to the new fund.
A third impact is on service providers such as employee benefit consultants, professional trustees, professional principal officers, auditors, financial institutions and investment management consultants, who would all have a smaller pool of funds to service. "They would need to position themselves to be appointed as accredited retirement institutions to either the national savings fund or the remaining say 1 000 accredited funds. A positive impact of this competition could be benefits such as lower costs, more regular measurement and better monitoring of service level agreements. However substantial shrinkage of the underwriting book for insurers may occur as member numbers decline or schemes are cancelled. The consolidation of funds would leave umbrella arrangements in a favourable position to absorb those funds and members who choose to opt out from the second-tier fund. Large umbrella funds are likely to emerge and could dominate the accredited pool of funds in years to come."
A national savings fund would affect unions, with a loss of direct influence and control over funds' investment assets, as current member trustee representation on trustee boards would fall away. There would be a loss of both bargaining power and regular interaction with management via the fund structures. Alternative arrangements would need to be made through negotiation at the National Economic Development and Labour Council (NEDLAC).
The compulsory nature of the new fund would mean that all registered tax payers will become contributors and thus will impact on individual financial planning. The self-employed would have to budget for this new contribution and reassess their monthly savings positions. Changes to personal taxation are envisaged as the tax treatment for all types of retirement funds will be harmonised, and the new approach is likely to favour tax treatment of the basic savings elements, with no special relief above a specified ceiling. And when retirement is reached, the days of taking a full lump sum from a provident fund are probably over, as new limits are being proposed.
Wiese says the administration of such massive fund would entail special legislation for the national savings fund and a revision of the current Pension Funds Act. "Transitional arrangements for the implementation years are required as individuals planning for retirement under the existing arrangements should not be penalised. SARS's systems need to be geared and staffed for the additional collection burden."
Wiese concludes that with an optimistic initial planned implementation date of 2010, more likely to be 2011 or 2012, much still needs to be done.

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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