This interview gives a neat summary of the key changes that are coming to the South African retirement savings industry. First, there are some changes to the tax laws. Starting in March next year, you can deduct up to 27.5% of your income as retirement savings if youâre putting that money into an approved vehicle (up to a cap of R350,000 a year). This should help incentivize people â especially middle income people â to increase their savings rate to save on their taxes.
Second, there are some changes coming to the rules around withdrawing your retirement savings. Historically, people could withdraw all their retirement savings in cash when they changed jobs. Thatâs all set to change, with new rules allowing only a limited cash withdrawal, and requiring the bulk of your savings to be reinvested in a new retirement savings vehicle.
Now, if the extortionate costs of South African retirement savings vehicles could just be checked⌠– FDÂ
ALEC HOGG: South Africaâs Retirement Fund industry has undergone some important changes, but according to PWC, thereâs still a long road ahead with much stronger reform, regulation, and supervision expected in the near future. Gert Kapp, PwCâs National Retirement Fund Leader for South Africa joins us now for more. Itâs interesting to see how the titles have developed. The guy who started Yahoo! was just called the Chief of Yahoo! You have quite a long title. What does your business card look like?
GERT KAPP: I donât have a business card.
ALEC HOGG: Well thatâs better. Youâre just from PWC.
GERT KAPP: Yes.
ALEC HOGG: But youâve been focusing on retirement. It seems to be more and more in focus here, in South Africa, not least amongst the Department of Finance Treasury. Looking at ways, I guess that if our investment performance has been good, yet very few people are retiring in a comfortable position. Thereâs something going wrong.
GERT KAPP: Yes, I think itâs closely linked to the investment performance, but itâs also closely linked to the type of funds that we do have. As you know, weâre in the fund contribution environment. The new Treasury papers move towards fund contribution, but only a limited withdrawal under pension so as you grow older, you donât spend your money. I just listened to the previous speaker as well. Youâd rather pay off that loan, which can go bad. Yes, I think it is a problem worldwide but I think in South Africa more particularly, you have to have forced savings and savings vehicles, to really force people to save and the easier vehicle is that of the Retirement Fund because itâs a vested industry.
ALEC HOGG: But we heard a lot in the budget from Pravin Gordhan, the Finance Minister, about retirement reform. Whatâs the state of play at the moment?
GERT KAPP: Importantly, the four papers are already out at National Treasury and then the date of the 1st March 2015 will be the watershed date, when the Taxation Law Amendment Act comes into force. The most important part is that of the capping of the contributions, taking all retirement or savings vehicles into account, the increased level – if youâre not already on the cap â and most importantly, the portability of your retirement fund savings and the preservation thereof.
ALEC HOGG: All right, so there are three issues. Letâs start with the cap. How does this…if you have a cap on the amount that you can save, how does that encourage people to save more for it?
GERT KAPP: I think the cap is more there to be a more equal basis of deduction, from an income tax point of view, but I donât think your retirement fund savings should be driven by income tax incentives.
ALEC HOGG: Sure.
GERT KAPP: I donât think thatâs the right thing.
ALEC HOGG: But I still donât understand. Why would there be a cap on your retirement savings, if you want to live…
GERT KAPP: I think itâs from a taxation point of view.
ALEC HOGG: So itâs a tax driven thing.
GERT KAPP: Itâs a tax driven thing but I think the more positive thing is where the current contribution cap is 20 percent; it has been increased to 27.5 percent.
ALEC HOGG: What does that mean, Gert?
GERT KAPP: That means that your contributions are tax deductible â 27.5 percent, but up to the cap of three-fifty.
ALEC HOGG: So if you own, letâs just say you earn a hundred-thousand rand a month.
GERT KAPP: Then you can take 27.5 percent of that as your retirement fund contributions, and that will be tax deductible, up to the cap, so itâs an incentive.
ALEC HOGG: Okay, so we canât argue with that. That is pretty sufficient for everybody.
GERT KAPP: Yes, and I think it is incentivising and if you look at new savings vehicles, to have interest free savings vehicles also on the cards. I think itâs to reach the wider population because there are those in informal employment as well. The most important thing, if you can achieve that, is the preservation. In other words, you canât take your Provident Fund when you change jobs or you eventually retire at whatever age, letâs say 55, that you can only commute one-third into cash but the two-thirds you buy an annuity or a retirement pensions vehicle. I think that will make a huge difference because nowadays you take the whole bunch, you buy that car youâve longed for and then you have nothing for retirement.
ALEC HOGG: Yes, but the problem is you also might take the whole bunch and fix up your home, which could be in a rural area. You could be buying cows. You could be investing in your daughterâs happiness through lobola. Youâre old enough to remember 1983. There was a Pensions Preservation Recommendation, from the Wiehahn Commission, if you recall and South Africa went out en masse, on strike. It wasnât just the Unions who were against it. South Africans donât like being told what to do, in the best of times. Do you think itâs realistic that Pensionâs Preservation Legislation will have no kickback from the population?
GERT KAPP: No, I think it will have some kickback but I think it must be in such a way that you achieve the final goal. At the final goal you realise it is good times weâre living in, you get returns of 26 percent p.a. but I think one tends to forget the 2009 recession, when it was -30 percent. Then you have a different angle on that.
ALEC HOGG: But Gert, people are logical. People know that a big portion of their retirement savings are being sucked up by costs. They look around them and they see the massive big offices. They see the (with respect), Coronations results â R2.5bn in profits from a company like that and they say âWhy shouldnât I go and buy a few more goats?â
GERT KAPP: Yes, part of our survey also indicates that cost is an issue, and if you look at the participants in the survey, the recognised costs⌠Itâs up to those Boards of Trustees to take a careful look at the investment structure. Why donât you opt for cheaper investment options? Itâs the Boardâs task. If you want to protect Membersâ interests, you really need to protect them.
ALEC HOGG: People are rational. People look at that and they say âour Trustees are not qualified. They donât really care about making those decisionsâ. In many instances, the Trustees are certainly not sufficiently educated to make those differences. Consequently, the costs are still higher. I think the point here is what is Treasury doing about costs? Are you expecting that Treasury will be focusing more attention on it?
GERT KAPP: I expect that. I think one of the papers definitely⌠In future, one can see a standardised cost and really a focus on excessive costs and maybe – Iâm not an investment manager – but a focus on performance based fees. Maybe you need to cap that because if the market performs you need to do something, you really have to outperform the market, which I donât think, currently, really happens. I think it is difficult to outperform the local market.
ALEC HOGG: Gert, youâve opened up quite a few Pandoraâs boxes there. Thank you very much for your contribution today. Itâs a fascinating subject.
GERT KAPP: Itâs a pleasure. Thanks.
ALEC HOGG: Retirement is interesting. Itâs one of those subjects, which is like an onion. When you start peeling off the layers, you realise how little we do know as a nation, about what happens to our Retirement Funding. However, underlying it all is this view – Iâm absolutely convinced of this – that people are rational, people are logical, and theyâre saying âwell, if Iâm going to lose half of my money through costs anyway, why not take it out and buy that car? Why not live now and maybe buy that cow or, as Iâve said before, my daughterâs happiness?â That was Gert Kapp, PWC National Retirement Fund Leader for South Africa.