The last minute abortion of proposed changes to South Africa’s Provident Fund rules are being interpreted as a major victory for organised labour. After being threatened with a new series of strikes, Government kicked this particular retirement funding can down the road for another two years. Liberty’s head of umbrella fund solutions, Arno Loots, unpacks what happened and explains why he likens it to a rocket launch being stopped minutes before blastoff. But Loots regards this as a temporary setback, not a permanent reversal for the promotion of a savings culture in South Africa. – Alec Hogg
Iâm with Arno Loots. Heâs with Liberty, head of Umbrella Fund Solutions and an actuary. Arno, youâve been with Liberty only for a couple of years. Where did you study?
I basically studied in Johannesburg at the [then] Rand Afrikaans University (now UJ) and then from there, I went to Wits. I finished my Honours there and then qualified through the Institute of Actuaries in London.
Employee Benefits: Have you always been in that area?
I actually started there, did my crunch time/jail time there, valuing Group products for about three-and-a-half to four years. Then I went over to Individual Life for the next seven-odd years and now Iâm back in the umbrella space for two years.
Thereâs been a dramatic development in the past week. Letâs just start off with this whole debate about Pensions Preservation because thatâs really at the nub of the announcements that were made.
I think that is the end-game, the so-called P Day. Some of the unions donât agree with that.
Why? Whatâs their argument?
Iâm not exactly sure why theyâre against it but from what I can see, what theyâre saying is âdonât tell people what to do with their moneyâ and I guess thatâs what theyâre on about.
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So Pensions Preservation is something that they think should be left to the individual.
Yes, and I think it might have something to do with affordability as well, and thatâs probably why you saw the 75,000 increasing to 247,500.
Just explain that.
If you save less than 75,000 today, you donât have to annuitise in RAâs or Pension Funds. Government said, âLook, letâs try and accommodate the unions and meet halfway. Letâs increase that to 247,500 because many of the union members donât save more than that amount.â This means that they would actually not be affected by the one-third/two-thirds rule at retirement.
We need to unpack all of that for people who are finding this for the first time. If you then have savings of less than 247, there are really no rules. You can take the money out and spend it as you like.
Correct, 100 percent.
If youâre above that, what are the rules?
Then you can only take out one-third in cash, currently on RAâs and Pension Funds.
So if you have a retirement pot of say, R1m, you can take out R330, 000.00 in cash and spend it as you like, but the balance has to be put into an annuity.
Thatâs correct.
Stay in the system, as it were.
Yes.
Why is that?
That is because we need to make sure that people have an income in their retirement. We often see that when people have access to their money, they spend it. People donât think about it, that theyâve got another 20 to 30 years to go and thatâs why we need to help people to protect their funding.
So itâs almost a law for the good of the individual, even though the individual might not like that law.
Correct.
They might enjoy it in time to come.
Yes, they might.
It looked like everything was moving in the right direction for those who believe in Pensions Preservation, but then there was this jolt to the system. Just explain what happened.
There were further talks between COSATU and Government. Iâm not privy to exactly what the conversation was, but COSATUâs clearly not happy about telling people to preserve their money in retirement. Governmentâs a bit more flexible on that point and decided that we should remove that.
What was going to happen ahead of these talks? In other words, what was anticipated by the industry?
That we would go ahead, and that Provident Funds where you could access all your money at retirement, would go into the same mode as Pension Funds and Retirement Annuities.
In other words, the one-third/two-thirds. Take out the one-third. You have to leave two-thirds in. Now Provident Funds have this exemption. How long is it going to last for?
From the statement published by National Treasury, thatâs for two years until 2018 and at that point, theyâll reconsider the situation.
Only reconsider â not necessarily change it?
Yes. We must talk a bit about the other side â the contributions â to understand why theyâre saying âtwo yearsâ. At the moment, you donât get tax deductibility on Provident Fund contributions and you get different deductibility between RAâs, Pension Funds, and Provident Funds. All of that is being aligned and being made quite simple, which is nice. You can save up to 27.5 percent of total income, tax-free. The Government is saying, âIf we do that for you then please annuitise in retirement, otherwise youâre going to cost us money through old-age grants.â With that in place, they are saying that you get a tax deduction but then you have to preserve in retirement. Now that the preservation in retirement is falling away the question is, âDoes the deductibility fall away as well?â Government said, âLook, for two years weâll give you deductibility, which you donât even have today but if we canât agree by 2018, weâre going to then drop the deductibility side as well.â
So the unions have actually had a big victory.
Well, it depends on which side you look at, but I would say the good changes are still going ahead. Most of them are for the members â higher deductibility etcetera, but not all of it.
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All right. Letâs just start at the real basic level now. If you are a member of a Provident Fund for the next two years, if you retire it can be any age from 55?
Yes, you can retire on a Provident Fund, based on the normal retirement age of that Fund.
All right.
So itâs still normal retirement age. The employer chooses that. They say that when you reach 60, you have to retire. That will still stay.
So if you hit your Fundâs retirement age in the next two years, you can take all of that money out and not be taxed on it.
No. You will be taxed on your money. The normal rules apply. You get the first half-million of the lump sum that you take out tax-free, and then youâre taxed above that.
All right, so the real distinction here is that you can take it all out, you pay your normal taxes, but you can allocate it as you like.
Correct.
With Pension Funds, you canât do that at the moment. You can only take one-third out.
That is correct.
Surely there will then (because of the greater flexibility and because of the tax advantages that youâve just outlined for the next two years) be a big swing for people who are aware of it, from Pension Funds to Provident Funds.
Well, I wouldnât be surprised if that happens Alec, because of the uncertainty on the deductibility. Do you want to swing to Provident Funds? You might then lose deductibility two years from now. Well, if youâre in the Pension Funds, youâll enjoy that deductibility going forward. Treasury has said from the start that they actually want Pension Funds.
So they want to do away with Provident Funds.
Yes, eventually or they would just change the Provident Fund to look like a Pension Fund. Personally, I wouldnât go into a Provident Fund for that reason. However, for those who actually would retire in the next while and want all the cash out, Iâm sure they will continue with the Provident Funds.
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Itâs an interesting aspect. If the Treasury or the Finance Minister has caved in to the union demand on this point at this time, why would he necessarily have the ability to not cave in two yearsâ time?
My feedback on that point was âletâs first agree and then set a dateâ, because we have to do a lot of work every time we need to implement the systems. Communications was another big point and a large expense because we want our members to know whatâs going on. My request would rather be âdonât set the dateâ. First agree and then set a date. For this one, it looks like we just keep on setting another date.
Whatâs the history? Has this been on the table a long time?
Yes. This has probably been on the table since 2011. Weâve talked through a number of papers, then the drafts, and then the final so itâs been on the table for about four years.
What might make it different in two yearsâ time? Are we not (to use that famous American saying) just kicking the can down the road?
Well, we potentially are. I think it might be relationship discussion between COSATU and the Government so I donât know how thatâs going to change, but I canât see either party moving on this one at this point although thereâs a lot of time to work through things. I think the secretâs going to be for Government to start the engagement early because since the previous delay, it was almost as if six or eight months passed without any further engagement. Then there was suddenly a lot of engagement again. I think that this time we just need to tackle it head-on from next month, literally.
Arno, whatâs at stake here in terms of the country, in terms of peopleâs retirement, and in terms of the retirement industry?
Okay. Letâs look at why these things are being done. Itâs being done to make sure that people save more firstly, hence the tax breaks. Governmentâs trying to entice people to save more. Secondly, you save that money into a pot and you want to make sure that people donât access that pot too much during their working career and then at the end, at retirement. The end game is, if they donât save enough, guess whoâs paying? The taxpayers need to help these people in retirement or children have to look after them and then they donât save again. Itâs all about the savings culture and making sure people are saving enough. Thatâs the endgame. We are ticking boxes systematically and this is one industry where there is a plan â Retirement Fund reform â and systematically, weâre working through that plan. Itâs just a bit slower than I thought but in the end, I think weâll unlock that long-term value once we work through all of them.
Is this a serious setback?
I wonât say itâs a serious setback. It is just a setback in a longer negotiation. If we look back in 20 yearsâ time weâll say â20 years ago in 2016, this and that happenedâ but in 2025/2030, weâll look back and I think weâll have gone through. Given that the rules are currently like this, itâs not really a setback as such but we havenât gone as far forward as we thought we could.
So thereâs a sense of inevitability that it will happen eventually, but people are kicking against it for their own reasons at the moment.
Yes. Look, different people have their different reasons.
It all sounds pretty confusing. How do you communicate this to people who might be very confused as it is?
Yes. Itâs quite an extensive campaign that we work though. Weâve got three key parties, which we work with. We work with the financial advisors. We work with the employers and then the end members, and the Funds through various communication. We try and use the media articles but also direct communication. For example, Iâve had presentations up to last week, talking to brokers about the changes.
They get it, at least. The brokers know.
They get it. They understand these things. Now weâre in a situation where we spent all this money. We spent all this time. Advisors went on the road, made sure they talked to clients, and now everything changes. Iâve likened it to a rocket being launched. Its countdown time and now you pull out the astronaut just before it actually lifts off. Weâre going to have to do a bit of that and weâre going to have to tell people, âThis is where we started. This was what was going to be changed.â Then we almost need to throw a watermark over it to say, âThese things are not changing anymoreâ so people would have a full picture and understand exactly what is going ahead and what not. In the end, we must remember itâs about making sure people save enough. Itâs about making them comfortable with retirement. It just makes it a bit more complex to achieve that right now.
Arno Loots is Head of Umbrella Fund Solutions at Liberty.