Retirement reform: What’s truth, what’s rumour?

retirementWe all know we aren’t saving enough as a nation for our retirement, so the government is implementing measures to force many of us to set aside income for future income needs. Financial planner Dawn Ridler aims to separate fact from fiction in talk about pension reform. It is going to be financially uncomfortable for many employees when some of their income is diverted into compulsory savings, she predicts. There will also be more red-tape and decisions to be made for employers. – JC

By Dawn Ridler*

Dawn Ridler gives us the low-down on retirement reform: what’s fact, what’s fiction.

There has been a fair amount of hype in the press recently around ‘pension reform’ and the thorniest issue is the prospect of ‘compulsory retirement savings’. This includes the prospect of being forced to contribute to a government fund if your company does not have a fund of its own. With the way that the Road Accident Fund has been managed, this is the stuff of nightmares.

Rumour: It is important to state upfront that compulsory enrolment in a government retirement fund is merely ‘being discussed’ at this point and is not yet at a formalised stage, but once a decision has been made it could be implemented quickly – because the basic structures under the Public Investment Corporation (PIC) are already in place.

It is much more likely that employees will be able to choose whether to use the employer fund, the government’s, or even both.  The government is focused on increasing the savings of all South Africans, and some of the other pension reforms, due to be implemented on 1/3/2015 address these. The government also wants to keep a lid on the fund costs (quite rightly) and this is likely to see as further ‘consolidation’ of smaller funds into larger ‘umbrella’ funds where economies of scale in terms of administration costs can be achieved. The erosion of the retirement funds by some of these costs is frankly criminal.

Proposed: The government wants to make it more difficult to withdraw a lump sum moving jobs, and on retirement from a provident fund. The details of these ‘proposals’ aren’t known right now, but it is likely that the changes will only be imposed on future contributions. Compulsory ‘preservation’ of funds to prevent the ‘cashing out’ of funds when an employee moves jobs is also under discussion. In effect, fund managers are going to have to ‘hive’ the fund into two – before and after (already a reality because of other changes, detailed below).

Fact: As of 1/3/2015 all retirement funds, pension, provident and pension are going to be put on an equal tax footing, allowing many members to make additional tax savings (especially if they have a company fund and their own retirement annuity). It is however going to be capped. As of 1/3/2015 provident fund retirees will no longer be able to take the full amount, but will be forced to purchase a ‘compulsory annuity’ – as is the case with pension funds and retirement annuities already.

Most pundits agree that the wholesale ‘nationalisation’ of existing pension funds is extremely unlikely. Phew! The prospect of the billions going to the various providers suddenly going to PIC is a horror show. It would very quickly become the single biggest ‘shareholder’ on the JSE.

It is much more likely that existing retirement funds will be allowed to continue unimpeded. It is possible that the joining of such a fund might be made compulsory. When companies first set up a fund, currently  joining is usually not compulsory for existing employees, but becomes compulsory for new employees.

If an employee doesn’t have access to a group fund, then it is likely that a government fund will be provided. The only question is whether or not this will be compulsory or not. Making it compulsory is going to be politically ‘unpopular’, but unlike the proposed National Health Reform, massive infrastructure expenditure isn’t required. If your company doesn’t already have a retirement fund, now is a good time to get ahead of this curve so you aren’t left scrambling at the last minute.

When is a good time to introduce a new retirement fund into a company?

Introducing a fund into a company for the first time can be a very stressful process for managers and employees alike. In my experience the best time to do it is at the same time as the ‘annual increase’ so that employees don’t feel it instantly in their paycheck.

What about the economic cycle? Obviously the least painful time to introduce a new fund is when the salary increases are above inflation, preferably by a good 3% or more to make up for the 6-7% slice they’re going to save in the fund.

There are very few companies who can afford this sort of largesse. Very few employees have seen a real increase in their pay packets. Above inflation increases in things like fuel and electricity has taken more than its fair share of those disposable incomes.

One could use other ‘group benefits’ like life or funeral cover as the ‘carrot’ to get employees to join voluntarily. Group benefits, especially disability cover, protects both the employer and the employee.

‘Boarding’ an injured employee is onerous and time consuming, and in the interim the company may be obligated to continue to pay the employee. With temporary and permanent income protection this risk is transferred to an insurance provider. Funeral cover for blue collar workers can be very powerful.

I saw it at work myself in a previous company. The first time the funeral cover paid out for an employee’s family, the news spread throughout the company like wildfire. It is an inexpensive, but powerful, goodwill gesture.

Dawn is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.

Also read:

Six very nasty money traps. Beware: these wipe out wealth!

Investment success: Discomfort is necessary to build wealth – financial planner. Brilliant analysis!

Choosing a financial adviser? What to look out for. Critical skill #1

Help! I’m retired and deep in debt – personal finance lessons for young and old

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