National Retirement Fund Reforms welcomed but further clarity still needed
Johannesburg, 31 July 2013 - Professional services firm Deloitte says it is cautiously optimistic about proposed retirement fund reforms being promulgated by the National Treasury even though it has concerns about a lack of clarity on transparency and governance related to the planned amendments.
“We welcome any efforts to get more South Africans into the national savings pool but it is crucial that the framework that is put in place is properly administered,” says Dinesh Munu, Financial Services Partner and Head of Funds and Investments Audit at Deloitte. “Only with the correct governance and transparency around the benefit structures and investment policies can South Africans derive any real benefit out of national savings reform.”
National Treasury has published a series of five discussion papers since September 2012 on promoting household savings in South Africa and reforming a retirement industry that is perceived to be too fragmented and costly. The papers were titled ‘Charges in South African Retirement Schemes” (July 2013); Enabling a Better Income in Retirement’; ‘Preservation, Portability and Uniform Access to Retirement Income’ (September 2012); ‘Incentivising Non-Retirement Savings’; and ‘Improving Tax Incentives for Retirement Savings’(October 2012).
Deloitte estimates that there are as many as 3000 active retirement funds (still further consolidating in South Africa) and currently a fair chunk of contributions are being swallowed up by administration costs, risk premium charges and investment fees. Complicating the matter further is that South Africa’s roughly 25% unemployment rate and vast informal economy means that the majority of the nation’s population is effectively locked out of the savings industry.
“South Africa has too many retirement funds which makes them difficult to govern,” says Munu. “However, the biggest challenge is to get people in the informal economy to join the national savings pool because at the moment the burden for funding these people in their retirement is being shouldered by National Treasury and by extension, the taxpayer.”
Munu says an equally problematic issue in South Africa is that retirement fund members who resign from a job are allowed to ‘cash in’ their accumulated savings, with the proceeds often used to fund conspicuous consumption such as new vehicle purchases or overseas holidays. Although retirement fund reforms are likely to promote consolidation in the industry and reduce membership costs, it is imperative that stringent administrative and governance protocols be put in place to prevent an erosion of public confidence in the proposed national savings platform.
“While we certainly welcome any efforts that promote savings, transparency and governance will have to be crucial ingredients in a national savings platform of this magnitude,” says Andre Rousseau, Insurance Industry Leader for Consulting at Deloitte. “Members need to know how their money is being invested, what assets are being purchased with their savings and how the prescribed limits will be adhered to and monitored . Currently there doesn’t seem to be much clarity on issues like how the fund will be administered and whether members will receive regular status reports on their contributions, benefits and investments including disclosure of costs.”
Munu says that government should consider implementing pre-set guidelines on how much money can be invested in the assets of state-owned entities as well as other asset classes such as cash and equities. While National Treasury’s objectives of promoting consolidation in the industry, and its improved governance and simplicity should be commended, Munu says more detail needs to be given on how these goals will be achieved.
The success of the proposed national savings initiative will also hinge on the accessibility of the platform with ease of access being a key criterion. Incentives such as cost effectiveness and possible tax benefits may also be required to augment the offering.
“We as Deloitte are supportive of the National Retirement Fund Reform,” says Munu. “However, we feel there are some concerns and challenges that Treasury and the Financial Services Board need to address before the system can be implemented.”