RETIREMENT REFORM: Editorials: Edition: March / May 2020

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Defects in the system

Rowan Burger, head of client strategy at Momentum Investment, calls for them

to be addressed so that funding can be improved across the board.

It’s time for the legislators to reassess the state of SA retirement savings. They should change their focus from one of cost saving to look more broadly at financial inclusion and quality of outcome. Much has been done over recent years to simplify the tax system and push for greater efficiencies. This can be demonstrated by the fact that, over the last decade, the number of active retirement funds has reduced from more than 13 000 to just over 2000. A streamlining of pension and provident funds may bring even further reduction. The level of governance and reporting has increased significantly, as evidenced by the increase in the size of the levies from the FSCA regulator. It means a cost-only outcome of the reductions drive is not the sole benefit. Take a step back to consider what the unintended consequences of this focus have been so far. Ours is a voluntary tax-incentivised savings system. Employers have a choice to enrol their employees in the system. With greater member choice, employees decide their level of savings. Measures of the system’s success would also be the extent to which the working population is covered and whether the benefits delivered are adequate. From the 2018 National Treasury tax statistics, we can observe that in the system there are only some 4,7m of an estimated 16,5m workers. We also see that contribution levels average 11% of taxable remuneration dropping down to only 2% for the top earnings category. This clearly indicates that the current system misses its mark in terms of coverage and delivery of outcomes.

(It is broadly accepted that a 15%-of-salary retirement savings level, appropriately invested for 40 years, will deliver an adequate retirement income.) Instead of further focus on incremental cost savings which could be achieved by funds, it is time to take a broader view of how to solve these other problems:

•  The old-age grant is generous by international standards. As it is means tested, it forms a disincentive for low-income workers to participate and preserve savings;

Much of our workforce is informal or part-time. It means that the pre-determined regular contributions required by the Pension Funds Act excludes them from meaningful participation, since SA has only around 9m permanent full-time employees;

While there is a tax incentive for higher-paid workers, those below the threshold have no incentive to tie up their savings until they are aged 55;

Threats of prescribed assets and other investment restrictions have higher-paid workers preferring to save outside the system where they can control their savings;

The ability to encash benefits in full when changing jobs leads to over 90% of these members doing so. This results in savings terms being nowhere near the 40 years, and therefore in insufficient benefits;

With the current poor savings levels, lack of skills in the economy and improvements in old-age life expectancy, on international experience there should be increases in retirement ages to at least age 65;

Contribution reconciliations and death-benefit distributions remain administratively-intense activities. Their benefit to members should be better interrogated and debated;

Disclosures of costs have been important but need to be balanced by an assessment of value created. Over recent years, the advantage of a significant pool of assets to support the economy and transform the lives of ordinary South Africans has become clearer than ever. Support for this savings pool is essential. Much has been achieved over the last decade to achieve better retirement outcomes. However, our system will remain sub-optimal without a broader focus and a few more bold reforms.