The pillars of retirement savings reform that Rob Rusconi tabled for discussion at the ANC’s Polokwane conference in 2007 included the following key elements:
Preservation of savings, portability of benefits, universal coverage, adequate benefits, administrative efficiency and governance and regulations.
Preservation of savings
Preservation of savings simply means “implementing measures to prevent individuals from withdrawing their retirement savings before retirement, which was a common practice that left many without adequate funds in old age”.
The problem faced was that employers could choose to set up either pension or provident funds. Provident funds became more attractive as they allowed employees to take all their savings in a cash lump sum on retirement (whereas pension funds only allowed employees to take one third in cash at retirement).
Legislation was introduced in 2016 to align the taxation of contributions to pension and provident funds. The Taxation Laws Amendment Act of 2015 harmonised tax treatment for contributions to different types of retirement funds and from 1 March 2016 all retirement savings instruments enjoyed the same tax deductibility of a maximum of 27,5% of all taxable income.
At that point, preservation of savings had not been effectively addressed as members of pension and provident funds could still take their money in a cash lump sum at withdrawal.
The COVID pandemic highlighted a real need for financially distressed members to have early access to their retirement savings. The two-pot system introduced a solution by providing early access, while also introducing compulsory preservation at the same time.
From 1 September 2024 two thirds of future contributions will only be allowed to be accessed on retirement or death.
The new legislation will now lead to preserved savings and more importantly will increase members’ retirement benefits in future, meaning that fewer members will be reliant on the government for old age grants.
Portability of benefits
This means “Allowing workers to retain their retirement savings when they change jobs, ensuring that their savings remain intact and continue to grow regardless of employment changes”.
Rusconi outlined the concern that when an employee changed their job, they could either preserve their savings in a preservation fund or transfer it to their new employer’s retirement fund. Their retirement savings had to be moved in terms of the Second Schedule of the Income Tax Act, 58 of 1962.This transfer process often required the member’s investments to be disinvested before the transfer could be affected with the unintended consequence that members who transferred when the market was depressed effectively locked in their loss.
This practice was dealt by the default investment regulations which were implemented by the Financial Sector Conduct Authority (FSCA) on 1 March 2019.
The regulation introduced a category called “Paid Up” member. Withdrawing members can now opt to leave their current investment value with the administration company as a paid-up. However no new contributions can be made and the member is no longer linked to their previous employer.
Universal coverage
Universal coverage refers to the “aim to ensure that all South Africans have access to some form of retirement savings, addressing the problem of many citizens, particularly those in informal employment, having no retirement savings plan”.
South Africa has one of the lowest savings rates in the world at just 0.5% of GDP in 2023. The low savings rate in South Africa is a long standing issue, with the rate steadily declining over the past 20 years. This is largely attributed to a combination of factors, including high unemployment, lack of trust in financial products and poor household savings habits.
To improve the savings culture the regulators needed to implement policies that either incentivise or compel greater savings by individuals.
Tax-free savings accounts (TFSAs) were introduced in March 2015 as an incentive to encourage household savings and reduce household indebtedness. This, however, only benefits the middle to upper classes that have additional disposable income to invest.
While two-pot legislation addresses the preservation aspect of coverage, there are many members both in the formal and informal sector who do not contribute to any form of savings, leaving them financially vulnerable at retirement.
While membership of employer owned retirement fund policies is compulsory for eligible categories of employees, employers are still under no obligation to provide a retirement fund for their employees.
There has been mention that once the two-pot legislation is implemented on 1 September 2024, Treasury will be looking at compelling all qualifying companies in South Africa to offer their employees some form of compulsory savings solution. It is currently envisioned that an alternative government fund would be instituted for those companies that fail to comply.
Adequate benefits
This means “Ensuring that retirement savings are sufficient to provide a reasonable standard of living in retirement. This includes reforms to increase contributions and ensure benefits are substantial enough to prevent poverty among retirees”.
Members need to be making meaningful contributions if they wish to be able to comfortably retire. The Sanlam Benchmark Survey 2022 provides insights into retirement savings and contributions in South Africa. The key points regarding the contribution rates are that the 5-year average contribution rate for employees is 7% and the employer contribution rate is 9.4%. A meaningful total contribution rate, which would allow a member to retire without a drastic change in his lifestyle is believed to be between 15% and 16%.
The Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) implemented in 2016 introduced a 27.5% tax deduction up to a maximum of R350 000 per year. This meant that members could contribute up to 27.5% of all their income to retirement funds tax free. The maximum of R350 000 was introduced to ensure that the higher income earners do not exploit the system.
Members are effectively enjoying the compounding effect on the tax that is only due on retirement and they should be educated to save as much as is legally allowed.
Members should also be encouraged to make voluntary contributions.