By Nicolette Nicholson, Head of Legislation, Africa Employment Legislation Library

Retirement reform in South Africa is a contentious issue. Most employers only concentrate on the compliance and the impact it will have on the Total Cost to Company (TCTC) packages and so too on the business cost. Little attention is paid to the labour unrest this issue has the potential to cause because employees and unions do not fully grasp the implications of change.

One of the more significant changes is that fund members will have more control over their own retirement investments.

We believe that roadshows and consultation with employees should start sooner rather than later as this will alleviate labour unrest and ensure a trust relationship of transparency between employers and employees

Communicated timelines from National Treasury for the remaining reform consultation processes to be conducted through 2014 and 2015 has already been set.

National Treasury’s emphasis on requiring trustees to provide default strategies is becoming increasingly stronger and there are specific requirements to provide default investment portfolios for:

•    Contributing members,
•    Default annuities for retiring members and
•    Default preservation options for departing members

Members should face no unreasonable obstacles to opt out of the defaults, and it is still proposed that funds will be obliged to provide financial counselling at the point of retirement to guide members through their retirement income options.

Hopes that the preservation of accumulated benefits will be enhanced by requiring funds to retain previous employees as members and to automatically transfer preserved benefits of new members into the fund, where applicable, is still very much part of the vision of National Treasury.

We see stronger regulation and supervision to introduce tougher professional standards for trustees, to incentivise fund consolidation and, eventually, tougher entry requirements to become a fund service provider. We can expect draft regulations for comment from late 2014 onwards.

Tougher professional standards include
•    Better training to ensure a clear understanding of fiduciary responsibilities,
•    Higher probity standards and clearer prohibitions on service provider activity that can create conflicts of interest

National Treasury also wants to introduce the requirement for all retirement funds to provide full and comprehensive disclosure of total charges incurred, together with a clear indication of who benefits from these charges. This comparison must be available in the public domain – It will enable fund members and fiduciaries to benchmark costs and structures against a range of options.

Extending retirement system coverage is to create standardized default-type arrangements, with the emphasis on efficient distribution mechanisms that will make it possible to extend mandatory contribution to the formally employed population.

National Treasury published two new papers dealing with retirement reform and savings that affects the way an employee will be able to save.

The first paper 2014 Budget Update on Retirement Reforms provides more details on retirement reform and some responses to the papers released last year. Treasury says this paper will “form the basis for engaging with key stakeholders (trade unions, trustees, employers, industry) directly and/or through NEDLAC, to finalise the legislative framework for retirement reform. It will also facilitate consultations with ASISA in order to formalise the in principle agreement to lower costs in the retirement industry.”

The second paper gives more details on the tax exempt savings account.

National Treasury’s paper Non-retirement savings: tax free savings accounts, issued 14 March 2014, expands on the non-retirement savings reforms mentioned in the 2014 Budget speech. The paper outlines the key points raised in the previous discussion paper, the responses received, the revised proposals and the expected administrative requirements.

In summary, National Treasury intends to proceed with the tax free savings account. Individuals will be allowed to open one or two accounts per year; they may invest in interest-bearing and equity instruments; total contributions may not exceed R30 000 per year with a lifetime contribution cap of R500 000. Withdrawn amounts may not be replaced. Permitted investment products must be simple, transparent and suitable.

The paper specifically prohibits the following:
•    Direct share purchases,
•    Products with contractual periodic contributions and
•    Excessively high termination charges

In summary, the following design features apply:

•    Current interest exemption: This has been retained at R23 800 but will no longer increase from year to year (i.e. the real value of the interest exemption will erode over time).
•    Annual contribution limit: The annual limit – Initially set at R30 000 per annum without roll-over – is intended to spur procrastinators to act, by putting an annual deadline on the savings decision.
•    Treatment of withdrawals: Withdrawals cannot be replaced – contributions will be limited to the annual and lifetime limits.
•    Types of accounts: Individuals may open up to two accounts per year. Each account may hold either interest or equity products, or both.
•    Lifetime limit: This is set at R500 000 for now. National Treasury does not intend to increase this cap with inflation for now as the total permitted annual contributions would then never reach the lifetime limit.