How can retirement funds and employers prepare for phased retirement?

By Kobus Hanekom, Head of strategy, governance and compliance

The introduction of phased retirement from 1 March 2015, as proposed in the draft Taxation Laws Amendment Bill, 2014 published by National Treasury in July this year, is excellent news for retirement fund members. It is a bold and progressive step on the part of Treasury and enjoys the full support of the industry. Retirement funds now need to take action to ensure the necessary amendments and adjustments are done to take full advantage of this commendable new development.

Phased retirement will mean members can choose to retire from their retirement fund on a date on or after their ‘normal retirement date’. So while they will still have to retire from employment, members won’t have to leave the fund. Nor will they have to stipulate exactly when they do wish to retire from the fund. They can make this call at any time in the future.

An investment in a retirement fund is very tax effective – experts describe them as virtual tax havens. Not having to retire from the fund at a specified date will allow members to leave their money invested in the system while they pursue a second career to retire more comfortably at a later stage when it suits them.

A new retail membership category
From a fund perspective, phased retirement will create a new membership category with different membership requirements. Currently, when a member retires, funds typically buy an annuity in the name of the member, at which point membership of the fund ends. All the active members of the fund are still in employment and all communications go via the employer who maintains member data.

By 1 March 2015, funds will need to consider and implement:

• An adjustment to the arrangement in terms of whichmembers’ investments are liquidated and paid into a claims pending account to await payment of a lump sum benefit;
• New retirement forms that make allowance for such an election;
• Retail type data management procedures in terms of which contact details are obtained and maintained. This may include special arrangements relating to the communication of the death of such members;
• The deduction of fund management fees directly from the member’s investments on a monthly basis;
• Rule changes in DB funds to manage benefit expectations after normal retirement date;
• Clarity will be required as to whether section 37C will apply in respect of the death of such a member and whether such a member can transfer to another fund such as a preservation fund.

Although not provided for, members may well be allowed to make further contributions to the fund if the rules allow for this. Should this be the case, more significant adjustments will have to be made to the administration system that presently collects all the contributions from one pay point based on the updated member data provided by the employer on a monthly basis.

Simeka Consultants & Actuaries will work with fund administrators to amend the rules and develop the forms and procedures necessary to accommodate this new category of members. Most of these measures will happen behind the scenes by technical committees.

The world of work is changing
Many people just can’t afford to retire at the retirement ages of 60 and 63 as generally prescribed in fund rules and regulations. More and more people are therefore working well beyond these ages, because they need to, are able to do so and because they enjoy it. Alas, the world of work is changing. Research shows that people are living longer, which means more money is required for a longer period of retirement. The introduction of phased retirement will open up a whole new world of possibilities when it comes to retirement planning, enabling members to postpone annuitisation while they embark on a second career and retire when they can afford or choose to do so. Retirement funds and employers should now take immediate action to ensure they are ready to assist the thousands of employees who may want to take advantage of the new possibilities.