Retirement Reform – why all the panic?

With T-Day reforms just around the corner, many retirement fund members are reported to be nervous about how the changes will affect access to their money at withdrawal or at retirement. Many members are convinced they will have to resign to protect their retirement fund assets. These reforms have been talked about for years and we believe they are sound in the context of retirement planning. They are, however, problematic for those who are financially insecure.

T-Day and P-Day

• On T-Day (1 March 2015), a member’s right to take his/her entire retirement benefit as a lump sum will be phasedout. This will be limited to a maximum of one third, andthe rest must be taken as a pension. Although currententitlements will be protected and the new measureswill only kick in over a period of time, the freedom andsecurity offered by the ability to take all your benefits ina lump sum will no longer be there.
• P-Day has not yet been agreed upon. The current proposal is that members’ rights to take their withdrawal benefitsas a lump sum when their employment terminates willfall away. Members will only be able to take 10% of the benefit in any given year, based on current proposals.

A critically important nest egg
For many members, their retirement savings are a critically important nest egg that they can fall back on in the event of a life crisis. Many members are badly indebted and are desperate / may soon be desperate to lay their hands on their retirement fund money. While many may abuse the situation, this consideration is real and the current arrangement offers some security to these members.

Speaking in Parliament on 4 September 2014, Finance Minister Nhlanhla Nene cited anecdotal evidence that employees were resigning from their jobs in order to cash in their pensions. He said employees feared that they would soon not be able to access any of their benefits until retirement or that Government had some intention of nationalising pension funds. Nene emphasised that retirement funds belonged to their members. “Government has never had, and does not have, any intention to nationalise these funds. Rumours to this effect are a blatant lie. So are the rumours that Government has changed the laws on preservation before retirement,” he said.

A moratorium on T-Day?
Shortly thereafter there were press reports that at a Nedlac summit, Cosatu warned that it was ready to call a strike if a moratorium was not placed on the proposed reforms. In a pamphlet dated 18 September, Cosatu rejects the compulsory annuitisation of workers’ provident funds benefits (a T-day requirement) without an agreement on, and implementation of, a comprehensive social security and retirement reform policy. This statement on annuitisation seems to be retracting on previously agreed reform legislated in the 2013 Taxation Laws Amendment Act.

In the 2014 budget review, government undertook to raise the means test threshold of the old age grant as an interim step towards phasing out the test. Once the means test is scrapped, members will be entitled the state old age grant as well as their own retirement savings, of which they can take up to R150 000 in cash at retirement without being taxed. One would have thought that this undertaking should in principal have taken care of Cosatu’s stated concerns in as much as it relates to T-Day.

P-Day is a very different matter. Given the level of unemployment and the levels of debt, access to lump sum withdrawal benefits is likely to remain – but so will the thorny issue of unsustainable lending practices. Ultimately a member’s ability to save and commit to the discipline of contributing to a retirement fund is closely aligned with their level of indebtedness. Compound interest is often described as the eighth wonder of the world. It is also true for loans. The significant interest rates charged by micro-lenders can be like quicksand that closes in and suffocates a desperate borrower. Based on our calculations, this can be a slippery slope for members without financial discipline. Once they are on a tight repayment regime, the next wave of financial misfortune is often the last straw. For employees in such a desperate situation, the last resort is to resign, use their retirement fund savings to settle debt, and start over.

To move forward, we will have to take drastic measures to help develop a savings culture in South Africa. We need to find ways to help more members develop pride in contributing to and owning a part of the South African economy.