How Changes to the National Retirement Funding system could affect you

Few of the country’s working population will retire with sufficient savings to enjoy the same lifestyle they enjoy while working. In addition, poor investment returns and longer life expectancy are working against the odds of you enjoying the retirement you dreamed of. But the government is determined to change this while simultaneously widening the net to those who have never saved for retirement. A joint task team of National Treasury and the Department of Social Development are about to table reforms that could make profound changes to the way we save for retirement and the benefits we enjoy once retired.

South Africans are generally bad at saving because of their short term approach to life. Of the roughly 10-million people in SA’s working population, about half make no provision for retirement savings at all. Even those who are saving only have a salary replacement value of about 28% as opposed to the 70% target advised by financial advisors. This means a major adjustment downwards in lifestyle for the majority of people retiring. Besides our inability to save, South Africans also have the habit of cashing in their pension or provident funds when changing jobs. The other major contributing factor relating to the ability of South Africans to save for retirement is the high costs of administration such as penalties, exorbitant broker commissions and fees.

Despite SA still dealing with the devastating effects of HIV and Aids, South African men are still expected to live to about 79 and woman to 82 years of age, which translates to between 14 and 17 years of retirement if you retire at 65.

The government has been planning to reform the retirement funding system since 2004. The interdepartmental task team working on this matter has now completed its work and the reforms are being considered by Cabinet. Once these have been finalised, the talk team will begin an extensive process of public consultation before implementing any reforms. It is thought that government plans to widen the coverage social net by making retirement saving compulsory.

Two initial concerns have been raised regarding these reforms. Firstly, the creation of a National Savings Fund for which every individual may have to contribute could be used as a political tool by politicians to make promises to the electorate every 5 years. This would further hinder people from taking ownership of their own retirement savings when they have this backstop to rely on from the government.

The second concern is the potential for an opt-out clause being removed from the final proposal. Initial proposals referred to occupational retirement funds meeting certain criteria and being able to opt-out the national scheme. In the absence of an opt-out cause, the first portion of a person’scontribution – up to about R18 000 – will flow into the national scheme and the balance moving to the supplementary tier 3. Private citizens will need to mix national savings with their own private savings. While it does seem unlikely that the government will remove the opt-out clause, it is something to be considered.

Questions around capacity, efficiency and administration are also of concern. There may be benefits in economies of scale for a large national fund, but it may be difficult to obtain above average returns from a single massive pool of assets.

Overall, the reforms will aim to get the odds in favour of investors again. Regardless of what the changes government decides to makes, it is clear that additional savings is the way to ensure one’s long-term financial wellbeing. Being directly invested with your own funds has never been more important.