Sanlam : Impact on the Retirement Fund Industry

Default regulations to improve market conduct

The second revised draft of the default regulations were released for public comment in December 2016. The aim of the default strategies (investment, preservation and annuities) is to ensure that the retirement savings of members are better protected through lower charges and provide better value for money, especially to members who do not exercise any choice. The default annuity strategy section has been considerably simplified, given the difficulty of automatically defaulting members into annuity products that could be irreversible. While concerns on the blanket ban of performance fees and guaranteed products have been addressed, these may be reviewed in the final regulations published later this year. Further steps to lower charges will follow.

Pension Funds Act amendment

In 2017, amendments to the Pension Funds Act will be considered to introduce the concept of an umbrella fund, and to clarify the extent, purpose and interpretation of the powers of the Registrar of Retirement Funds to deal with funds that do not have properly constituted boards. National Treasury will also engage with the Financial Services Board to find a sustainable policy solution to the challenge of unclaimed benefits.

Annuitisation for provident fund members

The Revenue Laws Amendment Act (2016) postponed the annuitisation of retirement benefits for provident funds to 1 March 2018 to allow for further consultation with the National Economic Development and Labour Council (NEDLAC) and others. Discussions in the council and with other interested parties will continue, with the aim of reaching consensus on the need to annuitise at retirement.

Should no agreement on annuitisation be reached, Government will review the continuation of the tax deduction for funds that do not annuitise part of their retirement savings, to ensure the tax system is equitable across all retirement funds.

Comment: It seems that if no agreement is reached the current tax deduction of member contributions to provident funds will be withdrawn.

The National Treasury will engage with the industry to provide appropriate annuity products that take better account of the needs of low- and middle-income members of retirement funds.

Comment: This development of annuities for the low- and middle-income market will also form part the requirements for the proposed default regulations.

Automatic enrolment in retirement funds

South Africa has a well-developed occupational pension system, but there is limited coverage and a large number of funds. In November 2016, Government tabled a discussion paper on social security reform at NEDLAC. While NEDLAC engagement is expected to take some time to conclude, a parallel process is expected to consider more urgent retirement reforms for implementation. For example, Government is considering automatic enrolment in a retirement fund as a key and urgent initiative to ensure more workers save for their retirement. This initiative would encourage or require employers to automatically enrol their workers into a retirement fund, which could be either sponsored by the employer or sourced from a third party.

Comment: Auto enrolment will require all employers to enrol their employees in a retirement fund from a future date. Umbrella funds would be a suitable product in this regard.

Application of the cap on deductible retirement fund contributions

It is currently not clear how the overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees' tax. It is proposed that the amount of R350 000 be spread over the tax year, which is a more prudent approach.