nottheaverageactuary

Actuarial news and views from Cape Town and beyond

FAQs on the Retirement Reform in South Africa

9 Comments

This publication has several FAQs answered by the National Treasury regarding the Retirement Reform in South Africa, including what the Retirement Reform is, how it will affect workers and their pension/provident funds, and how and when legislation will change.

http://www.treasury.gov.za/publications/RetirementReform/FAQ%20on%20Retirement%20Reform.pdf

Advertisements

9 thoughts on “FAQs on the Retirement Reform in South Africa

  1. This is useful although I’m not sure it’s 100% up to date. We will definitely talk about it on Thursday. Anybody got ideas why the government is making things so complicated? For example, why not just introduce 100% preservation for everyone all at once, why this phasing?

    • In terms of the preservation at least, many people actually need funds as they move from one job to the next. Given the long unemployment duration typical of the South African labour market, the only way for some people to survive (and not loose their homes, etc) between the times that they lose their jobs and the times that they find a new one is to use some of their accumulated retirement savings.

      Simplifying the process and introducing a 100% preservation for everyone would immediately impose hardship on these kinds of people. The phasing allows people to make some sort of preparation for what the preservation entails – possibly through building up savings that they could use specifically for the periods when they are between jobs (though I suspect that no-one actually does this)

      • You’re right – it might be possible to distinguish between retrenchments and resignations to allow for this. The new reform has also been toying around with the idea of phased withdrawal – you could withdraw a proportion of your accumulation each year after the resignation. That could help with expenses but get away from the mass withdrawal (often by default).

        A question that actuaries ask is “what is the purpose of the pension fund”? is it to provide retirement pensions? or is it also to provide for other contingencies such as unemployment? Is it possible to achieve both?

  2. Follow up question: is everyone clear on what preservation is? 😛

    • Hi Jo. This was released in July last year so you’re right, it isn’t very recent, but it was the latest document I could find from the National Treasury’s website.

  3. Here’s a more recent article that describes the reform, explains some of the reasons why it is being done the way it is, and gives an indication of where things currently stand (the reform should be implemented within the next 2 years): http://www.iol.co.za/business/personal-finance/retirement/plan-to-nudge-you-to-preserve-retirement-savings-1.1828442#.VQCXTfmUcfU

    To answer why 100% preservation can’t be implemented at once: In the second last answer of the FAQ, it is suggested that people might “panic and resign” in order to withdraw their retirement savings if they think they will lose immediate access to their funds. If that’s correct, implementing 100% preservation immediately would have the exact opposite effect to what it intends to achieve, since it will lead to many people withdrawing their retirement funds rather than increasing their savings.

    Maybe the fact that many South Africans do not have other significant savings means that access to these funds needs to be allowed, for example, in the case of an emergency. I think that politically it would also be a poor move to essentially tell people that their money is no longer theirs to use, and phasing would lessen such perceptions (it’s might not be perceived as unfair if it only applies to new savings after the new legislation is implemented, for example).

    Overall, I think the reforms have to be a little nuanced in order to avoid negative perceptions and harmful repercussions they may lead to.

    • You are absolutely right about panic and resignations. There is also a general legislative principle of not changing regulation retroactively – so pensions accrued during a period where withdrawals were permitted should ideally continue to be witdrawable.

  4. It is also likely that employees close to retirement intend using their retirement benefits to pay off a mortgage or other loans. If 100% preservation were implemented, they would not be able to withdraw a lump sum to settle their loans and end up spending their retirement living in debt.

    The article posted above also suggests that certain employees would prefer starting a business upon a retirement and intend using their retirement benefits as capital for this, so 100% preservation doesn’t allow for this.

    In both cases above, 100% preservation prevents retirement benefits from meeting the needs of the employees at retirement.

    • We need to be careful to distinguish between pre-retirement preservation (stopping withdrawals) and at-retirement preservation (stopping lump sums at retirement). The reforms are generally hard on pre-retirement preservation but allow partial (1/3rd) lump sums on retirement, precisely to allow for the settlement of debts.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s