Retirement reform: how you’ll score

By Laura du Preez

Making trustees of  retirement funds responsible for choosing a default annuity for you on  retirement could result in you getting  a better pension, delegates to  the Pension Lawyers Association conference heard this week.

Kobus Hanekom, head of strategy,  governance and compliance at Simeka Consultants & Actuaries, an  affiliate of Sanlam Employee Benefits, says there is a huge shift in  responsibility to trustees in National Treasury’s latest retirement  reform proposals, which were released with the Budget late last month.

One of these proposals is that  trustees of defined contribution retirement funds be required to  identify a default annuity for members and move your savings into it  when you retire, unless you ask to move into a different product.

This measure is likely to be  introduced when it becomes compulsory for all retirement fund members to  buy an annuity with the bulk of their savings when they retire. It is  proposed that the measure will come into effect on a date yet to be set,  referred to as T-Day, in 2015 or later.

Dr David McCarthy, the retirement policy specialist at Treasury’s financial sector policy division, says if the measure is  implemented, trustees will be required to ensure members get financial  advice until the day after they retire.

He says many members are currently  being abandoned by their funds at retirement and “left to the retail  market with what is often the largest lump sum they have ever had”. In  the retail market, you pay retail charges and often have to rely on  financial advice that is biased by the commissions paid, he says.

In  terms of the latest proposals, trustees will be able to offer as the  default an annuity provided by the fund itself or an external annuity.

Hanekom says trustees will be  required to identify what they would like the default annuity to look  like and they will then be able to call for tenders from product  providers. He says that, with their significant negotiating power,  trustees will not only be in a position to choose the most appropriate  type of annuity for most of their members, but will also be able to  negotiate a wholesale price when it comes to the administration and  investment charges.

John Anderson, head of research  and product development at Alexander Forbes, the country’s largest  retirement fund administrator, told Personal Finance he also expects that the costs of annuities will come down when trustees select them on your behalf.

He says trustees will have to apply their minds, because there is no one-size-fits-all annuity, but they  could pick a good range of annuities, and they may have a better idea of  what is good for members than the members themselves.

McCarthy says large funds may be  able to get a better deal for members on annuities because the funds  will have records of their members’ mortality rates.

He indicated that such a move  could also increase competition in the living annuities market, which  may further reduce charges on these products, even if you opt for an  annuity other than the default.

Hanekom  says another advantage of the default annuity is that a member’s  investments before retirement could be aligned to those in the annuity,  and the transfer could then be made at a lower cost.

He says no commission may be  charged on these default annuities. The fund will be required to pay the  finanical adviser a salary or pay on a fee-for-time basis.

Alexander Forbes’s research indicates that retirees may still want to be presented with all the options, but if advice is provided by funds on a salary or fee basis, this could be very beneficial, Anderson says.

Treasury proposes that there be  some protection for trustees if they give you access to commission-free  financial advice when you retire.

Hanekom says this means that if  your trustees follow a sound process in selecting an annuity for you and  other fund members, and a few years down the line the provider runs  into trouble, the trustees may not be held liable for your loss.

There are currently two main types of annuities: living annuities and guaranteed annuities.

A guaranteed annuity guarantees you a particular pension until you die.

With a living annuity, you need to  invest your accumulated capital to provide an income for the rest of  your life, and you take the risk that your savings and the returns on it  will, in fact, be sufficient to do this.

Many people opt for living  annuities because they expect that they will be able to get a better  pension by making their own investment choices. But you could end up  worse off than if you had taken a guaranteed annuity.

Treasury’s proposals state that it  will be possible for trustees to choose a living annuity as the default  product, provided it conforms to certain requirements, including those  on charges, investment choices and the rates at which you can draw an  income.

McCarthy says Treasury also plans  to amend regulations so that it will be easier for you to split your  retirement savings between a living annuity and a guaranteed annuity.  This will enable you to guarantee a portion of your income while taking a  bet on the other portion that it will be sufficient for your  retirement.

FUNDS NEED TO GEAR UP FOR T-DAY

Retirement  funds will need to review their rules ahead of T-Day, the day on which  the tax deductions for contributions to retirement funds are expected to  change, the Pension Lawyers Association heard this week.

Beatrie Gouws, the director of  personal income tax and savings at National Treasury, says Treasury is  proposing that your employer’s contribution to your retirement fund  be  included in your taxable income as a fringe benefit, but that you be  entitled to deduct those contributions, together with any you make, up  to 27.5 percent of the higher of your remuneration or taxable income.

Your employer’s contribution will include any contributions to a group life or permanent disability scheme.

The deduction will also be limited to R350 000 a year in order to ensure the system is equitable, Gouws says.

Treasury is aiming for T-Day to be  on March 1, 2015, in order to coincide with the start of the personal  income tax year, she says.

To achieve this, Gouws says, draft amendments to legislation will be published this year.

If the  proposal is adopted, you may be able to deduct a greater contribution  amount for tax purposes, because the base to which the percentage cap  applies will be broader  because it will be the higher of your  remuneration or taxable income, Gouws says.

Your remuneration includes all  employment income, whether it forms part of your basic salary or is more  ad hoc in nature, such as overtime, bonuses and income attributable to  employee share schemes.

She says remuneration and taxable  income were chosen because they should be easier for members to  understand than a concept such as retirement-funding employment and  non-employment income.

She says that where employees are  on a total cost-to-company package, funds may wish to amend their rules  in order to allow members to increase their contributions.

Gouws says that employers can  safely facilitate tax deductions for you of up to 27.5 percent of your  remuneration, but they would be unwise to facilitate tax deductions on  your taxable income if it is higher than your remuneration – for  example, if you make a taxable capital gain or earn rental income. You  will have to claim the tax deduction from these kinds of income on  assessment or through the provisional tax system.

Currently, you cannot claim  against taxable capital gains deductions for contributions made to, for  example, a retirement annuity fund.

Gouws  says the current dispensation for employer-provided group life or  disability schemes will remain so that the employer premium is taxable  as a fringe benefit but the payout is tax-free. However, if your  employer is contributing to a retirement fund which in turn provides you  with a group life or disability scheme – a so-called approved scheme –  these contributions (and the payout) will continue to enjoy the tax  dispensation applicable to retirement fund contributions and payouts.

Treasury is also proposing to  remove the deduction you may currently enjoy for premiums paid to an  income protection policy. However,  the monthly income paid from these  policies will then be tax-free.

If your employer pays these  premiums on your behalf, this will remain a fringe benefit for you,  Gouws says, but you will no longer enjoy a tax deduction for the  premiums. No introduction date has been set for these amendments.

Gouws says that income protection  schemes can only be employer-provided and not provided by a fund through  an approved scheme because, legally, funds can pay out only on  retirement or death and not on disability.

PENALTIES ON LIFE RAs ‘STILL EXORBITANT’

The Pension Funds Adjudicator says  her office is “greatly disappointed” that it is unable to help members  with “excessive” charges for stopping or reducing their contributions to  life assurance retirement annuities (RAs).

Muvhango  Lukhaimane, Deputy Pension Funds Adjudicator, told the Pension Lawyers  Association conference that her office is forced to make determinations  on these charges in line with the Statement of Intent.

In 2005, life assurers and the  then Minister of Finance, Trevor Manuel, signed the Statement of Intent,  agreeing that the life industry would, in future, limit the penalties  on RAs if you reneged on the terms of the contract.

Despite these limits, Lukhaimane  says the charges are exorbitant, and they impoverish members who need to  make their policies paid up or transfer their policies to other  companies.

She says the way in which the  charges are levied and the underlying actuarial principles differ  drastically from one life assurer to another and are often not  understandable.

The adjudicator says her office is  at risk of being viewed as complicit in the charges that are levied  because it cannot rule against those that are in line with the Statement  of Intent.

She says it is very disheartening,  because most of the time the charges are levied on the savings of  self-employed people who fall into financial difficulties.

Lukhaimane  says she is glad that the National Treasury is looking into the costs  of saving for retirement, but she does not understand why the industry  does not reform itself when it comes to penalties on RAs.

The Statement of Intent limits the  penalties that can be levied on your savings to 35 percent of the  policy’s value if it was sold before 2009 and to 30 percent of its value  if it was sold after January 1, 2009, she says.

Members also need to be educated  about the fact that they are responsible for the selection of investment  portfolios and monitoring the performance of these in RA policies, as  they are often unhappy with the returns, she says.

The adjudicator says another  source of heart-breaking complaints is  bargaining council funds.  Bargaining councils are formed by trade unions and employers’  organisations. They can make collective agreements, solve labour  disputes and establish savings schemes for employees.

Lukhaimane says the governance of  bargaining council funds “falls between the cracks”, as these councils  are often unable to force employers to contribute to funds regularly and  timeously as required by the Pension Funds Act.

Often these councils commence  legal proceedings against employers, precluding the adjudicator’s office  from granting the fund relief.

The  adjudicator says it is important that retirement funds inform their  members of matters related to their investments. She says, for example,  that, as a member, you need to be told when your savings will be  disinvested and moved into a cash investment when you withdraw or retire  from the fund.

Also, funds that invest in  products that declare bonuses, such as smoothed-bonus policies, need to  have clear rules about what happens if you leave a fund after an interim  bonus, rather than a final bonus, has been declared on the investments.

Lukhaimane says there can be  delays in the declaration of a final bonus, and often the rules are  silent about how the interim bonus will be treated if a member leaves  before the final bonus has been declared.

Finally, the adjudicator says  funds should invest where they say they are going to invest, and if  trustees decide to change the investments, they must inform members.

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