Cosatu forces state to capitulate on new retirement law


retirement 3Author: Linda Ensor (BDlive).

The government has once again caved in to trade union pressure by agreeing to a two-year delay in the introduction of the compulsory annuitisation of two-thirds of provident fund savings on retirement.

This is the second time that the Treasury has unsuccessfully tried to implement the provision and then backtracked in the face of strong opposition from the Congress of South African Trade Unions (Cosatu).

The proposed postponement was tabled by Finance Minister Pravin Gordhan at an urgent meeting on Monday with the social partners of the National Economic Development and Labour Council.

Delegations from the Association for Savings and Investment SA, which is strongly opposed to any postponement, and Business Unity SA were also present. Mr Gordhan is expected to announce details of the postponement in his budget vote speech next Wednesday.

A postponement of the implementation date will require that an amendment to the Taxation Laws Amendment Act, which contains the provision, is rushed through Parliament. The Treasury has acknowledged in its talks with business and labour that employers and employees need certainty as to what will prevail after March 1 as systems will have to be changed, which may be “very costly”.

The concession is a victory for Cosatu, which threatened a strike and the withdrawal of its support for the African National Congress (ANC) in the forthcoming local elections if the law was implemented.

However, labour is expected to strongly oppose Mr Gordhan’s other proposal, which is to prevent any transfers from pension funds to provident funds for the next two years “to avoid weakening the current pension system”. The Treasury believes this is necessary to prevent tax abuse. High-income earners have used provident funds as a way to reduce their tax liability.

While a postponement of annuitisation will be good for Cosatu, it will not be well received by the retirement industry, which has made significant investments in its IT systems to accommodate the new regime.

The annuitisation clause of the Taxation Laws Amendment Act — signed into law by President Jacob Zuma in December — requires that two thirds of accumulated savings in provident funds be invested in an annuity, with only one third taken as cash. Currently the entire amount can be taken as cash.

Reliable sources in the financial services sector said the Treasury had proposed that the other tax changes in the Taxation Laws Amendment Act, including the 27.5% tax deduction for contributions to retirement funds (including provident funds and with a cap of R350,000) would still come into effect on March 1, as scheduled.

According to the Treasury proposal all constituencies would participate in the design of a compulsory annuitisation provision over the next two years. If no agreement is reached the tax deduction would fall away to ensure balance in the system.

Mr Zuma mandated Minister in the Presidency Jeff Radebe to meet Cosatu leaders in a bid to find a quick legal route to address the federation’s opposition to annuitisation.

This article first appeared on