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.