Retirement Fund Reform Discussion Paper

Presentation to Parliamentary Portfolio Committee on Finance

Bruce Cameron

Editor: Personal Finance(Personal Finance is an Independent Newspapers publication

published in the Saturday Star, Saturday Argus, Pretoria News Weekend and the Independent on Saturday. Personal Finance is

also published as a quarterly magazine.)

Changes are being made

Since the Rusconi Parliamentary hearing last year there has been a stop start response from the industry:

• Still significant resistance to change, but

• Two companies, Momentum and Sanlam, have launched new products that address some of the problems

General

• Comprehensive document

• Deals with the perplexing issues

• Sound analysis of current situation

• Achievable objectives

• National Savings Fund provides significant solutions

Areas for further consideration

• Compulsory membership

• Preservation of savings

• Costs of annuity (pension) purchases

• Section 14 transfers

• Perverse incentives

Compulsory membershipCompulsory membership imperative:

• All employers must contribute to membership.

• Make employer contributions tax deductible in all cases. Start with low base of compulsory contribution eg 2% of income.

• Employee contributions equal to employer (ie UIF basis)

• Single national social security agency will make it possible (ie UIF).

Preservation of Retirement Savings

Three big problems:

• Withdrawals before retirement

• High and unnecessary costs

• Mis-selling based on commission and perverse incentives (eg luxury foreign trips)

Preservation of Retirement Savings: Stop leakage

• No cash withdrawals

• In provable (to trustees) cases of dire need pay a taxable annuity (Cosatu recommendation)

Preservation of Retirement Savings: Deferred pensions• Make greater use of deferred pensions with

employer-sponsored funds. (Only transferable to another employer-sponsored fund)

• Preservation funds are a problem:

- High costs

- Commission driven

- Poor investment advice/decisions

Preservation of retirement savings: Umbrella funds• Zero commissions should be paid for transfer of an

employer-sponsored scheme to an umbrella fund.• Should allow for deferred pensions. Currently must

transfer to preservation fund• If transfer to preservation funds is retained should

be cost free and commission free• In interim a moratorium should be placed by the

FSB on all conversions of employer sponsored funds to umbrella funds

Preservation of Retirement Savings: Purchase of annuities• Switch from defined benefit to defined

contribution funds has created new costs.

• DB funds, in most cases, move was seamless. Active member became pensioner member.

• DC members receive benefits from which they must purchase an annuity (pension)

• DB funds outsourcing pensioners

Preservation of Retirement Savings: Purchase of annuities: Consequences• Additional costs (Up to six percent

reduction in value)

• Commission driven mis-selling (eg living annuity debacle)

• Poor investment advice/decisions (thousands of living annuitants face destitution)

Preservation of Retirement Savings: Purchase of annuities: Challenges

• Individuals need advice.

• Financial Advisory and Intermediary Services Act not sufficient

• Commissions are a problem? Advisers cannot work for nothing

Preservation of Retirement Savings: Purchase of annuities: Solutions• Onus should be placed on product providers to

ensure proper advice (face fines and suspension of sales)

• Minimum guaranteed annuity (eg 2x Social Old Age Pension) must be purchased before living annuity.

• Minimum percentage of living annuity assets must be invested in interest bearing investments of cash and/or bonds (e.g. 50%)

Section 14 Transfers• Many members of preservation funds, retirement

annuities and living annuitants are held captive by product providers, who can and do treat individuals badly.

• Investors requested Section 14 transfers must be permitted in all cases but no new commissions/incentives be paid to adviser; or penalties.

• Section14 transfers should be permitted without costs if any changes to terms/costs

Perverse incentivesAll perverse incentives should be banned

including:• All non-cash incentives to brokers,

particularly luxury foreign trips.• All rebates/kickbacks paid between different

companies and sectors of companies.• Any incentives by outside parties/service

providers to retirement fund trustees