Social Security & Retirement Fund Reform in South Africa

Transcription

1 Social Security & Retirement Fund Reform in South Africa The Financial Planning Institute of Southern Africa s Position Paper November 2007 Financial Planning Institute of Southern Africa (FPI) Technical Committee s Position on Social Security and Retirement Fund Reform In South Africa

2 This positioning paper has been written by the Financial Planning Institute of Southern Africa (FPI) to express this professional body s current viewpoints regarding the implementation of social security and retirement fund reform in South Africa. This paper serves only to highlight the FPI s broad principles regarding social security and retirement fund reform. The FPI is committed to reform, which protects the interests of the South African public. Therefore all opinions expressed in this document reflect our unbiased view of social security and retirement fund reform, which will serve the greater good of the South African people as a whole. November 2007 Published by: The Financial Planning Institute of Southern Africa Physical Address: Palms Office Court, Block A, Ground Floor, West Wing Kudu Street Allen's Nek Ext Postal Address: P O Box 6493 Weltevredenpark 1737 Tel: or FPI (374) [email protected] Website:

3 Index Contents Page No. 1. Introduction & Background 1 2. Executive Summary 3 3. Objectives of Reform 5 4. Integrated Social Security System 7 5. Multi-Tier Structure 8 6. Service Provision 9 7. Compulsory Benefit Preservation Member Choice & the Role of Education / Advice Solidarity & Cross Subsidisation Transition Arrangements Tax Incentives Benefit Management on Retirement Conclusion 15 Bibliography 17 Addendum 18

4 1. Introduction & Background The FPI s Position: The FPI is a professional and educational body, committed to social security and retirement fund reform, which promotes the aims of national solidarity and increases the public s financial security. All opinions expressed in this document reflect our impartial views of reform, which will serve the greater good of all South Africans. The task of the FPI s Technical Committee: The purpose of this paper is to provide a broad overview of the FPI s position on social security and retirement fund reform in South Africa. The task of the FPI s Technical Committee was to: Research the proposals made by South Africa s National Treasury and the Department of Social Development. To this end, this position paper takes into account a number of official publications (please see the Bibliography in this regard) Conduct workshops amongst the Technical Committee s members to form unified opinions on this matter Incorporate the united position of the Technical Committee into this positioning paper. Background: There are roughly six million South Africans 1 in some form of employment who are not included in formal retirement savings structures, the majority of these being domestic workers, farm workers and the self employed. The purpose of social security and retirement fund reform is to facilitate the means for these South Africans to be included in the retirement savings net. 1 Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September

5 The current proposals for social security and retirement fund reform builds on numerous previous reports and the feedback provided to government by stakeholders, following such previous reports. The first of these was the 2002 Report by the Department of Social Development. 2 This report provided recommendations for broadening social insurance and implementing a comprehensive and integrated framework. In 2004, National Treasury issued a Discussion Paper on Retirement Reform 3 in which the proposed concept of compulsory retirement provision was introduced. Ongoing research was thereafter conducted by the FOSAD 4 Social Sector Cluster task team. The Department of Social Development furthermore issued a discussion document in outlining their views on retirement reform. These recommendations culminated in the 2007 budget speech. In his budget speech delivered on 28 February , the Honourable Finance Minister, Trevor Manuel announced the broad outlines of reform to South Africa s social security and retirement funding regimes. 7. Thereafter, the National Treasury issued its Second Discussion Paper in February , which discussed the proposed national savings fund, private pension fund reform and a broad overview of retirement savings taxation. This discussion paper aimed to address the shortcomings of National Treasury s first discussion paper. However, it has raised as many questions as it answered. This positioning paper aims to provide the FPI s views on some of the issues which arise from this second discussion paper. 2 Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa, The Department of Social Development, March National Treasury s Discussion Paper on Retirement Reform, December Forum of South African Directors-General 5 Department of Social Development, Linking Social Grants Beneficiaries to Poverty Alleviation and Economic Activity, Discussion Paper, November Budget Speech, 2007, Minister of Finance, Trevor A Manuel, MP, 21 February Budget Speech, 2007, Minister of Finance, Trevor A Manuel, MP, 21 February National Treasury s Second Discussion Paper on Social Security and Retirement Fund Reform, February

6 Subsequently, the Department of Social Development released a Feasibility Study in September This Feasibility Study advocated a combination of defined benefit and defined contribution funding arrangements. The defined benefit element is proposed to be funded as a Pay as You Go arrangement with no option to opt out, inclusive of mandatory postretirement medical aid benefits, as well as death and disability benefits. The defined contribution element is to be facilitated via a government sponsored fund, with employers having the option of opting out of this arrangement, if certain minimum criteria are met. 2. Executive Summary The central focus of the FPI s viewpoints on the implementation of South Africa s social security and retirement fund reform structures can be summarised as follows: i. Holistic Social Security System: The FPI endorses legislative reform, which develops and ultimately results in one integrated system providing holistic social security benefits for all, specifically providing for individuals needs during each stage of their life. ii. Multi-Tier Structure The FPI supports compulsory contributions through a national savings scheme, on a defined contribution basis. Furthermore, we advocate options for employers and members to opt out of government sponsored schemes, should criteria set by the Regulator be met. 9 Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September

7 iii. Service Provision Basic governance principles dictate the separation between the bodies which regulate benefit provision frameworks and those that provide benefits / services within such frameworks. The FPI hold the view that the role of government is to establish a retirement savings framework which it should regulate and allow the free market to operate in respect of service provision. iv. Mandatory Contributions, Compulsory Preservation & Income at Retirement The FPI advocates compulsory contributions, which we believe are best funded on a defined contribution basis. Furthermore, compulsory preservation of retirement benefits (subject to exceptions on defined life events) is key to ensuring that the basic income needs of South African citizens / residents are met on retirement. v. Implementation of Solidarity & Cross Subsidization Principles The FPI supports the concept of solidarity, to ensure that all citizens / residents receive a minimum level of retirement income and risk cover via mandatory contributions to both regimes. We recognise that cross subsidization is an entrenched principle relating to the provision of basic risk benefits. However, we are of the opinion that compulsory contributions for retirement savings should be funded on a defined contribution basis and citizens / residents without sufficient means to save should benefit from social security programs funded by government. vi. Tax incentives The FPI believes that tax incentives are fundamental to ensuring that members save maximum amounts towards retirement. We therefore advocate the retention of the current EET tax system, with tax incentives on contributions being expressed as a percentage of salary / income. 4

8 3. Objectives of Reform The fundamental objective of social security and retirement fund reform should be that no individual should retire destitute. Gaps in Coverage: According to the Department of Social Development s Feasibility Study 10 the total number of contributors to retirement funds (based on an assumed double count of 1.4 million for members who belong to two or more retirement funds) is 5.9 million 11. This leaves 5.4 million employed noncontributors in the informal sector, without formal retirement fund provision. The diagram below 12 demonstrates the gap in coverage: 10 Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September Stats SA, 2005 as quoted in the Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September Department of Social Development, Reform of Retirement Provisions Discussion Document, March 2007, South African Retirement System: Contributors, Non-contributors, and Potential Contributors (Estimate for 2005) 5

9 Job Creation & Economic Development: The South African Government was mandated in 2004 to halve poverty and unemployment by The Accelerated and Shared Growth Initiative for South Africa (AsgiSA) aims to ensure sustained and strategic economic leadership from government, as well as to develop partnerships between government and stakeholders such as labour and business. The FPI supports the initiatives envisaged by AsgiSA. However recent results from Stats SA 13 indicate that only 25,5% of South Africans are employed in the formal sector (as at March 2007). The objectives of retirement reform cannot be realised over the long term without sustainable job creation and development for the large majority of South Africans. The FPI s Viewpoint on Reform Objectives: The FPI supports the concept of solidarity. Therefore it is the FPI s stance that every South African citizen / resident should be provided with adequate income on retirement, risk cover in the event of their death or disablement as well as post-retirement medical benefits. This would entail adequate benefit provision to fund members and / or their dependants, as appropriate. These benefits should provide for basic needs such as food, clothing, housing and medical care and should take cognisance of members needs at each stage of their lives (ie from cradle to grave ). Examples of this include: Greater levels of risk (death and disability cover) when members are younger Greater accumulated retirement savings near retirement Access to funds for medication and life sustenance when contracting life threatening diseases, including AIDS. 13 P Labour Force Survey (LFS), March

10 Initiatives to achieve this can be provided by government through the fiscus and via a framework established to ensure that all citizens / residents contribute towards the desired benefits. The FPI advocate a combination of these avenues. However, the achievement of these goals hinge on the successful attainment of AgiSA s initiatives, as only the employed are able to pay tax and contribute towards benefit provision. 4. Integrated Social Security System Currently, the South African social security systems are fragmented. Substantial gaps exist in the provision of retirement benefits, social assistance / grants; post-retirement medical aid; unemployment insurance and death and disability benefits for all. As a result, many South Africans are not able to receive the support and benefits to which they are entitled, at times of critical life events (such as unemployment, retirement, illness or death). The FPI believes that legislative reform is required, establishing one integrated system, which provides holistic social security benefits for all in a functional manner. This principle should be developed further: a social security system should be established, which provides practical support for the individual s needs during each stage of their life, i.e. from cradle to grave 14. Accelerated Benefits for the Critically Ill: It is the FPI s viewpoint that government and the private sector should provide financial support to the families of AIDS victims and other critically ill South African citizens / residents. The families of those who die early (as a result of the AIDS pandemic or other critical illnesses) should have access to sufficient financial support in the form of adequate death benefits. Furthermore, we believe that accelerated benefits should be provided as an advance on death benefits payable once conclusive medical evidence has 14 See Section 4, Objectives of Reform, The FPI s Viewpoint on Reform Objectives, page 7 of this report, for examples of cradle to grave needs. 7

11 been obtained that sufferers life expectancy is limited. (This could be measured as entering the AIDS sick phase of the illness in respect of the HIV positive.) However, economic realities should be taken into account there have been instances in the past where disablement has been induced for financial benefit. For this reason income benefits rather than capital / lump sum benefits are advocated. 5. Multi-Tier Structure The proposed social security and retirement reforms will see the introduction of a multi-tiered structure. The FPI advocates that this structure be rationalised into a three-tiered system, the detail of which is provided below. 1 st Tier: Social Assistance Social assistance grants take the form of the State Old Age Pension (SOAP), funded from government revenue. The Department of Social Development 15 has recommended that the means test be scrapped. The FPI supports the abolition of this means test. 2 nd Tier: Compulsory Savings The FPI advocates compulsory contributions in the region of 15% of salary / income, with members receiving full tax-deductions in respect of these contributions. We envisage that the default structure to house these compulsory contributions be a defined contribution national savings fund. However, the Regulator should set criteria in terms of which members / employers are able to participate in alternative private employer funds, occupational schemes and funds similar in nature to what is currently known as a retirement annuity funds for the self-employed. 15 Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September

12 Furthermore, minimum levels of risk (death and disability) cover should be provided on a compulsory basis, via a national pooling arrangement. Additional risk benefits can be provided by the private / occupational funds outside of the national pooling arrangement, should this be required. 3 rd Tier: Supplementary Savings Individual savings funds for voluntary savings, preferably provided on a tax deductible basis. 6. Service Provision Where South African citizens / residents are called to contribute towards their benefit provision on a mandatory basis, two fundamental options exist. The government can either position itself as a product / service provider or as the creators of a framework within which savings are harnessed for the provision of these benefits. The FPI hold the view that the role of government is to establish a retirement funding framework which it should regulate, and allow the free market to operate in respect of service provision. Basic governance principles dictate a separation between operational and oversight responsibilities. In this case, this would refer to a separation between the body which sets and regulates benefit provision frameworks (government) and service providers. Arms length transactions are key to ensuring that fund failure (as seen by the Fidentia like collapse) as a result of poor governance, does not occur. Although the South African Revenue Services (SARS) may in time be in a position to provide efficient systems for the collection of contributions, it is suggested that the entire existing marketplace of private sector resources should provide all essential fund services, rather than creating this capacity within SARS. 9

13 7. Compulsory Benefit Preservation Compulsory preservation of retirement fund benefits, when members move between jobs, is key to ensuring the success of a retirement fund reform programme. Members should not be permitted to access cash withdrawal benefits if a reasonable replacement rate is to be achieved on retirement. There are however some exceptions to compulsory preservation, which must be considered. The FPI envisage that members should be permitted to access a portion of their retirement benefits as cash, under the following circumstances: Pension backed lending (in respect of housing loans): many lower income earners rely on housing loan finance, which use retirement savings as surety. Many South Africans will not be able to afford housing unless this facility continues to be permitted. Cash benefits should only be permitted under this scenario, if members default on housing loans; are retrenched or become too ill to continue working. Unemployment / retrenchment: certain criteria should be established to ensure that members are permitted to access a limited portion of their retirement savings, in the event that they are unable to find employment. Having said this, these criteria should be carefully set, in order to encourage members to seek further employment, rather than using their retirement savings as some sort of unemployment insurance for indefinite periods. Illness: in the event that members are too sick to continue working and do not have access to medical aid funds or their medical aid will not pay out, cash payouts from retirement savings should be permitted. Strict criteria for this should be set however, to avoid abuse and to encourage members to recover and return to employment. 10

14 Divorce: on the premise that the Divorce Amendment Act will remain in its current form under the new dispensation, payouts in respect of pension interest may be required. In the event that cash payouts are permitted under certain circumstances and that strict criteria are established for determining the parameters surrounding access, thought must be given as to how cash benefits are to be taxed. 8. Member Choice & the Role of Education / Advice The FPI supports the provision of choice for members i.e. choice of fund to which they belong, risk, investment and benefit choice. However, whether choice is provided through the national savings fund or through private / occupational schemes, the FPI advocates that minimum educational criteria be set, thereby empowering members to make appropriate choices. The role of financial advice and education provided to members cannot be underestimated. Where choice is offered, proper communication, education and appropriate advice must be provided. Accredited financial planners should be made available to ensure that members have sufficient information and knowledge to make informed choices. 11

15 9. Solidarity & Cross Subsidisation The FPI supports the concept of solidarity, to ensure that all citizens / residents receive a minimum level of income at retirement and risk cover in the event of disablement and death. It is recognised that this cannot always be funded from contributions made by all the country s citizens / residents (as some do not have the means to fund required contributions). Therefore, in some instances it would be appropriate for benefits to be funded via the fiscus and provided by way of the State Old Age Pension, as well as via the wage subsidy proposed by National Treasury 16. Savings Benefits: The FPI are of the opinion that regular contributions should be funded on a defined contribution basis, where the resultant retirement benefit is directly linked to the contributions made. As stated above, citizens / residents without sufficient means to save should benefit from programs provided by the fiscus. The Department of Social Welfare s feasibility study 17 recommends that 50% of members retirement benefits be structured on a defined benefit, Pay as You Go basis. This structure will, in our respectful view, only prove sustainable if a contribution rate is set that alleviates the burden on the tax payer, provides a stabilised contribution payable by the members and is sufficient to avoid a long-term, fund deficit build-up. Thus the FPI advocate a defined contribution arrangement as a more practical alternative for funding long term retirement benefits. 16 National Treasury s Second Discussion Paper on Social Security and Retirement Fund Reform, February Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September

16 Risk Benefits: In respect of citizens / residents with the means to save, mandatory contributions should also be made to fund risk benefits. The FPI recognizes that cross subsidization is an entrenched principal relating to the provision of risk benefits for groups of people, and the principles of solidarity would apply to the provision of basic risk benefits. Basic risk benefits could be provided via a national scheme, with additional top up cover available in the individual s private capacity, their employer s retirement arrangement or via their occupational fund. 10. Transition Arrangements Vested Rights: The vested rights of members belonging to private retirement schemes need to be considered as part of the arrangements to establish a national savings fund. These arrangements should be as flexible as possible to ensure that the vested rights of those in current private schemes are protected, particularly those members who are close to retirement. On the other hand, this protection should be balanced with the need to provide transition arrangements that are as simple as possible, particularly in relation to taxation regimes applicable to contributions and retirement benefits. Administrative Efficiency: As discussed previously 18, the FPI is of the opinion that members / employers should be given the option to opt out of any national savings fund established. This view is consistent with the FPI s support of choice, as well as service provision by the private sector with the government establishing and monitoring the retirement fund framework. 18 See Section 5, Identification of Multi-Tier Structure, 2 nd Tier: Compulsory Savings, on page 9 of this report 13

17 Where members of funds (that have elected not to opt out), are transferred to the national savings scheme, efficient administration systems, processes and practices must be developed to ensure smooth transition. Some examples of this include: Common administration requirements and formats should be implemented Information technology systems should be developed to interface with employers administration systems when taking on member data Administration processes should be put in place to protect the integrity and confidentiality of the data and information Cognisance would need to be taken of investment products particulars (as an example, guaranteed products or structured products are sensitive to the date of disinvestment). 11. Tax Incentives The FPI believes that tax incentives are fundamental to any social security framework which requires contribution by citizens / residents. In order to ensure that members save the maximum amount towards retirement, the current EET tax system should be retained both within the government sponsored savings fund as well as within private / occupational retirement funds. Tax incentives should be expressed as a percentage of salary to ensure equality regarding the proportion of the incentives in relation to members salaries / income. 14

18 12. Benefit Management on Retirement In order to discourage large lump sum payouts on retirement, the FPI believe that a minimum level of pension income should be established, potentially as a minimum multiple of the State Old Age Pension. As an example, if members wish to receive part of their retirement benefits as cash, a minimum pension of 2 times the State Old Age Pension could apply. Furthermore, the requirements surrounding early retirement should be considered. Practically, early retirement from defined contribution arrangements would not yield many challenges. However, the minimum age at which retirement benefits are paid from either the State Old Age Pension or the (potential) defined benefit portion of the government sponsored fund (as envisaged in the Feasibility Study issued by the Department of Social Development 19 ) should be carefully considered. 13. Conclusion Fundamentally, the FPI supports legislative reform, which provides holistic social security benefits for all. However, care should be taken to ensure that individuals needs during each stage of their lifetimes are provided for. Income at retirement providing for all citizens / residents basic needs cannot be achieved without mandatory contributions and preservation. The FPI are of the opinion that the most efficient structure for this framework would see contributions funded on a defined contribution basis, where citizens / residents without sufficient means benefit from programmes provided by the fiscus (such as the State Old Age Pension, sans the means test). 19 Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September

19 We furthermore advocate the option for members / employers to opt out of government sponsored schemes, subject to regulatory requirements. The FPI support the concept of solidarity, providing all citizens / residents with a minimum level of retirement income and risk cover and recognise that cross subsidization is essential to the provision of basic risk benefits. However in our view, the role of government is to establish a savings framework which it should regulate, allowing the operation of the free market in relation to fund service provision. Finally, the successful operation of a holistic social security and retirement system hinges in our opinion, on reasonable tax incentivisation, which is fundamental to ensuring that all South African citizens / residents save sufficient monies towards retirement. 16

20 Bibliography 1. Budget Speech, 2007, Minister of Finance, Trevor A Manuel, MP, 21 February Department of Social Development, Linking Social Grants Beneficiaries to Poverty Alleviation and Economic Activity, Discussion Paper, November Department of Social Development, Reform of Retirement Provisions Discussion Document, March 2007, South African Retirement System: Contributors, Non-contributors, and Potential Contributors (Estimate for 2005) 4. Department of Social Development, The Reform of Retirement Provision, Feasibility Study, September Department of Social Development, The Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa, March National Treasury s Discussion Paper on Retirement Reform, December National Treasury s Second Discussion Paper on Social Security and Retirement Fund Reform, February P Labour Force Survey (LFS), March

21 Addendum The Financial Planning Institute With over members, the Financial Planning Institute (FPI) is recognised as a leading professional body within the South African financial planning profession. As the custodian of the profession, the FPI is uncompromising in upholding financial planning standards; ensuring members remain ethical and competent to retain their professional status. A number of South African companies have accepted the FPI as their independent standards partner. FPI members include both general practitioners and specialists in particular fields of financial planning. The FPI provides an independent quality assurance process, ensuring that appropriate educational standards are maintained for financial planners through the continuing education arm FPI Learning. Membership of the FPI and the right to use its professional designations are subject to annual accreditation. In addition to enabling financial planners to qualify and maintain their professional status, the FPI provides the public with a search facility for accredited financial planners and a knowledge base of financial planning information. The FPI (Southern Africa) is a full member of the Financial Planning Standards Board Ltd (FPSB), which is represented in 20 countries globally. This body s objective is to establish the financial planning profession internationally and set common standards of ethical / technical competence. The FPI, in support of the FPSB is dedicated to maintaining its reputation as the leading professional body for financial planning in Southern Africa. As such, we are committed to the maintenance of stringent academic standards for both admission examinations and continuing professional development requirements. We are furthermore committed to publishing the FPI s consensus viewpoints on industry reforms, which affect the South African public. 18