By Dirk Oosthuizen, Head: Research, Development and Implementation
A year ago our top priority was to implement the T-Day tax reform requirements. The tax harmonisation provisions in respect of contributions towards retirement saving vehicles were eventually successfully promulgated. The measures that failed at the eleventh hour was the compulsory annuitisation of at least two thirds of retirement savings of all new contributions.
A subtle tax policy change to encourage such annuitisation was already implemented in 2008 through progressive lump sum retirement tax tables. That policy change was promulgated and implemented without incident. Tax incentives however play a lesser role for lower marginal rate tax payers and the effect of the tax changes on workers have thus been limited.
The recent proposed changes was to force changes in funds’ rules at retirement. The latter change failed for a second time and there is little hope for success – at this stage – for a third attempt, now scheduled for 2018. The question is why would such a policy change attract so much attention?
These attempts at retirement reform are not unique to South Africa. Since the financial crisis of 2008, developed countries have been under pressure to undertake wide-ranging reforms of their welfare systems and labour markets due to the deterioration of government finances. These reforms are tested by the principle that governments are ultimately accountable to citizens. These reforms are not necessarily approved directly by referendums, but indirectly politicians are very aware that re-election is dependent on track record and the pursued agenda. Since the financial crisis, a number of countries fighting for economic survival, implemented radical retirement reforms, some only succeeding by forcing it through by decree, even in well-established democracies, e.g. Greece and Italy. In its wake was left a number of politicians who lost their jobs.
In South Africa the annuitisation reform process was aborted due to similar pressures. The population is however young enough and the economic situation not as dire as to require forced radical reform by decree.
Forced annuitisation, albeit only partial annuitisation, was met with resistance not only from unions but also more silently from the wealthier, as it would have reduced flexibility or optionality.
It is clear that retirement savings are spent at retirement, not to be disenfranchised from a State Old Age Grant due to the means tested benefits. Although the State Old Age Grant has many benefits in society, it can also act as a disincentive to save. The State with its well-intended policy measures (annuitisation) to avoid placing a burden on the young and future generations, was confronted with a demand for a broader welfare system. A lesson well learnt from developed economies, will be that very careful social welfare design will be required and not place an undue burden on young and future generations. Current social disruption at for instance the universities, show the consequences of unsustainable financial design, ill-informed promises and expectations.
I would argue that economic- and financial literacy is a prerequisite for retirement reforms such as compulsory annuitisation to find their way into the system in South Africa.
It will require an understanding that savings are required not only to sustain yourself in old age but to become financially independent. An awareness of the impact of debt on household finance that have to facilitate studies is manifesting itself in society at the moment. An understanding that savings, not only for retirement, facilitate investment in the country, including investment in the youth, is required. Financial literacy is required to create an understanding that protected regulated vehicles such as annuities (be it guaranteed- or living annuities) provide some financial security.
In a low trust environment where immediate cash is king, an enforced policy measure such as annuitisation is problematic. From this low financial literacy perspective, the intended annuitisation reforms entail immediate and easily computable costs, i.e. cash against an uncertain extended future benefit. These delayed financial welfare concepts are not simple and may take years, if not generations, to educate and change in a relatively young population such as ours.
For more than a decade, Simeka has developed strategies to help educate, inform and change member behaviour in order to ensure good retirement outcomes. These include special member presentations, default benefits and the Day One induction strategy. We are committed to working on more effective ways in which we can help change members’ relationships with money as well as to communicate more effectively using the latest technology. What we have found is that the single most important factor in bringing about the desired change is the commitment and energy of the Employer – more particularly the HR professionals.