LOA SUBMISSION

RETIREMENT REFORM

DISCUSSION PAPER ISSUED BY NATIONAL TREASURY

PCOF HEARINGS 15-16 FEBRUARY 2005

 

 

  1. INTRODUCTION

    1. The LOA is a member of Business Unity South Africa (BUSA) and will be providing its input on the Discussion Paper to BUSA for the NEDLAC deliberations. The LOA will not therefore be adopting a formal position independent from that of BUSA.

    2. BUSA has not yet formulated a position mandated by its membership.

    3. The LOA nonetheless welcomes the opportunity to offer comment on the Discussion Paper, based on preliminary discussions in a BUSA committee tasked with responding to the Discussion Paper. It must be stressed that these comments are at this stage preliminary and subject to revision in the light of further study of and deliberation on the Discussion Paper.

 

  1. PROPOSALS SUPPORTED

    1. OBJECTIVES (Page 4 of Discussion Paper)

      2. The LOA supports the objectives of retirement funding policy.

    2. COVERAGE AND LEAKAGE (Annexure 1 Sections 2.2 to 2.5)

      3. The LOA welcomes the recognition accorded by the Discussion Paper to the success of the retirement fund industry in achieving relatively high coverage in the formal sector, but shares the concerns expressed about leakage and low replacement rates.

    3. COMPULSION (Annexure 2 Section 1)

      4. The LOA supports the view that the law should not compel employers to contribute towards retirement savings for employees. See the concerns below, however.

    4. HARMONISATION (Annexure 2 Section 3.5.1)

      5. The LOA supports the proposals to harmonise the tax treatment of occupational and individual retirement funds.

    5. INDIVIDUAL RETIREMENT FUNDS (Annexure 2 Section 4)

      6. The LOA supports the concept of recognising a category of non-employment related funds in principle.

    6. ANCILLARY BENEFITS (Annexure 2 Section 6)

      7. The LOA welcomes proposals to increase the range of benefits that can be offered by retirement funds.

    7. FORM OF BENEFIT PAYMENT (Annexure 3 Section 3.7)

      8. The LOA supports the principle that retirement funds should provide income benefits.

    8. PRESERVATION (Annexure 3 Section 3.12)

      9. The LOA supports proposals to restrict pre-retirement leakage of savings from retirement funds but notes some concerns below.

    9. GOVERNANCE AND REGULATION (Annexure 4)

      10. The LOA supports the general stress on governance, and particularly proposals that the regulator use devices of cost benefit analysis and risk matrices. Some concern on issues of detail is expressed below.

    10. DISPUTE RESOLUTION (Annexure 4 Section 4)

      11. The LOA supports rationalisation of dispute resolution tribunals and the adjudication of disputes by adjudicators and ombuds knowledgeable in the retirement fund sector.

    11. GOVERNANCE AND TRUSTEE CONDUCT (Annexure 4 Section 5)

      12. The LOA supports the retention of the main features of the current structure.

    12. INTERSECTION OF LABOUR LAW AND PENSIONS LAW (Annexure 4 Section 6)

      13. The LOA supports the proposals in principle.

    13. INVESTMENT (Annexure 4 Section 7)

The LOA supports the broad principle of the proposals, but some concerns are noted.

  1. SOME CONCERNS

    1. COMPULSION (Annexure 2 Section 1)

      1. The LOA believes that the principle of allowing compulsory participation for employees in occupational funds through employment contract and labour negotiation should be preserved.

      2. Proposals as the following are inconsistent with the principles of legal non-compulsion and may need review:

        1. Those that try to prescribe how contributions should be apportioned between components of retirement saving, risk benefits and costs;

        2. Those that try to remove or inhibit fees and commissions that currently act as incentives to increase or extend retirement savings coverage;

        3. Those that try to prescribe a full range of benefits are inconsistent with an environment of legal non-compulsion.

    2. PRESERVATION AND THE NATIONAL SAVINGS FUND (Annexure 2 Section 2)

      1. The proposal of the National Savings Fund (NSF) is a creative one based on a recommendation of the Mouton Commission report.

      2. It would potentially divide non-taxpayers into the NSF and taxpayers into occupational and individual retirement funds. This may have some advantage in determining appropriate tax regimes.

      3. The concern of the LOA is that the proposal is apparently for savings in a deposit account to which the saver would have access at any time.

      4. Other proposals seek to encourage migration of low income members from occupational funds to the NSF.

      5. The consequence is likely to be massive leakage of retirement savings of low income earners. This would be contrary to the objectives stated at the beginning of the Discussion Paper.

      6. The LOA believes that the proposal of the NSF needs considerable debate about incentives, access to savings, its fit with occupational funds and its place in the three-pillar framework of retirement savings.

      7. Tax issues are unavoidable in the deliberation about the NSF.

      8. The NSF may nevertheless be a vehicle for offerings by a variety of financial institutions including life insurers and collective investment schemes (as suggested by the ACI on 15 February 2005). The LOA is currently working on CAT standards for a savings product that will meet the needs of the lower income sector, which will also allow our members to meet their commitments in terms of the access provisions of the Financial Sector Charter.

    3. DIFFERENTIATION (Annexure 2 Section 3)

      4. The LOA is of the view that the proposals dealing with risk underwriting:

      1. should not prevent the application of reasonable actuarial principles;

      2. should not go beyond those appropriate in terms of the Promotion of Equality and Prevention of Unfair Discrimination Act;

      3. should not inhibit varied product ranges, service levels or benefit ranges.

    4. POWERS OF THE REGULATOR (Annexure 4 Section 5.6.16)

      5. The LOA is of the view that the due process in terms of which the regulator will be required to exercise his powers needs much deliberation.

    5. GOVERNANCE AND TRUSTEE CONDUCT (Annexure 4 Section 5)

      6. The LOA is of the view that:

      1. existing trustee law provides sound guidelines for the law relating to fund governance;

      2. the regulation of financial service providers under the Financial Advisory and Intermediary Services Act is comprehensive and does not need an additional layer of regulation under the new retirement savings dispensation;

      3. proposals should be practical and not have the potential unintended effects of additional costs to retirement savings.

    6. INVESTMENT (Annexure 4 Section 7)

      1. The LOA believes that shareholder activism should be encouraged without being prescribed in detail.

      2. Prudential regulation of investment should not require onerous compliance provisions.

  1. TWO ISSUES FLAGGED

The Discussion Paper does not specifically address two areas of great significance to the future retirement savings dispensation, being the tax dispensation and transition:

    1. THE TAX DISPENSATION

The LOA recognises that a regulatory framework logically precedes the appropriate tax dispensation. The proposals in the Discussion Paper, however, themselves invite questions about the tax regime in proposals about (inter alia)

The tax discussion is to some extent, therefore, artificially bracketed.

    1. TRANSITION

It is important for the maintenance of confidence in the retirement savings environment that changes recognise the rights of those who saved under the dispensation before change. At the same time, provisions to protect or preserve existing rights should not add such complexity that administration of retirement savings becomes burdensome and costly.

Deliberation is needed on the best way to handle the transition from old to new dispensation, and inevitably this will also involve tax issues.

  1. CONCLUSION

The LOA regards the Discussion Paper as providing an excellent basis for discussion of the future retirement savings dispensation in South Africa. The key issues have been identified. On some issues, extensive deliberation will be required in NEDLAC.

 

Contact:

Gerhard Joubert

The Life Offices’ Association of South Africa

Tel: (021) 421 2586 Fax: (021) 421 2599

E-mail: [email protected]

www.loa.co.za