PENSIONS: Calling time on cash-outs

The biggest pension-related news in the budget is the final go-ahead for the harmonisation of pension and provident funds.

Provident fund members have traditionally been able to cash out their entire fund on retirement, while pension members can take out only a third and receive the rest as a monthly pension (annuity).

Buried in the Budget Review, it says: "Government and the National Economic Development & Labour Council [Nedlac] have agreed to proceed with retirement reform related to the harmonisation of all retirement benefits, including provident funds."

The review also refers to developing annuity products more suitable for the low-income market and improving oversight of commercial umbrella funds, fund consolidation and auto-enrolment.

But Rowan Burger, investment actuary at Momentum, says the review does not reflect progress on discussions that have been held to date, and it might create expectations that aren’t delivered on.

"It is time for the government to get a better handle on the challenges SA retirees face. All too often international fads are thrown as medicine without understanding the illness."

Andrew Davison, a senior consultant at Old Mutual Corporate, believes the government is now determined to impose annuitisation on provident funds, starting on March 1 2021.

"It will not be a big-bang process as only premiums contributed after that date will need to be used to buy a pension, and there will be a minimum fund credit below which the full amount can be taken in cash. Currently that is R247,500."

Davison says in the long run it makes sense to move people away from taking a lump sum in retirement (which is often consumed by greedy relatives within a couple of years) and steer them towards taking a pension.

Burger, however, says "given the staggered nature in which provident fund annuitisation is being introduced, we don’t expect commercially viable scale for these products until about 2030".

When it comes to developing pension products more suited to the lower-income market, Davison says the most popular annuity, the living annuity, is both complicated (it offers 200 or more options) and unsuitable, as it does not offer lifetime guarantees.

"We will need to work hard to develop the right product," he says. "Low-income people need their incomes to grow in line with inflation, but also need certainty that the income won’t run out."

The budget makes a cryptic reference to improving the oversight and governance of commercial umbrella funds. These funds are currently exempt from the need to run elections that would bring member-elected trustees onto their boards.

Burger says that as many corporate funds have merged into umbrellas, union shop stewards who represented members have lost these appointments. They have been replaced by professional trustees with specific experience in employee benefits.

At the same time, it is workers and employers who choose to shut their corporate funds and move to umbrellas. Perhaps there is still room within the reforms for member elections to be organised.

The budget also commits government to push for auto-enrolment in retirement schemes.

Anton Swanepoel, a legal adviser at Sanlam, says this will be an important tool for spreading retirement coverage where it currently doesn’t exist, including in the informal sector. Even now, one-third of about 9-million people permanently employed in the formal sector are not invested in retirement funds.

Burger says the international trend is to nudge individuals by enrolling them automatically in pension funds, and then allowing them to opt out.

"The real issue is the coverage gap. More thought needs to go into creating appropriate solutions for low-paid and informal workers," he says.

Burger says one barrier is that the generosity of the state old-age grant forms a disincentive for low-income workers to accumulate and preserve savings.