It finally happened. After several years of last-minute reprieves, finance minister Tito Mboweni announced in the budget that the annuitisation of provident funds will be introduced.
There will be no more lump sums on retirement for members of these funds; they will be treated in the same way as members of pension funds.
From March 1 members of provident funds, like their counterparts in pension funds, will not be able to take their entire capital in cash. Members of both of kinds of funds will need to use two-thirds of their capital to buy an annuity (monthly pension).
It was a sensitive issue at negotiations at the National Economic Development & Labour Council (Nedlac), and Alexander Forbes senior actuary John Anderson says there is a real concern that workers need access to their full capital — at least until there is a comprehensive social security system. They will still have this option if they resign from their jobs.
And, it might be argued, a safety net is developing, even though the state old-age grant has risen less than inflation — by R30 to R1,890 a month.
But for now the proposed national pension fund is off the table, not least because the fiscus is far more stretched now than it was when the fund was first mooted in 2007.
To get the provident fund change through Nedlac, a number of concessions have been made. All contributions to these funds before March 1 2021 can still be taken out in cash. And for those 55 or older when the new regime starts that day, even future contributions can be taken out in cash.
The Treasury hopes that the equalisation of treatment between pension and provident funds will lead to some of them merging, especially at companies that offer staff both options. SA has an inordinate number of retirement funds — at least 3,500.
Mboweni still spoke about a comprehensive social security system, though the government is taking only piecemeal steps towards this. It is introducing auto enrolment, in which all employed workers will join a fund unless they opt out.
Anderson questions the value of this as employers can already make membership of a pension fund compulsory.
Perhaps more useful, he suggests, would be the introduction of a fund for workers who do not have access to a pension fund — this would certainly be the nucleus of a national scheme.
There was speculation that there would be significant changes to regulation 28 of the Pension Fund Act. Many fund managers were hoping for an increase in the offshore allocation from 30% to 40%.
But Mboweni did not want any announcement about this to be lost in the noise of the budget. The National Treasury will issue draft amendments for public comment later this week.
The minister’s one hint was that the regulations aimed to make it easier to invest in infrastructure, to improve the country’s roads and dams as well as "soft" infrastructure such as student accommodation.
For now, unlisted infrastructure forms part of the "other" category that can account for a maximum of 15% of a pension fund’s assets, alongside hedge funds and private equity, which do not have the same social utility.
Andrew Canter, chief investment officer of Futuregrowth, says there is already scope for funds to invest in infrastructure if the returns are available. Both debt and equity funds exist for all long-term investors, including life offices and pension funds.
He says the government should lead by example and increase the proportion of infrastructure investment at the Government Employees Pension Fund, which still invests mainly in government bonds on the JSE and in commercial property.
Mike Teuchert, a partner at Mazars, says it is hard to expect funds to invest in unlisted infrastructure projects with uncertain returns. And they would have to sell existing assets, with the expectation that infrastructure could provide better returns.
Teuchert says it was no surprise to see that pension fund members who change their tax residency will still be subject to SA tax on their pension capital. "Tax might not be payable on emigration but it will be on retirement, and at a high rate, for some as high as 36%."
From this year emigrants will not be able to access their pension savings for at least three years after changing their tax status, even at punitive tax rates.
Yoza Jekwa, joint MD at Mergence Investment Managers, says: "We welcome the proposed amendment of regulation 28 to identify infrastructure assets as a separate class subject to a limit outside [those] applicable to private equity or other investment categories."
The firm says it recognises the need for the crowding-in of private capital from pension funds to invest in "well-structured, economically viable, critical infrastructure projects that will trigger economic growth".
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.