The retirement fund industry is facing several important changes, known as retirement fund reforms, first introduced by National Treasury in 2004. The modifications are aimed at transforming the South African retirement fund system to make it more effective and efficient. A certain degree of scepticism may have crept into the debate, but the reforms have been designed to protect pension and provident fund members, ensuring that they are in a better position to retire comfortably.
In particular, the reforms introduce the concept of preservation. This is specifically intended to ensure that a person’s assets are retained – in their name – for their own benefit on retirement. Preservation is currently only a proposal and has not yet been made law. There is still going to be further public engagements on this proposal before it can be implemented. In effect, preservation means that, when leaving a job, instead of being able to cash in their pension or provident fund, an employee will have to retain that money in some form of retirement vehicle, whether it is a previous employer’s fund, preservation fund or if they transfer it to their new employer’s retirement fund.
One of the challenges of the current system is that it has been easy for employees to cash out their retirement savings when they leave their employer or change jobs. While individuals are encouraged to transfer or preserve their retirement savings, the reality is that the vast majority choose to take their retirement savings as a cash lump sum payment. It has been estimated that roughly 70% of people who leave a company for another job, and about 90% of those who have been retrenched, will withdraw their retirement savings. These are high percentages and, as we know, there is always movement in the job market with employees changing jobs frequently.
This means that many people retire without having sufficient savings to rely on because they have not saved enough money, nor have they given it enough time to grow. Preservation seeks to address this problem by making it necessary for retirement fund members to preserve their retirement funds savings when they change jobs. Significantly, Government will need to strike the right balance between employees who are retrenched and employees who change jobs, when it comes to the issue of preservation of retirement savings.
It is important to note that the retirement savings will still belong to each individual, no matter where they are invested. These savings will be for their retirement and cannot be accessed by any other entity, be it Government or anyone else. Strict rules govern the management of such assets and they cannot simply be expropriated. Rather, the fact that Government has taken these steps to protect individuals’ retirement savings demonstrates a real concern that people should retire as comfortably as possible.
Another important point to remember is that once preservation becomes law, it will not apply retrospectively. This means that you will not be required to preserve retirement savings that you have accumulated before the preservation law comes into effect. Preservation will also allow limited access to funds. This is very significant – Batseta has heard about some unscrupulous brokers and service providers who are convincing members that they need to resign from their retirement finds to access their savings. This has resulted in terrible financial consequences for the members and should never be done. If in any doubt, members are urged to get more information from their retirement fund office bearers.
Batseta supports the Government’s attempts at improving the retirement system and encouraging savings. We strongly suggest that members contact their retirement fund with any questions related to these changes or any concerns.
As part of the retirement reform process, National Treasury published the Strengthening Retirement Savings overview paper during May 2012. The paper summarises the 2012 Budget announcements by the Minister of Finance on promoting household savings and reforming the retirement industry. The paper Preservation, portability and governance was released for public comment during 2012 as part of a series of technical discussion papers. This discussion document is an overview of the current preservation requirements in South African retirement funds, and presents several options for consideration by key stakeholders, including workers, employers, retirement fund members, Government and NEDLAC.
Batseta – A leading industry body which actively contributes towards the advancement of the retirement fund industry through engaging with appropriate authorities and stakeholders.
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