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RETIREMENT FUND REFORM. NATIONAL TREASURY DISCUSSION PAPER DEC 2004. General Response to the Discussion Paper. The Association of Collective Investments (ACI) is supportive of National Treasury’s Discussion Paper: We affirm Treasury’s general policy approach to retirement saving.
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RETIREMENT FUND REFORM NATIONAL TREASURY DISCUSSION PAPER DEC 2004
General Response to the Discussion Paper • The Association of Collective Investments (ACI) is supportive of National Treasury’s Discussion Paper: • We affirm Treasury’s general policy approach to retirement saving. • We believe that the Paper seeks to address the central transformation themes needed in S.A. retirement legislation.
Background on ACI Stance • In 2001, we submitted a proposal, that Gov. consider introducing the following: • A low entry, easy access vehicle for retirement saving that will benefit low & middle income workers, who may also have irregular income. Portability and independence from the employer relationship key. • A tax pre-paid savings vehicle to attract discretionary income to complement the tax deferred options available as retirement funds. • Consider linking a purpose orientated incentive to (1) above. (Home Ownership)
Background cont… • In 2004, we submitted an expanded proposal on (1) above (low entry, easy access, portable vehicle for retirement saving). • The following aspects were highlighted: • Current structure of the market and product design issues • Competitive competency of such a potential product • Current legislation/regulations which prohibit our Industry from implementing the proposal. • Recommended amendments which will enable implementation of the proposal.
Reasons for Retirement Reform • Structure of employment has fundamentally changed since the introduction of the Pension Funds Act in 1956. • Existing retirement legislation is employer centric. Vehicles therefore lack portability, are inequitable & encourage leakage. • Lack of low-cost vehicles for lower & middle income people, and those with informal or irregular income. • The structure of concessionary incentives for low and intermediate income earners needs reviewing. (Inapplicability of deferred tax, the upside down effect of the tax concession, compulsion & poverty trap created by the Social Old Age Pension)
National Savings Fund • ACI is supportive of the NSF. • NSF has economies of scale benefits for lower income earners. • Has modeling been done on achievement of “critical mass”? • TTE approach will cause portfolio shifts amongst existing tax payers. • From a policy perspective the existing deferred schemes (EeT) and the NSF (TTE) are not mutually exclusive. • Anti-abuse measure recommended (reduce tax-deductibility of other retirement contributions) may be a policy mismatch considering a contribution to the NSF has been taxed. (Para. 2.5.1.2.(g))
National Savings Fund • Full liquidity recommended in para. 3.15.2 will drive up costs and is not helpful to retention objectives. If compulsion is not legislated for contribution, the retention mechanisms need to be there to reduce ultimate dependency on the State. • Incentivised retention is complex – who will fund it? (Para. 2.5.1.2.(b)) • Association of Collective Investments would like to explore a co-operative initiative with Government.
Access & Compulsion • We recommend that discussions with industry bodies be undertaken concerning the manner in which the National Savings Fund & Individual Retirement Funds will be distributed in the market. • We appreciate the non-paternalistic stance on compulsion. However, as common perceptions of what constitutes essential consumption expand, we are concerned that there is not sufficient inducement for the target group of especially the NSF to forgo current consumption. • We support the proposals on employee education and access to payroll facilities.
Preservation • We share National Treasury’s concern about the issue. A means-tested support system (SOAP) in fact encourages dissipation of any lump-sum benefits, affording significant consumption after retirement. • Full liquidity in NSF proposal a negative. • Careful consideration needs to be given to the cost of paying minimal monthly benefits to small balance retirees especially in IRF’s. This may prejudicially erode savings rather than preserve them.
Differentiation / Equity • We support the proposal to harmonise the conditions for tax treatment across all types of retirement funds (para. 3.5.1.). This will provide equity between those in formal employment and the self-employed / independent contractors. • We support the non-discriminatory proposals in para. 3.5.2. (race, age, sex, seniority etc.)
Individual Retirement Funds (IRF’s) • The potential emergence of IRF’s in line with our previous motivations for: • Non employer dependent relationship • Allowing irregular contributions • Parity of tax treatment with occupational funds • Portability • Transparency • We propose that Prudential Unit Trust Funds be allowed to participate in this category of funds in Pillar 2. • The provision of ancillary benefits by the product provider be optional, to allow cost effective, pure retirement savings products as well as cafeteria style ancillary benefits (death, disability, funeral, post-retirement medical aid etc)
Individual Retirement Funds (IRF’s) • We recommend that to maintain fairness in the market and prevent portfolio shifting away from discretionary savings products (banks, unit trusts, insurance products) which will arise from establishment of the NSF, that financial institutions be allowed to offer, on a competitive basis, IRF’s with like tax dispensation to the NSF. • Result in a tax-deferred option and a tax pre-paid option being available in the market. We refer you to Kesselman, Jonathan And Poschmann (2001), “A New Option for Retirement Savings: Tax-Prepaid Savings Plans”. C.D. Howe Institute, Canada.
