2013 BUDGET RETIREMENT REFORM PROPOSALS

1. 2013 BUDGET RETIREMENT REFORM PROPOSALS May 2013 Pieter Cronje (pietercr@absa.co.za)

2. INDEX • Taxation of contributions • Preservation • Aligning of Provident Funds • Annuitisation

3. TAXATION OF CONTRIBUTIONS • From an effective date, on or after 2015 (“T-day”) • tax treatment of contributions to pension, retirement annuity and provident funds will be harmonised, allowing provident fund members to also enjoy tax deduction on their contributions • employer contributions will constitute fringe benefits • members will receive tax deduction on employer and employee contributions to pension, provident and retirement annuity funds of up to 27.5% of greater of their remuneration and taxable income • cost of risk benefit premiums will be included in 27.5% deduction

4. TAXATION OF CONTRIBUTIONS (cont) • members will however not be able to deduct more than R350 000 pa • contributions in excess of the R350 000 pa may be rolled over to future years to assist those members with varying income • defined benefit funds special arrangements to be made for db funds

5. PRESERVATION • From an effective date, on or after 2015 (“P-day”) • Protection of vested rights • vested rights in respect of accrued benefits that members have in their pension or provident fund on P-day will be protected • growth on that accrued benefit up to date they leave that fund will also be protected • members will be able to access this amount, in cash, at any time after they leave their fund or join preservation section of their fund

6. PRESERVATION (cont) • Default preservation option • funds must identify default preservation option for their members to which members’ accrued benefits, subsequent to P-day, may be transferred when members withdraw from fund before retirement • default preservation option could either be section inside fund, or preservation fund outside it

7. PRESERVATION (cont) • Default preservation option (cont) • trustees could be given some legal protection in respect of this choice, provided • certain conditions are met, including on design, costs, transparency, investment strategy and investment options and • members are given access to commission-free independent financial advice when they leave the fund, paid for by fund on salary or fee-for-time basis

8. PRESERVATION (cont) • Mandatory preservation • From P-day, other than a de minimis provision (no further details as to what this provision entails are provided in reform document), pension and provident funds will not be permitted to pay cash withdrawal benefits to any member who withdraws from the fund before retirement. • Instead, all members must have their entire accrued benefits paid either into • default preservation fund • fund preservation section • new employer’s fund • preservation fund they have chosen themselves

9. PRESERVATION (cont) • Preservation funds • members will, at any time, be able to withdraw in cash portion of initial amount deposited by them on joining preservation fund to which vested rights apply • preservation members will be able to withdraw each year greater of state old age grant or 10% of initial amount deposited by them on joining preservation fund, excluding any portion to which vested rights apply. • any unused withdrawals may be carried forward to following year, but to reduce administrative costs, members will be limited to one withdrawal per calendar year or part thereof

10. PRESERVATION FUND (cont) • RA funds • consideration will be given to relaxing preservation requirements of RA funds by allowing members of RA funds to transfer their accrued benefits in RA fund to preservation funds • this will be subject to prescribed conditions to prevent tax arbitrage. • these conditions may include preventing members who have transferred funds out of a RA fund from rejoining that fund, or, alternatively from receiving a tax deduction in respect of any RA contributions for a period

11. ALIGNING PROVIDENT AND PENSION FUNDS • From an effective date, on or after 2015(“T-day”) • annuitisation requirements of provident and pension funds will be aligned, meaning it will become compulsory for provident fund member to convert at least 2/3rd of his benefit into an annuity on retirement • new annuitisation requirements will however only apply to new contributions, as well as growth on such contributions, made to provident funds after T-day. • members’ accrued benefits in provident funds as at T-day, as well as growth thereon, will thus not be subject to new annuitisation requirements

12. ALIGNING PROVIDENT AND PENSION FUNDS (cont) • members of provident funds who are older than 55 on T-day will not be subject to new annuitisation requirements even on their new contributions • provided they remain members of same provident fund until they retire • new employees will still be able to join and contribute to existing provident funds • new provident funds can be created subject to the same tax annuitisation rules set out above

13. PROVISION OF ANNUITIES • From an effective date, on or after 2015 (“P-day”): • amount allowed for commutation of small annuities to be increased from R75 000 to R150 000 and adjusted for inflation thereafter • legislation for splitting annuities to be reformed to allow easy splitting and to ensure that commutation of small annuities allowance only applies once. • part of trustees’ responsibility to guide members through process of converting their retirement lump sum accumulation into regular income after retirement • FSB directive to be issued, outlining minimum requirements that trustees must meet

14. PROVISION OF ANNUITIES (cont) • Default annuity products • trustees will have to select default annuity products that meet appropriate principles and standards, and automatically enrol members into that default product when they retire, unless members request otherwise • fund itself may provide the default annuity product, or it may use externally-provided product • Members free to opt out of default product

15. PROVISION OF ANNUITIES (cont) • Default annuity products (cont) • living annuities, whether provided by or outside fund, will only be eligible for selection as default annuity products if they meet strict conditions, including conditions on design (default strategy, limited investment choices, limited drawdown rates) and costs • trustees could be given some legal protection in respect of choice of default annuity products; provided certain conditions are met, including that members are given access to commission-free independent financial advice at retirement, paid for by fund on salary or fee-for-time basis

16. PROVISION OF ANNUITIES (cont) • To increase competition, living annuity market to be opened by allowing registered collective investment scheme (CIS) providers to create CIS-like living annuity to compete alongside registered life insurer companies • CIS products will be eligible for defaults provided they meet requirements applicable to living annuities. • funds can already provide in-fund living annuities or conventional annuities to members if they wish to

17. QUESTIONS & ANSWERS