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Retirement Fund Reform Discussion Paper Presentation to Parliamentary Portfolio Committee on Finance

Retirement Fund Reform Discussion Paper Presentation to Parliamentary Portfolio Committee on Finance . Bruce Cameron Editor: Personal Finance

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Retirement Fund Reform Discussion Paper Presentation to Parliamentary Portfolio Committee on Finance

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  1. Retirement Fund Reform Discussion PaperPresentation to Parliamentary Portfolio Committee on Finance Bruce Cameron Editor: Personal Finance (Personal Finance is an Independent Newspapers publication published in the Saturday Star, Saturday Argus, Pretoria News Weekend and the Independent on Saturday. Personal Finance is also published as a quarterly magazine.)

  2. Changes are being made Since the Rusconi Parliamentary hearing last year there has been a stop start response from the industry: • Still significant resistance to change, but • Two companies, Momentum and Sanlam, have launched new products that address some of the problems

  3. General • Comprehensive document • Deals with the perplexing issues • Sound analysis of current situation • Achievable objectives • National Savings Fund provides significant solutions

  4. Areas for further consideration • Compulsory membership • Preservation of savings • Costs of annuity (pension) purchases • Section 14 transfers • Perverse incentives

  5. Compulsory membership Compulsory membership imperative: • All employers must contribute to membership. • Make employer contributions tax deductible in all cases. Start with low base of compulsory contribution eg 2% of income. • Employee contributions equal to employer (ie UIF basis) • Single national social security agency will make it possible (ie UIF).

  6. Preservation of Retirement Savings Three big problems: • Withdrawals before retirement • High and unnecessary costs • Mis-selling based on commission and perverse incentives (eg luxury foreign trips)

  7. Preservation of Retirement Savings: Stop leakage • No cash withdrawals • In provable (to trustees) cases of dire need pay a taxable annuity (Cosatu recommendation)

  8. Preservation of Retirement Savings: Deferred pensions • Make greater use of deferred pensions with employer-sponsored funds. (Only transferable to another employer-sponsored fund) • Preservation funds are a problem: - High costs - Commission driven - Poor investment advice/decisions

  9. Preservation of retirement savings: Umbrella funds • Zero commissions should be paid for transfer of an employer-sponsored scheme to an umbrella fund. • Should allow for deferred pensions. Currently must transfer to preservation fund • If transfer to preservation funds is retained should be cost free and commission free • In interim a moratorium should be placed by the FSB on all conversions of employer sponsored funds to umbrella funds

  10. Preservation of Retirement Savings: Purchase of annuities • Switch from defined benefit to defined contribution funds has created new costs. • DB funds, in most cases, move was seamless. Active member became pensioner member. • DC members receive benefits from which they must purchase an annuity (pension) • DB funds outsourcing pensioners

  11. Preservation of Retirement Savings: Purchase of annuities: Consequences • Additional costs (Up to six percent reduction in value) • Commission driven mis-selling (eg living annuity debacle) • Poor investment advice/decisions (thousands of living annuitants face destitution)

  12. Preservation of Retirement Savings: Purchase of annuities: Challenges • Individuals need advice. • Financial Advisory and Intermediary Services Act not sufficient • Commissions are a problem? Advisers cannot work for nothing

  13. Preservation of Retirement Savings: Purchase of annuities: Solutions • Onus should be placed on product providers to ensure proper advice (face fines and suspension of sales) • Minimum guaranteed annuity (eg 2x Social Old Age Pension) must be purchased before living annuity. • Minimum percentage of living annuity assets must be invested in interest bearing investments of cash and/or bonds (e.g. 50%)

  14. Section 14 Transfers • Many members of preservation funds, retirement annuities and living annuitants are held captive by product providers, who can and do treat individuals badly. • Investors requested Section 14 transfers must be permitted in all cases but no new commissions/incentives be paid to adviser; or penalties. • Section14 transfers should be permitted without costs if any changes to terms/costs

  15. Perverse incentives All perverse incentives should be banned including: • All non-cash incentives to brokers, particularly luxury foreign trips. • All rebates/kickbacks paid between different companies and sectors of companies. • Any incentives by outside parties/service providers to retirement fund trustees

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