Retirement Fund Revamp -- The Weekender / Business Day -- April 2007

Government’s plan to intervene in retirement fund legislation was first mooted in President Thabo Mbeki's state of the nation address in February, where he spoke about a National Savings Fund.

This has been clarified by the Social Security and Retirement Reform Second Discussion Paper introduced by Finance Minister Trevor Manuel.

This is great news for employers. No longer will employers need to motivate or educate employees about the importance of saving for retirement and contributing to a retirement fund. Disability and life cover would be a standard part of the package and there will be no need for extra levies to an unemployment fund.

The key to any successful social security system is that the contributions and benefits be straightforward. There should be no exceptions and no special allowances.

Employees will be forced to contribute to the retirement fund, and their employers' contributions will in part be subsidised by government (at this stage a figure of R30bn a year is proposed).

The subsidy is a farsighted realisation that there will be a far higher cost to pay while trying to provide income for pensioners and people on disability grants in the future.

Although we pay lip service to saving, we spend. One of the reasons for the state intervention is our poor national savings record. South Africans are in more debt than ever before.

The economic growth over the past five years has seen a huge amount of spending by the emerging middle classes. For the first time ever, South Africans spent more than they earned in the third quarter of last year. This was financed by borrowing.

Often the savings levels in SA are compared with those in the US. However, we should not use the US as a comparison, as US society is very different from our own. US interest rates are far lower; the US attracts huge investment income; the currency is used as standard throughout the world; and the US still has the largest economy in the world.

In most middle- to upper-class households there is a perception that pension funds should be preserved and long-term investments should be maintained. In lower- income groups, provident fund payouts and pension fund withdrawals are seen as the quickest ways out of short-term debt.

If people have too much capital or income, they would negate the opportunity of state assistance. The state assistance currently paid is close to R3bn a month.

Government’s plan to subsidise contributions to your retirement fund is excellent news for all involved in business or wealth creation.

With increased levels of saving, and without the need to fund our internal expenditure by capital flows into SA, the introduction of a long-term savings mind-set should have major spin-offs for the economy.

The treasury has not decided who will manage the social security funds. But, as we have seen with the current government employees pension fund, a fair amount of the funds should flow into the hands of the experienced fund managers in SA.

They, in turn, will be looking for new opportunities to invest and the economy should benefit. Depending on the rules regulating these social security funds, financial planners may be required to advise members on the selection of the underlying investment.

Existing retirement annuity funds, provident funds and pension funds will still be able to operate after the introduction of the social security fund, but the treatment for tax purposes and the deductibility of premiums are still under discussion.

We have in SA some of the best, internationally-accepted retirement fund and pension fund administrators. Unfortunately, due to our various historical factors, they have never been able to cater for the size of the intervention that will be in place by 2010.

Currently, only three out of every 100 South African 30-year-olds will be able to retire at 65. In SA people job-hop and spend rather than save or transfer their pensions. There is always a debt to pay, a house to fix or a car to buy.

If you are unsure how much you need for retirement, speak to your financial planner. If you do not already have a financial planner visit the website of the FPI on www.fpi.co.za to select a qualified certified financial planner.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.