FREQUENTLY ASKED QUESTIONS ON RETIREMENT REFORM
FOR AKANI RETIREMENT FUND ADMINISTRATORS APRIL 2021
- On 1 March 2021, a new set of regulations aimed at pension funds came into effect. This is the latest in a series of changes in the retirement landscape effected since 2011. Over the past decade, government has effected changes that are aimed at encouraging both employers and employees to provide for adequate retirement income and not depend on a state pension grant.
- Earlier changes have included lowering of costs, improving transparency for members to make informed investment and withdrawal choices by introducing default options for investment and withdrawal decisions, introduce preservation in case of resignations, improve individual investment decision choices by amending Regulation 28 and improve fund governance.
- As with previous changes the latest amendments do not apply retrospectively or to retirement savings before 1 March 2021. They will only affect contributions and balances as of 1 March 2021 going forward. Accumulated balances before this date, as well as balances for members over the age of 55 will not be affected by the new regulations.
In this FAQ, we seek to give answers to some of the pertinent questions that members of retirement funds may have about the reasons behind these latest set of regulations and how their retirement funds will be affected.
At the start of the retirement reform process in 2011, and in research published in 2013, government found that parts of the South African retirement system were characterised by complex products, with high charges.
This led to consumers and employers being unable to exercise choices in a way that leads to best outcomes for members of retirement funds. Moreover, there is a low rate of participation in the retirement system, as well as preservation during their working lives, particularly by lower paid workers.
The reforms are thus aimed at:
- Encouraging employers to offer retirement saving as a benefit to their employees and employees to save and provide adequately for retirement with contributions that lasts through their retirement.
- Ensuring that employees receive good value for money for their retirement savings and are treated fairly, and that their savings are prudently and diligently managed, and members are kept informed of their retirement savings in a simple and understandable language.
- Improve standards of retirement fund governance as well as the protection of members interests.
The most important change is that members of provident funds or defined contribution schemes, will upon retirement, not be allowed to withdraw all their retirement savings as was the case before. Instead, they will only be allowed to access a third of the accumulated savings as a lump sum and be required to purchase an annuity with the remaining two thirds of their savings unless the accumulated savings are less than R 247 500. This brings the rules in line with pension funds.
No. The rules are applicable to all contributions made after 01 March 2021, all contributions made before this date, as well as their growth or investment returns will not be subject to these rules and can be withdrawn in full.
Members under the age of 55 will be subject to the new rules for all contributions made after the 1 st of March. Members over the age of 55 will not be subject to the new rules if they stay with the same fund until retirement. If the member transfers to a new fund or to a preservation fund, the contributions made to the new fund as well as its growth, will be subject to the new rules.
The rules for investment choice are subject to previous amendments and remain unchanged. Funds must clearly communicate options to members in a clear and simple language including with non-binding, illustrative figures. members must also be clearly advised on the default options they have if they do not make a selection for a particular period.
Members are encouraged to request updated rules from their fund.
South Africa lags its middle income, emerging market peer countries on savings and investment. The National Development Plan envisages raising the savings and investment rate to drive economic growth. Savings and Investment can be both domestic and foreign. Foreign investments tend to be short term and can be volatile. Pension reform, and increased retirement savings, thus helps raise the level of domestic savings and investment to raise economic growth.
A person that takes early retirement or gets disabled or deceased will be paid out their retirement benefit in line with the rules of the fund they are contributing to.
No. There is no intention by Government to nationalise workers’ pension/provident funds, or to prevent them from accessing their money. Instead, Government is proposing important measures to encourage workers to keep their savings until retirement, and to convert some of these funds into income at retirement instead of withdrawing all the money and leave nothing for retirement.
The reforms are designed to encourage fund consolidation. However, consolidation requires many other factors to be considered. One such example is understanding the implications on vested rights when transferring provident fund members who are 55 or older on 1 March 2021.
Other factors include:
- the size of the funds
- potential cost savings or cost implications
- Section 14 transfer requirements
- Deregistration and
- liquidation requirements of the transferor fund
The biggest change to occur in retirement funds over the past 20 years is the movement from defined benefits to defined contribution funds. This places the onus on boards of trustees to be prudent in member funds management and the responsibility on individual members to monitor performance. Funds must at all times, maintain transparency and keep members informed in a clear and simple language.