There were some pleasant surprises for retirement funds in the budget. One is that the offshore allocation is now 20% for retirement funds.
The industry has been begging for a relaxation in exchange controls - institutional investors had been restricted to 15% of assets for many years, in terms of the Pension Funds Act - and Catherine Brown, director at Fifth Quadrant, says: "It will enable trustees to make decisions much more quickly."
But, says Rowan Burger, head of consulting strategy at Alexander Forbes: "I don't think we will see significant outflows offshore immediately. Regulation 28 of the act still needs to be changed and some funds are hovering around 20% at the moment anyway, as a function of rand decline."
Burger agrees retirement funds will do better in an unconstrained environment.
The relaxation means assets can be allocated offshore without getting prior permission from the Reserve Bank, in line with global best practice. But the responsibility to ensure the allocation stays within the prudential 20% limit rests with the fund. Retirement funds must still submit quarterly asset allocation reports to the Reserve Bank.
Sanlam's Elias Masilela notes an advantage for those planning to retire overseas: "It would be much better to have more of your assets nonrand-denominated for liability matching."
Most observers would have preferred to see the allocation at 25%-30%, but overall they are encouraged to see previous policy proposals being adhered to. It also means the environment is primed for further relaxation.
The change also applies to the underwritten policies of life insurers.
Collective investment schemes and asset managers, and the investment businesses of long-term insurers may now make an offshore asset allocation of 30%.
Jarred Glansbeek, CEO of RisCura, says this is good news for individuals saving for their own book because they can also increase their offshore allocations through unit trusts.
Patrick Mamathuba, chief investment officer at Stanlib, says: "This is a welcome change as it encourages diversification across sectors, and international companies may also be included in the asset allocation."
Though the offshore permissions are a welcome development, it's also true that SA's strict exchange controls have helped insulate investors from sub prime issues and the global liquidity crunch.
Proposals are also in the pipeline on the tax front. Taxation of withdrawal benefits from retirement funds should soon be simplified, in keeping with last year's change to the taxation of lump-sum payments at retirement.
There will also be revisions to the monetary thresholds and percentage contribution limits for retirement funds. But not much clarity was provided on how these changes may pan out.
Burger hopes that any changes to taxation at withdrawal from the fund "do not change its punitive nature, because people should be encouraged to preserve instead of taking cash benefits".
The changes to the taxing of percentage contributions to retirement funds are understood to mean that tax advantages on such contributions will be capped for individuals, which may discourage investments in retirement annuities.
An intriguing decision is the reduction in the national retirement age for males from 65 to 63 in 2008, 61 in 2009 and 60 in 2010. The female retirement age is already 60. This is despite the global trend of raising retirement ages. Should the age for females not have been raised instead? Treasury's officials say only that "we are aware of the trend to raise retirement ages, particularly in developed markets. We will, however, be monitoring the situation closely."
Mortality expectation in SA is lower than in developed countries, especially for lower-income earners, and the intention, apparently, is to see them derive benefit from the social old-age pension while they are still alive. But the problem with this is that it is a disincentive for lower-income earners to save, because their working life will be shortened. Most industry observers were disappointed with the lack of clarity on social security.
It remains to be seen if the reduction in corporate tax to 28% (putting one percentage point more in investor s' pockets) and the total individual tax relief of R7,2bn will encourage retirement savings.
