There have been many pivotal moments in our country's history: 1910 when the Union was established; 1948 when the National Party came into power; 1990 when former president Nelson Mandela was released; and the 1994 democratic elections. SA's retirement fund industry has had similar crucial events: in 1956 the Pension Funds Act was promulgated; in the late 1980s and early 1990s compulsory preservation was rejected; in the 1990s there was a wave of conversions to defined-contribution funds; in 1998 elected trustees become compulsory; and in 2001 the surplus legislation was promulgated.
With the retirement reform process in full swing, the SA retirement environment is at another important point. There is no doubt that retirement decisions made now will have long-term effects. The National Treasury's first reform document set out admirable principles that were generally well-supported. The second reform document is long-awaited and hopefully will provide greater clarity on National Treasury's proposals.
In the late 1980s in the UK one of the most significant reform proposals was the move away from membership of retirement funds being compulsory. At the time, compulsory retirement fund membership was almost considered an additional form of taxation. This led to lower membership numbers and lower contribution rates. Now the UK has its own reform process (again), and an independent pensions commission has been reinvestigating the adequacy of pension provision and savings in the UK.
It is important to ensure in the SA reform process that there are few, if any, unforeseen consequences, so we can avoid setting up a commission in 15 years' time to correct the mistakes that may be made today.
In SA most members will be on defined-contribution arrangements; the surplus legislation has killed off the possibility of a resurgence of defined-benefit funds. An important element of defined-contribution funds is the fact that you manage your own retirement provision, you are no longer guaranteed a fixed percentage of your salary at retirement. This is not simple, since if you want to ensure success in retirement, you need to consider, among other things: how much to contribute ; what deductions there will be for risk benefits and expenses; what your salary progression is likely to be; and what investment returns will be.
In many countries occupational retirement funds are considered the best way to ensure effective retirement provision. The National Treasury has recognised the importance of occupational retirement funds. However, it still needs to put options in place to address the informal sector, those with irregular incomes and the self-employed.
A general concern in the SA environment is the mistrust of service providers and advisers . Nevertheless, given the complexity of retirement provision, most people need some advice and assistance to achieve their retirement goals. It is imperative that the SA reform ensures that ordinary South Africans receive advice and assistance with their retirement planning.
As with many issues of policy, absolutes can be a problem, but SA needs a retirement system that is flexible enough to change with evolving circumstances, but also has enough introspection to see its own weaknesses.
The discussion with Treasury is a move in the right direction, but "the proof of the pudding is in the eating", hence our hunger for the second reform document.
Neil Lloyd is head of retirement consulting at Alexander Forbes
