T-day: Ke nako, it’s time
The reforms, which seeks to harmonise the way in which benefits can be accessed across different funds at retirement, were met with concern and scepticism when first proposed. For some key industry bodies and stakeholders, notably organised labour, the level of discomfort was untenable, such that National Treasury backtracked mere weeks before the legislation was to be enacted on 1 March 2016.
“This is almost unheard of in the sphere of South African regulation as it had followed the process through parliament and had been promulgated, then the regulator pulled portions of it back,” says Jennifer Anderson, head of product and communication at INN8.
Only some of the regulatory changes were implemented, for example lifting the threshold for the de minimus rule from R75 000 to R247 500, and changing the contribution limits which qualify for tax deductions from 15% of your taxable income to 27.5%, with an annual ceiling of R350 000.
The T-day components of the reforms, with its required annuitisation of two-thirds of all retirement savings, including those in provident and provident preservation funds, were not implemented, with the promise of a postponement of a year or two.
It turned out to be a year or five.
Concerns raised at the time were that consultation with broader groups were lacking and that such reforms would be more appropriate to roll out when a State pension comes into existence. The latter has, however, not come to fruition as yet, while the annuitisation of provident funds and provident preservation funds are now officially in force.
And the big bang that all of this controversy promised? It turned out to be no more than a fizzle, perhaps because the industry and members of provident funds have had so long to digest the changes.
“A lot of us probably thought it would never happen, because it was postponed time and again,” says Anderson.
“But here we are, it’s happening and T-day has arrived.”
Now that it’s here, let’s look at some of the concerns and misgivings around the legislation that have been raised in the past, as well as lingering questions around the change in legislation. These were addressed in a recent webinar on the annuitisation of provident funds, hosted by INN8.
- I have been planning my retirement for decades and counted on that 100% taxable lump sum from my provident fund.
“It is fair to say that it is a quite a big change, but the good news is that the regulator recognised this,” says Anderson.
The changes will not be applied retrospectively, thus resulting in the differentiation between vested benefits in provident savings accumulated prior to T-day and the non-vested portion, contributed into the fund after the date of implementation.
This means that none of the money invested prior to T-day will be affected by the change in regulations and is considered a vested benefit. New contributions made after T-day, however, will have the new regulations applied to it, except if you are a provident fund member who is 55 years and older on 1 March 2021.
- What about the growth of my vested portion, it makes up the bulk of my savings?
Vested benefits include any future growth from the vested portion in your provident or provident preservation fund.
“The growth is taken into account and I think that is vital, otherwise your vested benefit will just shrink annually with inflation. If for example come 1 March you have R100 as a vested benefit and it grows into R5 000 by the time you retire, that full R5 000 will be seen as your vested benefit which you can withdraw in cash,” says Anderson.
- You are changing my goalposts. Kick-off was when I was 18, now I am 56. It is not fair.
This is another element that the regulators have taken into consideration and thus, for provident fund members over the age of 55, the changes will have no effect as all their contributions to the provident fund, prior to T-day and post, will still operate under the previous rules where the full amount can be taken in cash upon retirement, says Anderson.
However, if you are over the age of 55 and start saving in a new provident fund, one that you have not been a member of prior to T-day, the new rules will apply.
The government is trying to control where I keep my money. Buying an annuity product forces me to keep it domestic and takes away from cash in my hands.
Anderson does not believe that the motivating factor behind the changes was to ensure domestic control over funds.
“When we think about this topic, we have to look at the bigger picture and put it into context,” says Anderson.
Citing information available from local studies, for example the annual Alexander Forbes Benefits Barometer, or estimates from the Financial Services Conduct Authority (FSCA), Anderson states that there are various reasons for concern about the state of retirement in the country.
The average replacement ratio in the 2019 Alexander Forbes study stood at only 32%.
“This ratio means that on average, if you are earning a monthly salary of R10 000 when you retire, you will only be receiving R3 200 in annuity income post-retirement,” she says.
The study also showed that less than 10% of respondents were preserving their retirement savings. “Anecdotally they say if you take your money when you change jobs once, you may be ok. If you do it twice, you are in trouble.”
Furthermore, the FSCA estimates that only 6% of South Africans who retire, can do so comfortably.
Addressing the domestic limitation issue, Anderson says that it is important to remember the annuity product you purchase with the two-thirds of your retirement savings, is not bound by Regulation 28 limits, and therefore can be fully invested offshore, if this is appropriate for the investor.
“This retirement reform, in my opinion, is not borne out of some nefarious ploy to control our money or further impose Regulation 28 structures, I really think it comes from a good place where the government wants to get us as a country to a position where our elderly people can have a decent retirement,” says Anderson.
- Is my financial services provider ready to track my vested and non-vested benefits accurately?
“An enormous amount of work that has gone into the preparation for this change, particularly around this issue of tracking the vested vs non-vested benefits,” says Anderson.
In 2016 everyone was geared up and ready for the intended implementation date of T day. “At the last minute the industry had to unknit all that knitting. And then there was this strange cadence to the implementation with the looming possibility of enactment every year, only to be postponed again and again. You almost could not blame a product provider if they were eventually caught on the backfoot to get everything ready for the actual T-day,” she says.
Now, I am forced to buy an annuity product when I retire. What about my concerns that they are expensive and non-transparent on cost?
Cost has certainly been a hot topic in the industry for a long time, says Anderson.
“In the Retirement Annuity space specifically, the industry really has come a long way. historically retirement annuities had a bad reputation. There were fears of getting stuck in an RA, with terrible termination fees for example. But since then, particularly for platform-style Retirement Annuities, you can now get pretty good value for money and they have become quite cost-effective,” she says.
“The stigma, however, remains and the only way for fees to come down is for us as an industry to keep demanding it.”
Are we in the clear?
Unfortunately, everything around the new regulations is not crystal clear yet.
Because there was no clear indication from the regulators how pre-retirement withdrawals should be handled, the industry has agreed split such a withdrawal proportionally over both the vested and non-vested benefits of a member.
“SARS, in the last week, has come back to say that they think it should come firstly out of vested, and only thereafter dipping into non-vested benefits,” says Anderson.
“This reform is the gift that keeps on giving. Just as you thought we were out of the woods, there is an indication that perhaps the rules can once again change.”