Comprehensive Social Reforms on the Cards

Finmonitor

Among others, the green paper provided for a state-administered pension fund to which all income-earning South Africans would be obliged to contribute, as well as a basic income allowance.

Meanwhile, the document has been withdrawn with indications that it would be published at a later stage. According to the Department of Social Development, the document will be reviewed “to provide more clarity on some of the matters included”. The Department indicated that some of the technical proposals have not been well understood, while others have been depicted incorrectly in comments on the green paper, especially with regard to the Social Security Fund.

Like the national health system (to mention one example), the South African retirement landscape is a thorny issue, and has long been under scrutiny. With South African social systems being under pressure, it is understandable that sustainable long-term solutions are sought for the broader population. However, as we all realise too well, it’s easier said than done.

The competent PSG Technical Advice Services team recently shared more detail on the content and potential outcomes of the proposals, as contained in the original green paper.
According to the above, the green paper is aimed at introducing reform measures to address three major gaps in the public social security system, namely:

• The absence of a mandatory system to provide for pension, death and disability benefits for all workers.
• Systemic weaknesses in the private retirement system.
• Inadequate existing cover to address the position of individuals without an income, or those who don’t meet the means test criteria to receive social grants.

One of the basic aspects of the proposed reforms (as contained in the original green paper) is to establish a national social security fund. Other prominent proposals are, among others, a universal basic income allowance, regulatory reforms of the pension and life insurance industry, and enhancing existing unemployment insurance benefits.

The Finmonitor team has continuous access to experts in this field and we will keep our finger on the pulse for updates of the proposals. Readers should bear in mind that a green paper neither represents legislation nor government policy. It is merely a discussion document that is published for broad public comment, proposals and ideas. Finalising the proposals may take years, and significant consultation and transitional changes need to take place prior to any implementation. National Treasury has announced that it has not been consulted in the process.

However, in its turn, through a senior official – Ismail Momoniat, Deputy Director General for tax and the financial sector – National Treasury indicated in a Bloomberg article that comprehensive reforms of retirement fund rules are planned. These reforms are mainly aimed at encouraging South Africans to save more. Of course, this is a very noble goal and something we as a nation desperately need. In the same interview reference was made to advanced stages of investigating the possibility to offer investors limited early access to their retirement funds.

The article also points out how such a decision (to allow people early access to their retirement funds) had catastrophic consequences in Chile. Chileans withdrew approximately US$50 billion (over R700 billion) in savings following the adoption of similar legislation, while the withdrawal of funds led to chaos in capital markets and basically caused the adequacy of the nation’s retirement provision to collapse. However, the SA National Treasury’s approach aims to avoid a repeat of the events in Chile.

Investors should remember only to react to events over which they have control. We don’t have control over the way legislation can be adjusted, or how the retirement landscape may change. However, we do have control over how we prepare ourselves once greater clarity is provided, and how we react to that.

Pre-retirement lump sum withdrawals will have major adverse consequences for your retirement capital, and hence a sustainable income in retirement. Speak to an experienced financial adviser to assist you with scenario planning to establish how such a decision will affect your position, as well as suitable alternatives to consider.

NOTE: The information in this article does not constitute financial, tax, legal or investment advice and the companies in the PSG Konsult Group do not guarantee its appropriateness or potential value. Since individual needs and risk profiles differ, we suggest that you consult your qualified financial adviser if necessary. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider (FSP 728).