Picture: 123RF/OLEGDUDKO
Picture: 123RF/OLEGDUDKO

Seeing the heaving beaches and queues at liquor outlets the day after President Cyril Ramaphosa lifted SA’s “beach and booze ban”, one could be forgiven for thinking the president had announced that Covid-19 was a thing of the past, that there was no longer any chance of being infected when standing cheek-by-jowl with strangers.

This latest response to easing of pandemic-related regulations confirmed what Covid-19 had already shown us: we must often be compelled to act in our own best interests. The Treasury should apply this lesson to its attempts to reform retirement saving.

The Treasury’s retirement reform, the final pieces of which are due to come into effect on March 1, has rather poor odds of having the desired effect of bolstering SA retirement savings because it largely pussyfoots around the real problem: allowing savers to make poor decisions.

The new rules require provident fund members to annuitise part of their savings at retirement, in the same way that pension fund members already do. They are the final stage of a reform process that has simplified the system, but the new regulations still leave plenty of room for people to make bad choices.

If there’s one thing we’ve learnt during the Covid-19 pandemic it’s that informing people and urging them to behave responsibly will take us only so far. Unless there are strictly enforced rules many people will carry on regardless.

People pay lip service to social distancing and mask wearing in public but, unsupervised and unjudged, they ignore the safety protocols, so gatherings persist and keep the virus going. Even strict lockdown measures don’t work, except in police states and countries with compliant populations.

South Africans are notoriously noncompliant, which is why we have not contained the virus yet and why these attempts to lock down savings similarly won’t work either. The evidence shows that we don’t usually make optimal choices, even when we are well informed.

Instead, we do what feels comfortable, which is often nothing at all. When it comes to saving and investing, we procrastinate and disengage. We choose instant gratification over long-term benefit. We would rather have 3% more take-home pay each month than 50% more income in retirement.

That’s not to say our savings system has not been improved. It has. The tax laws and access rules have largely been harmonised across the different fund types, making the system less confusing and more accessible.

Group schemes are required to offer risk-appropriate and cost-effective default portfolios, which will improve the long-term savings outcome for many. Preservation is now the default option, so employees don’t automatically cash out when they leave.

Pension and provident fund members approaching retirement are entitled to counselling to help them make better decisions about their savings. There’s also the new Association for Savings & Investment SA (Asisa) cost disclosure standard, which lets members review and compare fund costs — a key driver of long-term investment returns — across different products and providers.

And a new Financial Sector Conduct Authority standard prescribes the minimum skills and training required for retirement fund trustees so they may do a better job safeguarding members’ interests.

These are all worthwhile changes that facilitate better outcomes. But facilitation is not enough. We also need changes that deliver better outcomes because fund members are still free to choose poorly. They can still invest in high-cost actively managed funds if they are given investment choice. They can still cash out every time they change jobs. They can still avoid annuitisation by resigning before retirement.

Compounding this, employers are still not required to offer a retirement fund and, if they do, there is no legal minimum contribution rate. And there is no formal cap on fund fees. To achieve better outcomes, the regulator needs to set firm rules and boundaries.

Other countries show the way. In Australia’s superannuation system every employer is required to pay at least 9.5% of each employee’s earnings into a “super” fund. Benefits are preserved to age 60. Exceptions must be motivated on the basis of severe financial hardship, specific medical conditions or compassionate grounds. Even then, only one withdrawal is allowed over any 12-month period, limited to A$10,000 (about R115,000).

At retirement all withdrawals are tax-free, but if savings are transferred into a pension drawdown account future investment returns are also tax-free. This incentivises preservation.

In the US employees are incentivised to contribute to their companies’ 401(k) pension plan by way of matching employer contributions. This money may be accessed only from age 59 and six months. Again, early withdrawals are possible, but also subject to severe restrictions and tax penalties.

These systems do a better job incentivising saving and enforcing preservation. For most people, scoring compulsory or matching retirement fund contributions is more appealing than saving tax on contributions, especially if they pay little or no tax anyway.

Our government has a lot on its plate right now, so the country’s pension shortfall will not be top of mind. If anything, the Treasury will be grateful that we don’t have compulsory preservation, so that those who have lost their jobs can fall back on their retirement savings.

But we can only kick this can so far down the road. If the  government is serious about increasing retirement incomes, these latest reforms cannot be the end of the process, merely the end of the beginning.

• Townsend is business development manager & employee benefits consultant at 10X Investments.

Picture: 123RF/OLEGDUDKO
Picture: 123RF/OLEGDUDKO

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