News

Posted on February 25th, 2011 in Industry News

The 2011/12 budget brings some news on the direction of the Retirement Reforms and the NHI. Mostly, there are plans to discuss and explore rather than concrete proposals. The topics raised for retirement funds are mandatory preservation, retirement industry consolidation and increased transparency and disclosure. The NHI is off with a R8bn bang, showing government’s commitment to the issue – but the actual spend is on improvements to the current healthcare system rather than on new structures, and a 14 year implementation period lends realism to the proposals. There are also a number of changes to the tax regime with respect to benefits and contributions which we highlight at the end of this article.

Retirement Reform

The actual National Social Security Fund, which has been mooted since 2007, does not materialise in the budget. The budget and a separate paper released on the same day, “A Safer Financial Sector to Serve South Africa Better”, raise many proposals intended to make pensions more transparent, less costly and more regulated:

• Lack of preservation is highlighted as a major concern. 89.8% of retrenchments and 52% of resignations result in a cash withdrawal rather than any form of preservation. The Treasury is planning to consult with the public this year to raise the possibility of mandatory preservation when changing jobs, a topic that has proved to be very controversial in the past. The documents again stress that this would only be for benefits accumulated after some future date.

• Another proposal, still without concrete implementation date, is to reduce the cash lump sum on retirement from provident funds to one third of the benefit.

• The number of retirement funds – already reduced to 3 200 from around 13 000 just a few years ago – is still deemed too high, and further consolidation of the industry is sought to reduce the workload of the FSB and to make funds more cost efficient. Ideas such as only allowing funds of a certain size to register as free-standing, and directing smaller funds towards umbrella arrangements, are mooted. According to research quoted, in funds with 20 members or less, R6.20 is needed to meet expenses for every R10 contributed towards retirement. In funds with 10,000 members or more, the expenses drop ten-fold to R0.69 for the same retirement contribution. The optimum size is thought to be 220,000 members.

• There is a commitment to a gradual increase in the means test for the old age grant. This fits in with the reform proposals where low income workers are likely to be exclusively provided for via this grant.

• There is an increased focus on trustee and member education, and a proposal to establish a code of ethics to govern the retirement industry.

• Retirement annuities in particular have been highlighted as too expensive and untransparent, and that must urgently be addressed.

• Regulation 28 has been revised and finalised. We will discuss the full details of this new regulation in our next newsletter.

Overall, the drive towards a smaller, cheaper, more regulated retirement industry continues.

Healthcare reform

The NHI has been at the forefront of mooted reforms during the course of 2010. No official government paper has yet been released on the approach to be followed, and the ANC proposal which has been commented on in the press contains little research or reference to costs. However, there was an expectation that government will have to do something to show its commitment to the NHI, and the budget answered this expectation with an R8bn allocation towards the start of an NHI.

Rather than introducing a new healthcare insurance system, this allocation is being put to work creating “family health care teams” to improve basic preventative care, improving healthcare facilities in general, and maternal and child health services in particular, more training for doctors and nurses and institutional reforms and more quality control over healthcare facilities.

R8bn is not a large amount compared to the total health care spend, which is already in excess of R100bn. It does however again indicate a moderate and practical approach to the reform, appeasing both the policy makers who called for an NHI and experts with concerns over the cost and feasibility of introducing a full blown system immediately. In fact, the introduction of the NHI is expected to take 14 years to complete.

However carefully implemented, an NHI will come at significant cost. A commitment has been made that the 2012 budget will explore how this can be funded – increased income tax, VAT or payroll tax are suggested as possible sources of funding.

Changes to taxation of individuals

Medical Aid contributions: the tax deductible amount has been increased from R670 to R720 for the first two beneficiaries, and from R410 to R440 for each additional beneficiary, effective 1 March 2011. From 1 March 2012, there will be a further change where deductions for contributions to medical schemes and qualifying medical expenses will be converted into tax credits. The manner in which these credits will operate will be communicated in a separate discussion document.

Lump Sum retirement benefits: The tax free lumps sum has been increased to R315,000 from R300,000, and all other limits have also been increased:

Retirement Fund Contributions: At the moment, there is a tax-free allowance of 7.5% for member contributions and 15% for employer contributions. Starting 1 March 2012, this will be amended so that both member and employer contributions are seen as a fringe benefit and are taxable in the hands of the member, with a tax free allowance of 22.5% of salaries. This will however be subject to a R200,000 p.a. maximum, meaning that members earning more than R889,000 p.a. and whose total employer and member contribution is at the maximum of 22.5% will no longer be able to deduct all of their retirement contributions.

Joanna Legutko

Actuary and Chief Technical Officer