Posted on February 27th, 2009 in Industry News
After a long period of silence, the 2009 Budget brings back news of Social Security reform: it seems the National Treasury has not forgotten about the project and it continues to form part of their Social Security agenda. In addition, SARS Commissioner, Pravin Gordhan, indicated at a media conference last week that the implementation date for the reform has been shifted from 2010 to 2012.
Finance Minister Trevor Manuel’s budget speech only touched lightly on SSR – he once again stressed that healthcare reform has been firmly put on the agenda, and he referred in detail to social grants and the social security safety net needed to help alleviate poverty. However, the more comprehensive budget review document deals with Social Security and retirement reform in more detail and gives us an insight into some elements of current thinking.
National Savings Fund
The budget review states:
“Research on a contributory social security arrangement will continue in 2009. Particular consideration is being given to options for improving and extending unemployment relief, while encouraging labour market participation. The design of a national savings scheme that would improve coverage of the retirement funding system and provide income protection in the event of death or disability of low-income workers is under review.”
So Pillar 1 arrangements – basic retirement, death and disability benefits, as well as improved unemployment benefits – appear to still be on track.
An interesting statement is made later regarding the national savings scheme:
“A key consideration is the design of a standard, basic retirement saving and income-protection scheme. It needs to be affordable, simple, cost-effective and available to low-income employees and those with irregular earnings. It needs to allow for income assurance in the event of unemployment, death or disability, which are significant risks in South Africa’s circumstances. It needs to combine assured minimum benefits with a reasonable return on accumulated savings.“
[Emphasis added]
This may be an indication that the National Savings Fund is to have a Defined Contribution component – at least in the view of National Treasury. The Department of Social Development has, in the past, opposed this position and we look forward to seeing if a consensus has been reached on the subject.
Another telling statement, which possibly indicates a slight shift in focus for the inter-ministerial committee, is an indication that the national savings fund might be either a central fund or a number of approved private funds:
“The central aim, whether realised through a single national fund or a variety of approved funds, is to ensure that all contributors have access to retirement savings and social insurance vehicles that provide income protection effectively and economically.”
[Emphasis added]
In previous documents, the single national fund was not negotiable and opt-out of this fund was the subject of heated debate. The budget review seems to see the national fund as one possible alternative, with approved funds being another – a system that is closer to the current arrangements and therefore less disruptive to implement.
Means Test and Preservation
The preservation issue is addressed, with concerns about members withdrawing their savings before retirement, either to meet financial needs or to ensure that they qualify for the means-tested State Old Age Grant (SOAG). It is proposed that the means test threshold be lifted to improve the situation – possibly a departure from previous discussions which dealt with removing this test altogether.
National Health Insurance
The proposed national health insurance system is explicitly linked to SSR:
“Options for the development of a national health insurance system, as part of the longer-term social security reform agenda, are also under scrutiny.”
Contributions
The review reaffirms that the contribution rate currently contemplated is in the region of 12% – 15% (it is unclear whether that includes risk benefits) and that the UIF ceiling is still the likely limit for tier 1 contributions. Two items of interest stand out: the admission that much more modeling work is required before the correct level of contributions can be selected, and a comment that indicates that it is not yet certain that contributions above the UIF ceiling will be compulsory:
“Greater discretion about savings vehicles and contribution levels is appropriate at higher income levels, though international experience suggests that there may be a case for mandatory savings above the social security threshold as well.”
Unification of Provident and Pension Funds
This has been the intention for some time and the budget reaffirms it:
“…a long-term aim of South Africa’s retirement industry reform should be a unified statutory and regulatory framework, applicable to all retirement funding arrangements.”
In particular, provident funds, which reduce preservation, are likely to be phased out over time.
Tax Relief for Retirement Savings
Contributions towards retirement are likely to continue to receive tax relief after the reform, but only up to a certain limit. Contributions above that limit are very likely to lose the favourable tax treatment.
New Implementation Date
While this was not addressed in the budget, the SARS Commissioner has gone on record to place the “final” implementation date for the reforms to be some time during 2012. He does suggest that some reforms will be incrementally implemented before this time – this makes sense since some aspects of implementation have already begun, for example the age of qualifying for the Social Old Age Grant is already being moved from 65 to 60 for men. Other developments we expect to see before 2012 are the unification of pension and provident fund regimes, as well as the possible adjustment of the means test.
Bottom Line
The budget review indicates that Social Security and Retirement Reform are still on the National Treasury agenda and that elements such as the level of contributions, the type of benefits, the commitment to preservation, national health insurance, the unification of Pension and Provident Funds and the removal of tax privileges for contributions above a certain threshold are still contemplated.
Some of the statements made could be hinting at new thinking in the reform process – the assertion of a Defined Contribution-type national fund, the possibility of approved funds replacing the national fund and the means test being raised rather than removed. While these are revealing comments, it needs to be remembered that they may represent the view of the National Treasury rather than a consensus view of the task team. We will need to continue to await a joint proposal before a thorough assessment can be made – watch this space.
February 2009
This article was written by Joanna Legutko
Joanna Legutko
Actuary
Joanna Legutko studied Actuarial Science at UCT and graduated in 1997, joining Old Mutual, where she was involved in investment product development. Three years later, she moved to the UK to work at NIB International, managing their multi-manager fund of funds products. Her next position in London was with Jardine Lloyd Thompson, which is where she gained exposure to the EB market as an actuary in their Pensions Consulting division. She qualified as an actuary in 2003 and joined Jacques Malan Consultants and Actuaries (RSA) (Pty) Ltd in 2006, where she heads up the Actuarial division.
