by Stephen Cranston, 26 June 2014, 07:16
REMEMBER when we were promised a new retirement fund system in time for the 2010 World Cup? That was back in 2007, when we briefly enjoyed a budget surplus. In the more constrained fiscal circumstances of 2014 government has wisely gone for a more evolutionary approach. The retirement fund industry is among the most inefficient, often incompetent, in SA. But the reform process is forcing it to tighten up. For a start it has simplified the tax regime. Pension and provident funds will be treated under the same tax provisions from March 1.
Up to R500 000 of a pension lump sum will be tax-free. And there is no more confusion about pensionable income — up to 27,5% of total remuneration is deductible. And wisely, to avoid the wealthy abusing this tax break, there is an annual limit of R350 000 on deductions. Government has made it clear that it wants to see wholesale changes in the behaviour of the big employee benefits businesses. It has barely disguised its contempt for gimmicks such as loyalty bonuses, a form of repackaged surrender penalty. It is equally scathing about the use of high-margin smooth bonus policies as the default option in, for example, the Old Mutual Super Fund. I believe the authorities will stop short of making passive index-tracking portfolios compulsory, if only because merchant banks have already perfected the high-fee index product — just look at some of the exchange traded notes on the JSE charging close to 1%/year — while some active funds are available for as little as 0,3%. But a fee cap on at least the default portfolio offered to the bulk of members looks inevitable. The fund landscape looks more rational as the process evolves.
Many subscale funds have accepted that they will never be efficient and have been absorbed into umbrella funds. Trustees and principal officers have to be honest about why they continue to keep their corporate pension funds alive. For trustees, is it the prestige of the office or another line in the CV?As a trustee of my pension fund, I believe that I fulfilled my fiduciary duty when I voted to move into an umbrella fund, which makes sense in the long term. The pensions industry is among the least efficient in SA.