What the 2017 South African budget review means for pension funds
The 2017 South African Budget Review, published on 22 February 2017, contained several statements (summarised below) that may be of interest to pension funds, their investment managers and administrators.
Preservation of benefits after reaching normal retirement dates: In 2014, amendments were made to the Income Tax Act, 1962 to allow individuals to elect to retire. The date on which the lump sum benefit accrued to the individual depended on the date on which the individual elected to retire and not on the normal retirement age. Currently, once the individual elects to retire, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another. The budget review proposes that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.
Tax-exempt status of pre-March 1998 build-up in public sector funds: Currently, the Income Tax Act provides for the tax-free transfer of pre-March 1998 lump-sum benefits from a public sector fund to a pension fund. The budget review proposes that subsequent transfers of these lump sum benefits to another pension fund be tax free.
Removing the time limit to join an employer umbrella fund: Existing employees who do not join a newly-established employer umbrella fund have 12 months within which to join the fund, after which they are unable to join. To encourage employees to contribute towards their retirement and remove practical difficulties, the budget review proposes that the 12-month limit be removed and that employees be allowed to join without time restriction, subject to the rules of the fund.
Application of the cap on deductible retirement fund contributions: It is currently not clear how the overall annual cap of ZAR350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees’ tax. It is proposed that the amount of ZAR350 000 be spread over the tax year, which is a more prudent approach.
Annuitisation for provident fund members: The Revenue Laws Amendment Act, 2016 postponed the annuitisation of retirement benefits for provident funds to 1 March 2018 to allow for further consultation with the National Economic Development and Labour Council (“NEDLAC”) and others on retirement reforms. Discussions in the council and with other interested parties will continue, with the aim of reaching consensus on the need to annuitise at retirement. Should no agreement on annuitisation be reached, government will review the continuation of the tax deduction for funds that do not annuitise part of their retirement savings, to ensure the tax system will engage with the industry to provide appropriate annuity products that take better account of the needs of low- and middle-income members of retirement funds.
Government proposes that local collective investment scheme management companies registered with the Financial Services Board and regulated under the Collective Investment Scheme Control Act, 2002 be allowed to list exchange-traded funds referencing foreign assets on South African exchanges. These funds will not be subject to macroprudential limits on amounts that may be invested offshore. South African institutional investors and authorised dealers will be allowed to invest in such funds, subject to their respective macroprudential limits. These funds will be classified as foreign assets for prudential purposes.
Legal and regulatory
Default regulations to improve market conduct: The second revised draft of the default regulations was released for public comment in December 2016. The aim of the default strategies (investment, preservation and annuities) is to ensure that the retirement savings of members are better protected through lower charges and provide better value for money, especially to members who do not exercise any choice. The default annuity strategy section has been considerably simplified, given the difficulty of automatically defaulting members into annuity products that could be irreversible. While concerns on the blanket ban of performance fees and guaranteed products have been addressed, these may be reviewed in the final regulations published later this year. Further steps to lower charges will follow.
Pension Funds Act, 1956 amendment: In 2017, amendments to the Pension Funds Act will be considered to introduce the concept of an umbrella fund and to clarify the extent, purpose and interpretation of the powers of the Registrar of Retirement Funds to deal with funds that do not have properly constituted boards. The National Treasury will also engage with the Financial Services Board to find a sustainable policy solution to the challenge of unclaimed benefits.
Automatic enrolment in retirement funds: South Africa has a well‐developed occupational pension system, but there is limited coverage and a large number of funds. In November 2016, the government tabled a discussion paper on social security reform at NEDLAC. While NEDLAC engagement is expected to take some time to conclude, a parallel process is expected to consider more urgent retirement reforms that can be implemented. For example, government is considering automatic enrolment as a key and urgent initiative to ensure more workers save for their retirement. This initiative would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party.
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