The evolution of retirement funds in SA and what to expect in the future
The recent implementation of the retirement fund default regulation has sparked a lot of interest among the public around retirement funds, particularly the history behind the rules and regulations that govern the management of these funds. Cornerstone Employee Benefits prides itself on continuously being on the cusp of new innovations and changes in the employee benefits space.
We believe that financial education plays a massive part in financial wellness and it’s with that ethos in mind that we have decided to dive into the evolution of retirement funds and look at what their future in South Africa might look like.
A brief history of pension and provident funds
To reduce South Africa’s retirement fund history to a paragraph or two is, to a large extent, frivolous and unjust. However, even in its briefest form South Africa’s retirement fund history is as one would expect and played a profound role in the shaping and sculpting the Pension Fund Act we know today.
The existence of retirement funds as we know them today is largely due to the industrial revolution and the continuous competing need for high quality, skilled workers by large corporate companies. One of the ways employers found to attract better quality workers, was to provide some form of reward for long, loyal service to the company. And so the pension fund was born. By the early 1920’s tax incentives were introduced by the government to inspire saving for old age and due to this benefit, more and more companies started offering pension funds to their employees.
In 1956, the South African Government introduced what is generally considered as the world’s first ever Pension Funds Act that was specifically designed to regulate the business of pension funds. In the decades that followed, pension funds became more and more sophisticated with the growth of available investment vehicles and international investment channels.
Today, employment patterns have changed dramatically and are still evolving. South Africa along with many other countries are trying to keep up with these changes by constantly updating and amending the Pension Funds Act to be more efficient and applicable to today’s employees. Our everchanging economy and workforce might force the pension fund concept that was introduced more than a century ago, to make way for something more dynamic and entirely different.
A member centric approach: latest changes and innovations
As members of the public became savvier about their finances and more aware of the benefits their employers were or weren’t offering, a need arose for more control over what and how their retirement funds were managed. This sentiment paved the way to a more member centric slant to retirement funds.
- Beneficiary funds
The introduction of beneficiary funds in 2009 completely changed the way employers and employees perceive pension funds and risk benefits. The main purpose of beneficiary funds was to improve the way death benefits are managed if the main beneficiary is a minor. When a member of a retirement fund dies, the trustees of that fund can decide to pay money due to a minor into a beneficiary fund instead of paying the lump sum to the child’s guardian. The money in the beneficiary fund can help to pay for the child’s schooling until the child completes his/her education. Monthly payments are made to the guardian or caregiver to assist towards the general living costs of the minor child.
Over the last decade, the benefits of these funds are undeniable, and the costs associated with them are some of the lowest in the business. One of the biggest benefits of a beneficiary funds is the protection of minors’ assets and improved investment and management thereof. It also holds significant tax benefits as beneficiary funds and whole tax exempt – there are very few investments available today that can compete for a tax perspective.
- Default regulations
Another massive change that aims to put member concerns first was the new default regulations that came into effect earlier this year. After many concerns within the public and private sector regarding the selection of investment portfolios, the low replacement value of retirement savings and low incidents of fund preservation, the national treasury stepped in to make a difference.
An excerpt from the explanatory memorandum gives more clarity on what the new regulations aims to achieve:
“The default regulations broadly and mainly seek to standardise and simplify, where appropriate, the default investment portfolios members are enrolled into during the accumulation phase, with the aim of promoting transparency and reducing costs. Secondly, the default regulations aim to protect members at retirement or in the de-accumulation phase, by providing them with cost-effective and suitable annuities. Lastly, the default regulations seek to encourage preservation when members change jobs, which is critical in assisting members to retire with decent retirement savings.”
The benefits of the new default regulations are to provide members with a better understanding of retirement savings and improve their personal financial management. Furthermore, it will provide a more cost-effective way of saving for retirement as well as improved quality of life during retirement.
The future of retirement funds in South Africa
Cornerstone Employee Benefits believes that the industry will continue to move towards a more cost-effective way of providing and administering retirement funds. Members will be playing an even bigger part and the way providers and managers engage with members will continue to improve. With new players such as Discovery, Allan Gray and Sygnia, there is an incentive to bigger providers to restructure and redesign their offering to the general market to be more member focussed.
Employers and custodians of retirement funds have a renewed interest fees and want to know exactly what members of retirement funds pay for – this will also empower members to be more involved in the way their funds are being managed. The introduction of legislation and new default regulations have been met with optimism across the industry and will continue to reshape the future of the industry.
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