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Pensions reform in South Africa progresses

Tuesday, 04 October 2011   (0 Comments)
Posted by: SAIT Technical
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Pensions reform in South Africa progresses

Max Rowley: Associate Pension Law Department, Shepstone & Wylie Attorneys

Due to the lack of a mandatory retirement provision in South Africa and poor performance by elements of the private retirement industry, government is in the process of introducing a compulsory state pension system.

At a recent presentation the Department of Social Development outlined its proposals for extending the current social assistance system that is in place. Looking at time frames a discussion document is expected to be released in the next month or two and that draft enabling legislation to be sent to Parliament next year (2012) following which the necessary structures will be put in place which could take up to a further four years. While the current thinking retains its three tier structure there is more detail and some important changes.

Tier 1 will provide a benefit payable to men and women at age 60 who will not be required to make any contributions in order to qualify for this benefit. This is similar to the current old age grant, however, there will be a gradual removal of the current "means” test and the benefit received will be adjusted in accordance with inflation. The only issue to be decided in this initial tier is how to provide for risk benefits that are not age related such has income protection, death and funeral benefits.

Tier 2 will consist of a mandatory centralized defined benefit fund which will be a partially funded "pay as you go” fund, with a fixed accrual rate based on average lifetime earnings rather than final salary. A percentage of the contribution will be allocated towards providing for retirement savings whilst a percentage will be allocated towards death and disability cover.

There has been no indication from the Department of Social Development as to what the percentage will be. Contributions to this fund will be payable on earnings from the level of the state age pension (currently income of R44 880 per year) under Tier 1 up to R150 000. The intention is to provide for a 40% replacement ratio. This means that at retirement individuals should expect to receive from this fund 40% of their average lifetime earnings. Subsidies will be provided for lower income earners.

Tier 3 will consist of a defined contribution element whereby individuals will contribute a percentage of their income above R150 000 to a ceiling of R750 000 to the National Social Security Fund ("the NSSF”). The current thinking is that individuals will be able to opt out of contributing to the NSSF and choose rather to pay these contributions to an approved private fund. Such private funds will be required to be accredited following compliance with certain criteria.

There is a similar proposal for auto enrollment into a state pension fund in the United Kingdom, however, the intention in the UK is to allow individuals to opt out as long as they are contributing to another retirement arrangement, which need not be specifically approved and accredited as is the intention in the proposed South African structure.

The retirement age for Tiers 2 and 3 will be 65 and they will be regulated by a specialist regulatory body which will be established by government. Individuals would be able to make additional voluntary contributions above R750 000 to private funds regulated by the Financial Services Board. This would obviously only apply to high income earners and will have a significant impact on the pension fund industry.



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