Issue: June - Aug 2013


Political preservation

A battle line has been drawn, but retirement-fund issues are too serious for point-scoring. In support of Treasury, Zuma should slap down arch-opponent Vavi and expose the noise for nonsense.

If anything can be politicised in SA, it will be. This is the real and present danger for National Treasury’s proposals to introduce mandatory pensions preservation. It’s easy meat for populist attack when the ANC government, racked by division amongst its alliance partners, faces an election year.

There are two ways, mutually inclusive, of looking at preservation. One is as a necessary good in itself; without it, the overwhelming majority of pension-fund members have scant chance of financial comfort in their retirement. It also mitigates their reliance on the state.

The other is as a cornerstone of the National Development Plan; without reversing the low level of household savings, which preservation can significantly assist, SA will remain over-dependent on unpredictable inflows of foreign capital to finance the infrastructure investments that the NDP identifies as essential for economic growth, job creation and poverty alleviation.

Pensions preservation is consistent with the investor-friendly NDP. Leading lights are Planning Minister Trevor Manuel and unionist-turned-businessman Cyril Ramaphosa (now also the ANC deputy president). Finance Minister Pravin Gordhan couldn’t draw the national budget to align with it unless supported by President Jacob Zuma.

Lingering on the back burner is the statist-orientated New Growth Path. Led by Economic Development Minister Ebrahim Patel, it focuses on a strengthened role for state-owned enterprises and advocates the introduction of prescribed-asset requirements as an economic stimulus. It’s supported by such powerful Cosatu affiliates as the National Union of Metalworkers, and by Cosatu general secretary Zwelinzima Vavi.

The NDP would appear to have triumphed over the NGP. This was the interpretation of Zuma’s address to the ANC’s conference in Mangaung last December. He embraced the NDP to “steer our economy boldly”. But then came a semantic contortion that “some of the instruments we are using, within the NDP framework, is our New Growth Path”.

That was more confusing than clear. Is the wily fox still allowing for options, just in case it later becomes expedient to offer trade-offs between the NDP and the contradictory NGP? For instance, to let the former win on a variety of “active labour market policies” and the latter on prescribed investments for support of floundering state-owned enterprises?

Vavi . . . loud protests

Vavi and his cohorts within a factious ANC consider the NDP to be the antithesis of the Freedom Charter, and are determined to fight it.

It’s easy meat for political opportunism. It’s also highly toxic.

Look no further than the Marikana turmoil when mineworkers demanded their pension money to pay loan sharks. Or the more recent strike of SA Post Office workers who engaged in a prolonged strike on a flimsy suspicion that their pension entitlements were threatened. Or the experience of the 1980s when the then government’s attempt to introduce preservation was abandoned in the face of violent resistance and mass resignations by workers from their jobs to get their pension money.

This is a history not to be replayed. Neither is a lesson of e-tolls to be left unlearned. Then, as Vavi turned up the heat on the eve of e-toll implementation, Zuma left Treasury hanging out to dry. Now, specifically on preservation, Zuma can avert a similar calamity by proactively expressing his explicit endorsement of preservation.

That’s not too much to expect. For the Treasury proposals are hardly the stuff of contest. They’re grounded in accommodation of disparate needs, researched and debated with ample opportunity for public comment (as were e-tolls), nowhere deserving the distortions and exaggerations to which they’re vulnerable in a partisan hothouse. They’re a modest move to alter behavioural patterns from consuming to saving and, properly seen, they offer no reason to anticipate a panic cashing-in of pensions before preservation takes effect.

However, simple endorsement is insufficient. It additionally requires a commitment not to impose prescribed-asset requirements on the investments of pension funds. Paramount to fund members is their net returns that prescribed assets, by definition, will reduce. Investments offered at market-competitive rates don’t need to be forced by prescription.

Zuma . . . dismiss the objections

As part of the preservation package, government will introduce tax-preferred savings and investment accounts in 2015. To give on the one hand with tax incentives, and take on the other with prescribeds, would be illogical and self-defeating.

So the endorsement needed can pit Zuma directly against those in the alliance for whom Vavi speaks. Using anti-capitalism rhetoric at its most inflammatory, late last year Vavi gave notice of his intention. He told the Nedlac labour constituency that “we cannot look at the problems confronting the retirement funds in isolation from the broader issues of social security policy”.

He was “increasingly concerned” by the “outrageous length of time that it is taking government to produce its long-awaited social security policy document”, and “extremely worried” that Treasury was proposing “piecemeal reforms” such as preservation “which would prevent workers from drawing funds before retirement”.

Treasury must stop making these “counterproductive interventions”, he argued, and discuss them in the context of comprehensive reforms: “There seems to have been extensive consultation between Treasury and the financial service sector since 2007, both on their piecemeal proposals and the pending policy paper, yet organised labour has been excluded from this process apart from the recent minimal and superficial engagement on the retirement reform papers. This is an insult to workers.”

Exhortations for mass consumption tend to be thin on factual content. It’s mischievous to allege that Treasury hasn’t been bending over backwards to build a consensus on retirement reform, particularly on its preservation initiatives, both prior and subsequent to release of last year’s discussion documents for public comment.

Written submissions were requested by end-May. Gordhan promised in his Budget that consultation on the proposals would precede introduction of legislation later this year. If Treasury had not gone to Vavi – and it has been going aplenty to unions – Vavi could have gone to Treasury. There’s been no insult to workers.

Equally, it’s wrong to suggest that discussion is outside the context of a broader policy on social security. The NDP explicitly connects them. The worst to be contended is a difference in timing. Preservation is imminent because it can be; a National Savings & Social Security Fund will take longer because it’s much more complex. The former must precede, not preclude, the latter for the funding structures of an NSSSF to be finessed.

Moreover, to ignore the detail in Treasury’s proposals is disingenuous. There’s no sudden cut-off date when the withdrawal of savings is prohibited. If anything, what’s contemplated falls well short of the ideal to prevent continued pension leakages.

This is precisely in recognition of lower wage-earners’ living exigencies, to provide breathing space before there’s an NSSSF, and to impress on the public at large why preservation is essential in their longer-term benefit. Preservation is supplementary to social security, not a substitute for it.

To be countered is a pervasive sense that pensions, being the savings of individuals, are there for the taking whenever those individuals want to access them. That’s not what pensions are about. Yet withdrawals will still be allowed, although limited in number and disincentivised by loss of tax advantages, but nevertheless smacking against the tenet that people won’t preserve unless forced.

They won’t be forced. What’s Vavi not to like?

Manuel and Ramaphosa . . . side by side  

Gordhan has explained: “Retirement funds will be required to identify appropriate preservation funds for exiting members, who will be encouraged to preserve when changing jobs...and
guide their members through the process.” The February 2013 paper, containing “proposals for further consultation”, also uses the term “guide” and provides for retiring members to move automatically to a default annuity product unless they “request otherwise”.

Treasury is treading lightly, so lightly that on the table is ‘preservation lite’. Its discussion paper says: “Funds will be required to nudge members to save for the long term” and, when that member leaves employment, to transfer funds into a default option “unless the member has indicated otherwise” (i.e. not to accept the default). Member inertia will be a subtle driver of acceptance.

So accommodative is ‘preservation lite’, with all its allowance for withdrawals, that it should be an easy sell; unless, that is, the detail is ignored or misrepresented for purposes of political point-scoring. Eschewing full preservation, it accepts that unemployed workers should be permitted “some access” to their retirement funds “in case of need” and seeks not to harm workers unable to access their retirement savings “in times of great need”.

A few questions arising:

  • Who, and on what criteria, are “need” and “great need” to be assessed? Might different interpretations not lead to labour disputes?
  • Are there competent trustees in sufficient numbers to provide guidance for fund members wanting to cash out? How perfunctory or well-informed is their guidance supposed to be, and can it be ignored?
  • When a member instructs a fund that he wants to withdraw, say to pay off a bond or start his own business, can a fund-designated financial advisor prevent him (i.e. is the advice restricted to acceptance or rejection of financial products only)?
  • How are conflicts of interest to be avoided on the part of trustees (e.g. where they’re appointed by sponsors of umbrella funds) and of financial advisors (e.g. where, outside their mandate from the fund, they earn commissions from service providers)?
  • As there’s no mandatory membership of a retirement fund, might mandatory preservation not discourage employers from compelling employees to join one (i.e. because employers don’t want to fight with employees reluctant to accept the cashing-out restrictions)?
  • What is the right cut-off age for retirement? Is age 55 too late for those who haven’t enjoyed first-world healthcare, and too early for those who have? Does one size fit all?

As always, the devil is in the details. As always, they’ll be refined as they’re identified in the evolution of practice. They aren’t stumbling blocks.

In fact, for the millions of present and future members of retirement funds, the need to understand the workings and benefits of preservation is a huge opportunity to launch a popular educational campaign supported by institutional commitments under the Financial Sector Charter.

The better for it to be launched with the head of state’s imprimatur.  Zuma is surely not oblivious, either, to the tactical gain in showing up the Vavi arguments as silly.


National Treasury cannot be faulted for the clarity with which its proposals have been presented. Replete with synopses and examples, they’re easily intelligible for anybody serious about wanting to understand them. Take the trouble to read2013: Retirement reform proposals for further consultation. It runs to only 12 pages.

A summary was presented to the Pension Lawyers annual conference by Kobus Hanekom of Simeka. Here’s a summary of his summary on how it’s proposed that the rules on preservation of pension benefits will change on the implementation date, known as P-day, which will be during or after 2015:

Pension and provident funds

  • The balance that individuals have in these funds, plus the growth on this balance, will be protected. Members will still be able to withdraw this amount in cash, even from a preservation fund;
  • The funds will be required to identify a default preservation option for members;
  • On a member withdrawing from a fund before retirement, these funds will not be permitted to pay cash-withdrawal benefits. Individuals’ entire balances will have to be paid into the default preservation fund, or the new employer’s fund, or into a preservation fund that the member chooses. Only small amounts (to be quantified later) may be taken in cash.

Preservation funds

  • There will be no restriction on the maximum number of withdrawals;
  • Members will be able to take out their “vested cash-withdrawal benefits” at any time. (“Vesting” refers to a right that cannot be taken away without the person’s consent.)
  • They’ll also be able, once a year, to withdraw an amount equal to the state old-age grant (at present R15 120) or 10% of their initial deposit, whichever is the greater;
  • The initial deposit will be equal to the value of the of the member’s preservation fund on
    P-day. Vested rights will apply to this amount only if the member has not already used it for his annual allowable withdrawal;
  • Any unused withdrawals may be carried forward to the next calendar year.

Post-retirement preservation

  • The means test of the state old-age grant will be phased out by 2016;
  • On T-day (when tax changes take effect during or after 2015), contributions to provident funds – and the growth on these contributions – will be subject to the same annuitisation requirements (the amount accumulated by the member converted to a series of future income payments) will be the same as for pension and retirement annuity funds i.e. two-thirds of any pension benefit must be unitised to purchase a life annuity;
  • Members aged 55 and older will not be subject to these requirements, even on their new contributions;
  • Amounts below a threshold (to be increased from R75 000 to R150 000) may be taken
    in cash.