Edition: Dec 2014 - Feb 2015
Editorials

RETIREMENT REFORM

When the tail wags the dog

Clearly evident is Cosatu’s influence over government. It’s the more disconcerting for apparent contradictions between leaders’ views and members’ behaviour on nationalisation of savings. Left begging is who'll pay for retirement and social security.

Strange that history repeats itself. Stranger that little is learned from it.

In the 1980s, mandatory pensions preservation was called off in the face of mass protests and job resignations. Led by the then-fledgling black trade unions, their resistance was ostensibly occasioned by mistrust of the National Party government gaining access to workers’ savings.

In October, at the behest of a factious Cosatu, T-Day was postponed from March 1 2015 when there was supposed to have been tax harmonisation and savings incentives in the next step towards preservation in the retirement-reform process. The postponement was preceded by mass protests and job resignations, ostensibly occasioned by mistrust of the ANC government gaining access to workers’ savings.

Unfortunately, it was foreseeable (TT Sept-Nov). A consequence in the 1980s was wholesale conversion of retirement funds from defined-benefit to defined contribution, much to the unions’ later chagrin. A consequence this time is the halt to essential reforms, much to regrets that will later be inevitable.

When will T-Day kick in? "For now," said National Treasury, "the delay will be for a year to allow for further consultations at Nedlac". But should there be no agreement at Nedlac by end-June 2015, it added, the implementation date "may" be moved to March 1 2017.

So it’s impossible to say what will ultimately kick in, or when. It depends, as Treasury put it, on the outcome of "further consultations between government and Nedlac (where government, organised labour and business are represented) on social security reform". P-Day, for preservation, would need to be at a point after T-Day.

Cosatu, a shadow of its former self, has been allowed by government to punch above its weight. First, had government proceeded with T-Day on schedule, Cosatu might have done its worst. Like what? More strikes and more hardship? Anything worse than its failure, through intent or inability, to communicate with the grassroots on what preservation actually means; why it is a national imperative, whom it will affect and how it will impact? Too late. The surge of workers handing in their notice, for fear of preservation, has happened.

Second, Cosatu’s victory is pyrrhic. Nobody benefits from government’s surrender. Tax certainty and savings stimulation have fallen victim to a political power play. Service providers and employers, having prepared T-Day implementation for ages, take a hike. Investors, domestic and foreign, will note who called the shots.

Third, the war cry of Cosatu has been no pensions preservation without a comprehensive social security system, no matter that they are different exercises with different timescales. Preservation requires no new funding vehicles; social security does. Preservation can help to support social security, through an increase in the savings pool; postponement undermines it. By twinning them, Cosatu has successfully held a gun to government’s head as though stymying preservation can accelerate social security.

Vavi . . . loud voice

Cosatu’s stance has been known at least since 2012 when general secretary Zwelinzima Vavi spelled it out at a conference of the Nedlac labour constituency. Intensive discussions between National Treasury and the labour unions, not only Cosatu, were followed by passage of the 2013 Taxation Laws Amendment Act and a firm Treasury commitment after the 2014 Budget to proceed with the reforms. To suggest at this late stage that there has been inadequate consultation is spurious.

Nevertheless, Cosatu has exposed a seminal lesson on nationalisation. What the leadership favours ideologically flies in the face of rank-andfile behaviour. Hardly can the paradox be more clearly evidenced than in the heated imbroglio that has seen workers in turmoil despite preservation – which protects vested rights and accords withdrawal allowances – having minimal affect on lower-paid wage earners; except that in March they won't get the increased tax-free lump sum from their funds on retirement.

When the chips were down, and fund members’ money was at stake, political theory fell flat. Workers voted with their feet, rushing en masse to resign their jobs so as cash in their pensions to avoid them being "nationalised." For these thousands, the consequences are tragic. For those fortunate to be reemployed, the terms are often less generous. And all this on a rumour, totally wild and unfounded, that any such nationalisation intent was ever remotely on government’s radar.

The contradiction doesn't end there. In an emotive statement on September 18, Cosatu offered the assurance that "there is not and never will be nationalisation of workers’ pension funds in South Africa". Yet the same statement called for a "comprehensive social security system" that must imply an element of nationalisation; not for government to take a part of existing pensions now but to make at least part of future pensions become the "first pillar" of a National Savings & Social Security Fund, assuming that plans for it are revived.

In fact, proposals for the NSSSF dominated the post-2004 years of discussion on retirement reform. When this "comprehensive social security system" was being scrutinised for every nut and bolt, it’s hard to recall the unions being particularly vociferous against the nationalisation elements of it. At the same time, financial institutions and other service providers prepared to make the best of it. What then is the current problem? Is nationalisation okay for other people’s money but not one’s own? Or is there a way to have one’s cake and eat it? Somebody, somewhere, has to pay for old-age provision and unemployment sustenance. To delay on pensions preservation is to increase the burden on social security; the more people who can't support themselves when they don't work, the greater their reliance on the state.

Already the fiscus is close to hitting a wall. If it’s reaching the limit of its capacity to help fund state-owned enterprises, it cannot indefinitely fund ever-burgeoning social grants. In theory, it could sell off a few enterprises (and raise the ire of the antiprivatisation lobby) or restrict the social grants (and risk the political unpopularity). In practice, neither is likely.

Which introduces the possibility of another alternative. It’s for the relaunch, heaven help us, of prescribed assets. Such government intervention on investments of pension funds, temptingly easy to raid by regulation, will make them less attractive as savings vehicles by diminishing the returns and hence the benefits to members.

It also runs directly against government attempts for improvement of the "savings culture" because prescribeds are simply a tax by another name. "Government has no access to your retirement funds," Cosatu has hastened to point out. Prescribeds, however, are access. Should the matter again raise its head, let the Cosatu view be heard be consistency.

All too predictable, unfortunately

Look at the social security system as it stands. According to the 2014 Budget Review, there are 15,8m people on social grants (including 11,1m on child support and 2,9m on old-age pensions). Total cost was R118bn, amounting to 3,4% of gdp. To continue at this sort of rate requires a tax base rising in tandem. To add social grants for the unemployed will require much faster growth in the tax base; in other words, a high-growth economy.

This is hardly a sanguine prospect, given shrinking private-sector employment and country-specific constraints on generation of profits (electricity, strikes and all else in the litany). More than this, with world economies wobbly, the odds are more for contraction than expansion.

And with a protracted period of lacklustre equity prices not be ruled out tax incentives to improve SA’s "savings culture" – the tax-free R30 000 per year to a maximum R500 000 investment remains in place – could be offset by deteriorating returns.

Whether of its own or others’ making, government is not spoiled for choice. With preservation relegated to the back burner, social security rises to the fore. If only wastful expenditure in the public sector could be reasonably curtailed, preservation would attract less suspicion and there’d be little need to contemplate a new tax layer for social security. If only.

NOW YOU SEE IT.
NOW YOU DON'T.

There will be further reforms over the period ahead. Legislation has already been passed by Parliament...to align the rules and tax treatment of pension and provident funds, while at the same time protecting vested rights.

We will seek improved coverage and preservation of pension funds, and lower costs in the system. We are currently consulting within Nedlac on measures to cover the 6m employed South Africans who do not enjoy access to an employer-sponsored retirement plan. We intend to move progressively towards a mandatory system of retirement for all South Africans.

Finance Minister Pravin Gordhan,
2014 Budget Speech

From 1 March 2015, new contributions to any retirement fund will be subject to the same tax dispensation, and these contributions, and growth on them, will be subject to the same annuitisation requirements when members retire (that is, that no more than one-third may be taken in cash and the rest must be taken in the form of a pension).

Vested rights have been protected, so members who have contributed to provident funds before 1 March 2015 will still be able to receive their benefits in respect of those contributions in the form of lump sums at retirement.

These measures have been designed to protect vested rights to lump-sum retirement benefits and ensure a gradual transition to the new annuitisation requirements. The first low-income retirees from provident funds will begin to be affected by the new rules in 2020 to 2025. The transition to the new system will only be complete in 2055.

National Treasury 2014 Budget update on retirement reforms.