“I am pleased to be able to report that under the capable management of the Public Investment Corporation, the retirement funding assets of public service members and pensioners have grown strongly over the past year,” he indicated.
“Pensioners of the GEPF, the Associated Institutions Pension Fund and the Temporary Employees Pension Fund, as well as recipients of special and military pensions, will receive a 5.8 per cent pension increase with effect from April 2015.”
REASSURANCE ON PROPOSED PENSION REFORMS
Nene, speaking during South Africa’s 2015 Budget Review in Parliament on Wednesday, also moved to reassure civil servants that the proposed pension reforms would not adversely affect benefits to members of the GEPF.
The reforms, which are currently under consideration, were delayed after proposed changes to the legislation created confusion and debate in the South African market.
Nene however, stated that significant progress has been achieved with regards to the retirement reforms and further emphasised the purpose of them.
“Consultations with NEDLAC will continue. The first draft of default regulations will be issued shortly for public comment,” the minister added.
“These reforms have one central objective – to maximise the long-term benefits to retirement fund members, so that they can retire comfortably.”
RETIREMENT REFORMS IN THE SPOTLIGHT
In a recent interview with CNBCafrica.com, BDO employee benefits director, Cindy Wilson echoed this, adding that many South Africans are poorly prepared for retirement.
She also stated and that the intention behind these changes is to encourage people to save more for their retirement and to make this process as simple and as tax effective as possible.
“The first positive is they were simplifying that formula of saying employees can put away 7.5 per cent of their retirement funding, companies can put away a certain percentage as an employer contribution, and then over and above that, that 15 per cent of non-retirement funding income,” Wilson said.
“It was a very difficult formula for even people in the financial industry to perhaps put it in force and say what is considered non-retirement funding income.”
This, along with the fact that employer contributions to retirement funds would be taxed as fringe benefits in the hands of employees and that the commutation threshold upon retirement would be increased, were cited as some of the other benefits of the changes.
According to Wilson, another positive of the reform changes is that provident funds would align with pension and retirement annuity funds.
“What government was trying to do was remove the whole provident fund regime – what that meant was that when people get to retirement age, they can take a portion of their money in cash,” she added.
“The other two-thirds – they have to put together a proper financial plan or implement a financial plan strategy so that they don’t utilise all their money in the first few years that they’re on retirement and then they have nothing to live on.”
However, she does admit that perhaps one of the biggest mistakes government made when introducing these changes, was introducing them all at once.
“There was about four of five things they were implementing all at once and I think the confusion was that people didn’t understand what the changes were, so the rumours started,” Wilson explained.
“Perhaps government could have maybe communicated a lot better in the very beginning. I don’t think there was enough communication on this because this is one of the more positive things that government was trying to do, to help people retire comfortably.”
WHAT’S NEXT FOR THESE REFORMS?
According to the 2015 Budget Review, the taxation of contributions and the rules on compulsory annuitisation for pension funds, provident funds and retirement annuity funds will change from 1 March 2016.
“The level of deductible contributions will be limited to 27.5 per cent of the greater of taxable income or remuneration per year,” it said.
“An additional amendment will be investigated to correct an omission in 2013 that inadvertently excludes some retirement funds that enjoy the benefit of higher deductions without being subject to the uniform annuitisation rules.”
OTHER FACTORS IN THE FINANCIAL SECTOR
In addition to the proposed retirement reforms, the minister spoke about a number of other financial sector reforms during the 2015 review.
“I am pleased to confirm that with effect from 1 March 2015, the new tax free-savings accounts will be available,” Nene said.
“The bill establishing two new regulatory authorities, the so-called “twin peaks” reform, will be tabled this year. We have strengthened regulations for banks, and will be doing so this year for insurers, derivatives and hedge funds.”
Nene added under its curatorship, South African unsecured lender, African Bank is now generating positive cash flows.
“We announced a seven billion rand backstop last year, but our expectation is that the bank will be stabilised without recourse to taxpayer funds,” he stated.
“The problem of excessive household indebtedness remains a serious challenge. This results in part from poor market conduct by lenders and financial advisors. We are engaging with the major banks on further steps to be taken to assist over-indebted consumers.”