The National Treasury has published two papers on retirement reforms and non-retirement savings to help consumers get maximum returns when they retire without their savings being eaten up by schemes’ charges.
The publishing of the two papers follows an announcement by Finance Minister Pravin Gordhan during his 2014 Budget Speech last month.
In a statement on Monday, the National Treasury said: “The papers are also consistent with the shift towards a Twin Peaks system of regulating the financial sector, as initiated by the publication of the document titled “A safer financial sector to serve South Africa better” (February 2011).
“In particular, to ensure that customers or members of retirement funds are treated fairly at all times, including after they retire.”
The paper responds to public comments received in respect of the two papers on retirement reform titled “2013 Retirement reform proposals for further consultation”, which was released on 27 February 2013 and “Charges in South African retirement funds” – released on 11 July 2013.
The paper, the National Treasury said, summarises the process of retirement reform from 2011 until the present, and lays out a future direction for the implementation of reforms over the next few years.
Some of the proposals contained in the paper include:
- Implementing auto-enrolment or a mandatory contribution system, provided the system is well managed and well regulated, but a provision will be made to low-income and vulnerable.
- Improving disclosure on retirement charges.
- Consolidating funds. The National Treasury sees a need for schemes to enhance economies of scale and passing these benefits to members.
The paper also proposes that providers simplify their retirement savings products, as most may be competing on the basis of complex product designs instead of focusing on value-for-money for customers.
The paper will also look at how intermediaries are remunerated. The National Treasury said going forward, intermediaries should be paid in a way that won’t create conflicts between their own interests and their duties to their customers.
Following the lessons learnt from the 2008 global recession – where many companies needed to be bailed-out after losing large amounts of investment savings – the national treasury has proposed that an increased “tougher” regulation is needed especially to protect members and improve market conduct practices.
After taking into account comments received on the discussion document titled “Incentivising non-retirement savings” published in October 2012, government will proceed with the implementation of the tax free saving accounts.
“Most comments supported the establishment of a tax free savings proposal. Many comments were received on the proposal to abolish the interest income exemption. The revised proposal now retains the current interest income exemptions, but it is not intended that the exemptions increase with inflation,” the National Treasury said.
As per proposal, individuals will be allowed to open one or two accounts, where they may invest in either interest bearing or equity instruments or both types of investments in each account.
“But total contributions for the tax year may not exceed the annual limit, initially to be R30 000.
“Unnecessary withdrawals will be discouraged by not permitting replacement of withdrawn amounts. A lifetime limit of R500 000 will also apply.”
To ensure that customers are treated fairly, the paper will set principles and characteristics that products should abide by.
“These include simplicity, transparency and suitability. Direct share purchases will not be allowed although most exchange traded funds (ETFs) will qualify.”
The National Treasury and the Financial Services Board (FSB) will also look at a way for government and the industry to determine early termination charges with respect to products with contractual periodic obligations, where customers are currently being charged excessively for terminating their contracts early. – SAnews.gov.za
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