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Medium-Term Budget Policy Statement effect on the retirement industry

Review process to change Regulation 28

Dumo Mbethe, CEO of Momentum Corporate, confirmed that Momentum Corporate continues to support a review of Regulation 28 to allow for increased investment in infrastructure under circumstances that achieve the right outcomes for retirement fund members and are subject to the approval of retirement funds’ trustee boards. The review was announced in Minister of Finance Tito Mboweni’s 2020 MTBPS.

Mbethe highlights the essential role that private investment can and should play in restarting the economy and stimulating job creation. Investing in properly managed infrastructure projects and SOEs under the right circumstances could create value for members and broader society. The right circumstances require:

  • an investment where the return expectation is well understood,

  • that the risk of the investment can be accurately quantified, and

  • that steps can be taken to protect that investment.

These requirements are particularly important where members’ retirement savings are in defined contribution retirement funds or savings vehicles as the member carries the investment risk. Mbethe stressed that any lower-than-reasonable investment return will impact directly on their retirement outcomes. Confirmation in the MTBPS that the interests of retirement fund members must come first is welcomed.

Annuitisation of provident funds

Mbethe welcomes the certainty provided in the MTBPS that annuitisation for provident fund benefit payments will indeed come into effect on 1 March 2021. This will enable employers to consolidate various funds which should drive cost savings and greater uniformity of benefit structures for employees. It is important that boards of trustees ensure that their fund administrators’ systems are updated to ensure accurate record keeping.

Retirement funds, particularly provident funds, must embark on clear communication with members to ensure that they do not resign in panic. Annuitisation only applies to contributions post 1 March 2021 for members who are younger than 55 on 1 March 2021. Members older than 55 at 1 March 2021 will be allowed to continue on the current provident fund basis, subject to them remaining in the same fund up to retirement.

Existing provident funds will need to ensure that they are regulation 39 compliant by providing an annuity strategy and may also need to re-evaluate their default investment portfolios to cater for the changed nature of the retirement benefit. These boards of trustees will need to consider partnering with solution providers who can assist members in understanding their options and selecting appropriate investment and annuity strategies. The importance of offering retirement benefit counselling to ensure members are invested appropriately before retirement and that they choose appropriate annuities at retirement, becomes more critical than ever.

Pre-retirement withdrawals

Mbethe is cautiously optimistic by the news that legislation will be passed next year to provide carefully-managed early access to retirement savings, and that this will be subject to mandatory preservation requirements. He states that legislation will provide clarity on how accumulated retirement savings can be used during a national disaster like Covid-19 and lockdown regulations.

He cautions that early access to retirement savings should be implemented with great care as if it drives the wrong behaviour, it will impact negatively on the poor savings culture in South Africa, which inevitably will exacerbate already suboptimal retirement outcomes.

The proposed move does however present an opportunity for a future system that allows access but also compels preservation. We know that saving through an employer provided retirement fund is the largest pool of savings most working South Africans will accumulate in their lifetime, so it is important that it is deployed very carefully in addressing short-term financial pressures while ensuring that the longer term objective, i.e. providing for retirement, is secured. This will also ensure that additional pressure on the fiscus is minimised.

Retirement funds have a significant role to play in empowering members to improve their financial situations by offering retirement benefit counselling services that include financial coaching. Retirement funds should proactively reach out to members through various platforms to help improve their financial literacy, get on top of debt and support smart financial decision making. Momentum Corporate’s benefit counselling engagements increased by over 80% year on year, up to the end of June 2020.


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