Employment benefits are usually the last thing on the minds of SMEs and entrepreneurs. Running their factory and covering monthly overheads is what they’re really preoccupied with.
However, most come to recognise the benefit once they see that the ability to offer employees a suite of benefits puts minds at ease and typically improves operational performance. At the very least, it helps with attracting and retaining a better quality of employee.
It’s good that this is so, because retirement savings and a national savings scheme are likely to become compulsory for all employees in time, and employers should start planning now. Currently, only 50% of employed South Africans belong to a retirement fund, and government is considering regulations to increase this dramatically.
As to why: the country’s savings rate at 16% falls well behind even similar developing countries such as Russia (28%), India (34%) and China (53%).
Social security reforms
As part of its proposed social security reforms, government wants to bring about a compulsory savings scheme. The current proposal is that all employed individuals should pay to a compulsory fund a contribution of their annual income, up to a cap of R150 000 a year.
The contribution will be directed toward funding retirement savings, as well as a death benefit and a disability benefit. Current thinking is that the level of contribution would be 10% of earnings.
This contribution would go into the National Social Security Fund (NSSF). A pension received from the NSSF would amount to at least 40% of the annual income of the individual before retirement. Individuals could top this up with further tax-deductible contributions into either their own retirement fund or a defined contribution section of the NSSF.
For those individuals not currently belonging to any retirement fund, it’s likely to be onerous to find the additional money to save. Government is considering addressing this with a form of contribution subsidy to lower income individuals to assist and encourage them to contribute to the NSSF, but employers may want to soften the blow for other employees (and their own company contribution) by phasing in a scheme over the next few years.
National Treasury lists three broad objectives of retirement reform: firstly, to improve our rate of savings; secondly, to ensure retiring individuals have a reliable income; and thirdly, it has to be fair and low cost.
The first issue involves increasing the number of people contributing to retirement savings, and secondly introducing compulsory preservation so that those who have saved towards retirement cannot access their savings to spend it.
At the moment, members have three options when they leave an employer: they can take their retirement savings in cash, transfer it to a new employer, or transfer it into a preservation fund or retirement annuity. Invariably people take the first option.
The impact of this is that at retirement, members who ought to get a benefit equal to 70% to 90% of their final salary, in fact get only 30%.
To address this, National Treasury has proposed that some level of preservation of retirement become a default option when employees change jobs.
Access to retirement savings
As the new arrangement cannot be retrospective, compulsory preservation would not affect current retirement savings, which would still be available when an employee changes jobs. Further, Treasury is proposing that the unemployed be given some access to their preserved retirement savings and that access will also be allowed in cases of demonstrated medical need.
Post-retirement is also being addressed. Most people use their pension savings to purchase an annuity on which to live in retirement. Treasury’s proposal is to reform the annuity market, having identified the level of costs of some retirement savings products as an issue. By far the largest component of costs is the charge for financial advice, with the other two components being asset management fees and administration.
Treasury is also seeking to simplify taxation of retirement savings. Employer contributions will be included in employee’s remuneration as fringe benefit. Individuals will be permitted a deduction of up to 22,5% of income if under 45, and 27,5% if over 45 on all contributions made to pension, provident and retirement annuity funds.
Three papers have been released by National Treasury so far, one in May covering ‘Strengthening retirement savings’, and two in September covering preservation, portability and annuities. As of the time of writing, a further two were expected to be released in October.