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Strengthening retirement savings |
17 May 2012 I agree with a lot of what National Treasury has to say in their "Strengthening retirement savings" document. My main criticism is that too much weight is being placed on restricting behaviour and not enough weight is being placed on the Constitutional requirement to advance the financial freedom of South African citizens, and even worse, in some instances the legislation actually prevents people from making sensible financial decisions.
Firstly, do no harm (i.e. don't make the situation worse for people than if there were no regulations).
Don't get in the way of people making sensible investment strategies.
Maximise the freedom of South Africans to save in the manner of their choosing.
Avoid regulatory measures which distort capital markets.
Freedom with transparency - let providers of financial products do what they want, so long as they are fully transparent about it.
Protect those who don't know what they are doing.
Government's main active priority is to ensure that people save a minimum amount so that they don't become a burden on the State (i.e. on other citizens). Secondly, they don't want people to become burdens on their families in old age, so they want to encourage people to save in excess of the bare minimum.
Encouraging efficiency, especially in the form of low costs.
Calculating a minimum amount which individuals need to save in order that they don't become a burden on the State. This is invested in a National Savings Fund, and paid out by Government from the point of retirement, in the form of an inflation-linked pension (linked to the inflation experienced by poor retirees). This can replace the current state old age pension.
A limited amount of savings in excess of the minimum amount from "pre-tax wages", with:
a sensible default choice for those who don't know what they're doing.
employees aren't forced to belong to company schemes. If employees feel their employer's scheme is not up to scratch they can opt out and save elsewhere. This enhances human freedoms & encourages employers to set up great schemes.
those who opt out of the default have the freedom to invest as they please, including being allowed to (1) use retirement savings to pay off the bond on their properties (their property then becomes an asset in their retirement fund), (2) allowing people to do their own stock selection (why force us to enrich asset managers?)
Removing all taxes on interest, dividends & capital gains. This will encourage savings, reduce distortions in capital markets & simplify tax returns (the only losers are tax planners, who suddenly find themselves out of work!). The cost of this is financed by an increase in the company tax rate.
Treasury shows on a graph that SA new generation retirement annuity reductions in yield of about 2.4% p.a. and some 2% for SA Umbrella Funds. If I was in a scheme where my reduction in yield was 2.4% p.a. I'd want the freedom to leave immediately. As an individual I can, for example, invest in Allan Gray's Balanced fund, which had a total expense ratio of 1.4% last year (including trading costs & performance fees).
National Treasury's proposal to establish a market conduct supervisor doesn't go far enough. I further propose that all retirement funds be required to publicly disclose their total expense ratios over the previous year, so that we can see in a register who the bad boys are, that need to be avoided. This will allow people to factor in the quality of a company's retirement fund, when deciding whether to go work at a certain company.
"Passive investment management, which is significantly cheaper and not demonstrably inferior to active management over the long term, is under-utilised in South Africa." I'm an advocate of passive investments & ETFs for anybody who doesn't consider themselves an investment expert. Most trustees & even investment consultants find it difficult to predict which asset managers are going to outperform, and I see this as being a key part of a sensible default.
I agree with exemptions being granted from the FAIS Act for certain standardised products.
I agree with harmonising disclosure requirements.
I'd like to better understand the point on "preventing cross-subsidisation of services", but tentatively it sounds like a good idea.
"Developing standardised products into which retirement funds can automatically place members when they retire, without requiring financial advice" - sounds good. The products which best matches liabilities at retirement are inflation-linked annuities. I'd like to see more government inflation-linked debt as well, to back these. Or possibly they could be allowed to top-up the proposed Government inflation-linked pension paid from the National Savings Fund.
I think everybody should be able to continue to make their own investment decisions on the excess over the proposed minimum pension, not just the higher income individuals. As mentioned before, this should include the ability to invest where they want, including stock selection.
This is the single worst thing about our current regulations, so deserves a few words of explanation. It's a dangerous strategy to go into debt at the same time as saving, yet our regulations ensure that many South Africans owe a lot of money on their property mortgage at the same time as having an equivalent amount of savings in their retirement fund. This enriches banks (who collect a fee on the mortgage, which would otherwise be paid off) and asset managers (who collect a fee on the retirement savings, which would otherwise be used to pay the mortgage off); but is risky for individuals (who effectively are borrowing money to invest).
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