Latest budget review and what it means for pension funds

The 2017 South African budget review was published on 22 February and provided updates and solutions for pension funds, investment managers and administrators.

In 2014, amendments were made to the Income Tax Act 1962, which stated that the lump-sum benefit accrued to an individual depended on the date on which the individual elected to retire and not on the normal retirement age.

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The budget review proposes that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules. It was previously proposed that employees have a time limit of 12 months to join a newly-established employer umbrella fund but are now allowed to join without time restrictions.

The unclear overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds when determining monthly employees’ tax will now have a more prudent approach and the amount will be spread over the tax year. Government proposes that local collective investment scheme management companies will be allowed to list exchange-traded funds referencing foreign assets on South African exchanges.

South African institutional investors and authorised dealers will be allowed to invest in such funds and will be classified as foreign assets for prudential purposes. South Africa has a well-developed occupational pension system but there are limited coverages and a large number of funds.

The government is considering automatic enrolment as a key and urgent initiative to ensure more workers save for their retirement. This initiative would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party.

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The second revised draft of the default regulations was released for public comment in December last year and the aim was to ensure that the retirement savings of members are better protected from lower charges and provide better value for money, especially to members who do not exercise any choice. While concerns about the blanket ban on performance fees and guaranteed products have been addressed, these may be reviewed in the final regulations published later this year.

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