In 2013, Government enacted phase one of the Retirement Reform in the Income Tax Act, effective 1 March 2015. This phase was to address retirement savings and provident funds. The aim of the retirement savings incentive was to simplify the contributions to retirement funds to make the incentive more accessible and place a monetary cap in the system to prevent the incentive from being skewed in favour of a few select South Africans. In the case of provident funds, the aim was to give the same protection to provident fund members that pension fund members enjoy (i.e. a regular income in retirement as opposed to an upfront lump sum), but with a very clear shelter for vested rights.

It should be noted that phase one did not affect pre-retirement withdrawals, such as resignation withdrawals or withdrawals from a preservation fund. Whilst discussions around pre-retirement preservation is ongoing, no draft design has yet been included in a draft Taxation Laws Amendment Bill (possibly as phase 2).

On 16 October 2014, National Treasury announced, through a Media Statement, the postponement of phase 1 to March 2016, possibly even March 2017. The delay was reportedly a compromise with the labour constituency at NEDLAC (National Economic Development and Labour Council) in order to allow further consultations between Government and NEDLAC on social security reform. Is this a game changer? Has Government done an about turn on its stated policies around retirement, and have payroll providers and fund administrators wasted money on systems and procedures changes that will not be required?

If the resultant compromise was a moratorium on Retirement Reform changes until the NSSF (National Social Security Fund) was designed and funded, the answer would have been, Yes.  However, that is not the case; it is clear from the draft Response Document to the SCOF, that the National Treasury (supported by the SCOF) is still committed to the phased approach to Retirement Reform. The draft Response Document states that the effective date of the reforms will be 1 March 2016 in order to allow a year for further consultations at NEDLAC. However, should there be no agreement at NEDLAC by end-June 2015 (and we would assume a workable alternative), the implementation date may be moved to 1 March 2017.

What does this mean for employers, funds, members, trustees and other stakeholders? It seems that Government’s decision on whether to continue with phase one or to do a complete overhaul will be discussed with the SCOF when considering the 2015 Draft Taxation Laws Amendment Bill, and that the decision will be made by 31 July 2015.

Between now and July 2015, government will no doubt consider some tweaks to phase one, as there are certain critical matters that have not yet been resolved. For example, issues such as the tax treatment of South African employment related employer contributions to foreign retirement funds, the effect of withdrawals on provident vested rights (first-in-first-out?) must still be clarified. In order to be included in the draft Taxation Laws Amendment Bill, 2015 and so as to coincide with the 1 March 2016 changes, these tweaks should be addressed in the 2015 Budget.  

At this point, it is advised that all changes to systems, processes and fund rules based on phase 1 are put on hold. South Africans should wait until they receive an indication on 31 July 2015 on whether they should spark to get ready by 1 March 2016, or whether the implementation date for phase 1 will be further delayed. In my view, a further delay should result in a totally new design and model. Should  any changes be considered prior to July 2015, advice is not a luxury but a necessity.

Whilst this breather has been welcomed by some, concern that the momentum has now been lost is very real. The retirement sector is large, with varied participants. Getting buy-in on the changes from all to make changes without resultant miscommunication is a mammoth task. The recent spate of resignations (mindboggling in this economy) to ostensibly prevent “Government from taking our money” reminds one of the pre-1994 panic on much the same basis. The simple fact is that most South Africans do not know how their retirement and risk structures work. As with anything, if we do not know how something works, we are highly vulnerable to misinformation and rumours. Employers and trustees would do well to use the breather to communicate the current tax consequences, rules, and costs amongst others to their employees and members. It is after all, their money.

Written by Beatrie Gouws, Associate Director, International Executive Services at KPMG