Olefile Moea Fairheads

The other side of the T-coin

November 2016

By Olefile Moea, Executive Director, Fairheads Benefit Services

We are cognisant of the retirement pressures that we face as a nation and the consequences of not saving for retirement. This is why the authorities have put forward the idea of compulsory partial annuitision of lump sum benefits on retirement. As we all know, the idea is a fairly contentious one and therefore consultations are ongoing with all parties to decide when and how retirement reform’s “T-day” should be implemented in full.

The one side of the T-coin is painted with good intentions but the other is painted with unintended challenges when seen from the side of ordinary workers.

During the working life of an ordinary employee, such as a miner, the daily challenge remains creating a better life for himself and his family. The salary that he earns is used to survive in the present and the lump sum at retirement is the hope of this present changing in the future. This might sound like a contradiction but let’s explore it a bit!

There are basically three options

Take an employee who hails from the rural areas and grew up in a hut. He works and lives in the city, but when he goes back home, he still sleeps in the same hut. After seeing the houses in the city and witnessing how people buy new houses, his only wish is to one day have his own house. There are three options to attaining this wish; one is to use his salary to obtain a bond and make monthly repayments which is a challenge as this will simply not leave enough money to send home for the family to survive.

The second option is to wait in line for the government to build him an RDP house. In light of the fact that the family is big and there are several huts in the estate, how many RDP houses will have to be built? If he does not obtain an RDP house, the option will be to renovate the one RDP house to fit the whole family – thus reverting to option one of having to secure finance.

In addition to this challenge are the other financial responsibilities he carries, such as children’s school fees, uniforms, medical costs, food for the family and travelling costs for both himself and the family.

There is one hope – the third option if you wish – that allows this employee to survive in the present whilst looking forward to the day his dream is attained in the future. This option is contained in an envelope – a benefit statement that indicates the amount that will fulfil his dream when he reaches retirement age. In the employee’s mind, the option is “survive for now with this salary to fulfil a daily living and attain the big dreams at retirement”.

There are many examples of employees who have attained this goal, built houses with their retirement money, bought cars and put their children and grandchildren through school. Granted, some have ended up with zero balance bank accounts and have to depend on the government’s pension grant. Is this a painful experience? It depends on which side of the coin you’re looking at. One side of the coin shows that the dream which has been a work in progress for years is achieved. On the other side you are sleeping in a house and not a hut, but surviving on a government pension only.

Additional challenges

If we had to assume that the employee has one of his dreams achieved e.g. to have a house, whether built by the government or bonded, is it easier to accept one side of the T-coin to the other? Again it depends on perspective.

Another scenario is that some employees are heavily indebted and depend on their retirement lump sum to set them free. If their lump sums are annuitised, will this solve the issue of indebtedness?

Socio-economic conditions and family structures in South Africa also present challenges. Due to high unemployment rates, parents end up having to take care of their children well past their youth days. This is despite having put them through tertiary institutions successfully. Add to this most grandparents’ biggest challenge seen from a beneficiary fund perspective – that of grandparents having to take care of their grandchildren due to parents succumbing to HIV/AIDS. How will the T-coin fall for these grandparents as they worry about their grandchildren’s survival should they pass away. Will annuitisation help given that it would provide a monthly sum? But what happens if the grandparents depart – will the grandchildren survive?

Responsibility lies with all role players

It appears that there are many perspectives to how the T-coin will fall but in every scenario the socio-economic impact must be considered. Each role player will have to fully play its role in order to ensure that retirees are not left with a bitter taste in their mouth as one aspect of their socio-economic requirements were not met.

One role player, the government, has outlined its intention and the merits for its case. South Africa doesn’t have the resources to provide pension grants to each citizen in retirement and consequently it is imperative for currently employed citizens to start saving for their retirement. Compulsory annuitisation is the only way to force people to cater for their retirement. Although this is not yet implemented, perhaps government could consider the option of allowing those with very low retirement thresholds the option of a state pension. This will provide parity in all strata of the workforce, allowing those with low salaries and therefore low retirement benefits nonetheless to fulfil their dreams.

Having two thirds of your pensionable lump sum annuitised might be a realistic option but it can be a huge shock to someone who has spent their working lives knowing that they will get their entire benefit when they retire. Perhaps a phasing-in option may be apt, with the prospective retiree educated and properly counselled on the choices they will have to make at retirement.

It might be possible to appease negative voices if the retiree is given a product that will ensure that they have an income that will sustain them during their retirement and any shortfalls are clearly highlighted in advance so that government intervention in the form of a grant can be triggered.

The government has indeed taken some positive intial steps and must be applauded for increasing the tax-free threshold for lump-sum benefits and leveling the playing fields between  provident and pension funds (which was always confusing to employees).

That said, the envisaged retirement reform is going to be a shifting landscape and clearly there is a need to tread carefully. All role players have the obligation to ensure that those that will be affected are clearly informed of the pros and cons. A major retirement reform of this nature requires a system change and, above all, properly trained and informed financial advisers who will put the client’s needs before any product commission. This is where the government and the industry as a whole will have to be more vigilant – if not, the T-coin will not drop in favour of the retiree.

Published in Fairheads Times, Issue 35, November 2016