Defusing the time-bomb
National Treasury reform proposals2 suggested that the concepts of RFI and NRFI may soon be scrapped. Tax incentives would be based on percentages of total income instead of RFI and NRFI, although the exact definitions are still uncertain. While sponsors using a TCTC basis would not be compelled to change their fund rules to have pensionable salary reflect total income, it is expected that many would do so. Total income in this context is technically the greater of taxable income and employment income.
If the contribution rate toward retirement savings remained fixed, then contributions to retirement funding could shoot up dramatically. For example, an employee with a 70% pensionable pay percentage would pay 43% more towards retirement funding, and have a reduced level of take-home pay.
Employers, unions and retirement funds need to take corrective action before these changes are implemented as well as prepare for their implementation. While it would be premature to focus on the specifics of adjusting to the proposed tax regime, there are some general principles that should be borne in mind.
Show employees the money
As mentioned before, very few retirement fund members are shown what their projected benefits are in rands and cents. In response to this, some funds have started introducing benefit statements to put things into perspective and allow members to make more informed decisions about whether they are on track for retirement and whether they have enough death and disability cover in place.
Where employees can choose their pensionable pay percentages or their contribution rates towards retirement funding, they should be shown the consequences on their disability, death and projected retirement benefits at the same time.
Rethink goals
Research suggests that the 75% replacement ratio may be too low for many South African households3. Trustees need to apply their minds to what a suitable retirement goal might be and use this goal as part of their asset-liability matching. Explaining the rands and cents impact of financial decisions can be much more beneficial than discussing traditional investment return metrics such as performance relative to benchmarks4.