Abstract
Orientation: National Treasury acknowledges that 90% of all South African retirees will not have adequate financial resources in order to sustain themselves.Research purpose: This study aimed to address the retirement income shortfall by assessing possible changes to prudential retirement fund regulations.Motivation: Asset allocation plays a pivotal role in achieving the required rate of return of any portfolio. However, the restrictions on asset allocation imposed by article 28 of the Pension Funds Act of 1956 limits pension funds’ ability to achieve adequate returns.Research approach: A survey was conducted among chief investment officers (CIO) of the top 25 South African investment management companies.Main findings: The study proposes changes to the Income Tax Act, the Collective Investment Scheme Control Act and Regulation 28 of the Pension Funds Act.Managerial implications: The proposed framework should result in fewer pensioners becoming dependent on the state for their pension and empower pensioners to have greater amounts of post-retirement savings.Contribution: The contribution of this article is the proposed changes to the regulatory framework, which could – ceteris paribus: (1) Enable SA retirement fund investors to contribute to the retirement wealth pool in an unconstrained manner. (2) Enable SA retirement fund assets to increase investment returns by as much as 1.21% per annum. (3) Increase the average SA GRRs from the current projected 10.0% to 10.7% by 2045. (4) Increase the efficacy of the existing tax incentives. (5) Reduce spending requirements for grants in the national budget.
Highlights
The South African National Treasury acknowledged that only 10% of South Africans will be able to maintain their preretirement level of consumption after retirement (National Treasury 2012a)
Personal spending and budgeting habits that cause retirement funding shortfalls may include, but are not limited to, one or more of the following: firstly, insufficient accumulated funds at the time of retirement because of either saving too little (WorldatWork 2009) and/or saving too late (Edelstein 2013) and/or not saving frequently enough (Van Rensburg 2013); secondly, personal spending and budgeting habits that cause retirement funding shortfalls may be caused by excessive withdrawals (Barclays Wealth 2013); and, lastly, personal spending and budgeting habits that cause shortfalls may be caused by insufficient investment return growth before or after retirement because of poor investment decisions (McGrady Financial 2011)
The majority of factors relating to personal spending and budgeting habits relate to personal retirement planning and are issues that could potentially be addressed by way of an appropriate retirement plan, assuming the regulatory framework allows for efficient flow into retirement fund vehicles (PI Financial 2013)
Summary
The South African National Treasury acknowledged that only 10% of South Africans will be able to maintain their preretirement level of consumption after retirement (National Treasury 2012a). The issue stems from various factors relating to personal spending and budgeting to more complex issues on a macro- or socio-economic level. Macro- and socio-economic issues that cause retirement income shortfalls may include, but are not limited to, inflation (Bermuda Sun 2012) and/or increased longevity [Pfau 2014; South African Medical Research Council (SAMRC) 2015] and/or industry and regulatory impact factors (including insufficient investment growth before or after retirement because of suboptimal regulations within the financial services regulatory environment) (Organisation for Economic Cooperation and Development [OECD] 2012; Pfau 2014). The majority of factors relating to personal spending and budgeting habits relate to personal retirement planning and are issues that could potentially be addressed by way of an appropriate retirement plan, assuming the regulatory framework allows for efficient flow into retirement fund vehicles (PI Financial 2013). The individual’s personal financial knowledge coupled with his or her goals, income and desire will all combine to define that person’s wealth picture (Wealth-Steps.com 2012)
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