Financial Liberation – By Mark Thompson, CEO, Southern Charter – Financial Liberator
First, create 200 000 black micro entrepreneur financial planners.
Then, enable a better income in retirement for all!
South Africa has one of the most successful retirement fund industries in the world, as approximately 10 million people participate in some form of retirement funding. This represents 50% of the work force. This success is a tribute to the highly successful market-driven distribution channel that encouraged workers to voluntarily contribute towards their retirement.
Pravin Gordhan’s Crocodile Tears…
Regrettably, only 6% of the retirement funders get to retire financially independent. It is only this 3% of the workforce that National Treasury has a concern for regarding the longevity of their retirement incomes, as 90% of the annuities are now placed with living annuities today rather than guaranteed annuities provided by the life insurance industry. Of the guaranteed annuities, 90% are level term annuities guaranteeing retirees certain poverty in an inflationary world! Incidentally, the move to living annuities is a worldwide phenomenon, as life insurance companies cannot provide inflation-proof annuities at a reasonable or fair rate.
National Treasury’s concern is that the draw down and costs are too high on living annuities. After all if 50% of the work force don't have a pension, their costs are of absolutely no consequence to you!!! We think the National Treasury’s concern is misplaced and that the Treasury should focus on job creation and use it’s power to create an enabling environment for young black financial planning entrepreneurs to flourish.
National Treasury’s proposal
The National Treasury discussion paper’s recommended solution focuses on the narrow concern of longevity. This potentially destroys the existing successful distribution channel by not allowing members investment choice, cutting the fees significantly and it throws a life-line to a dying life insurance industry by proposing to force members to invest the first R1.5m of their retirement funds in a guaranteed annuity, guaranteeing retirees certain poverty!
The Financial Liberation Movement’s Alternative;
We see an opportunity to create 200 000 black micro entrepreneurs, providing a basic financial service to the 50% of the workforce not covered by retirement funding. That’s 10 million people not providing for retirement who should be saving for retirement.
In addition, we see an opportunity to simplify the retirement funding industry. An opportunity to save fees and transaction costs and a real opportunity to increase national savings.
With due respect to both the honourable Trevor Manuel and our Reserve Bank Governor Gill Marcus, the Financial Service sector is not adequately considered when job creation is dealt with in the National Plan. It is our belief that the emerging black middle class would welcome the opportunity of being afforded the services of black financial advisors.
What actions are required to create 200 000 black financial planner micro entrepreneurs?
From the asset managers – the likes of Allan Gray, Coronation, Investec, Foord etc.; companies with significant assets under management and financial resources. Pro-actively train black learners in the basics of financial planning, for placement with the independent financial advisors. Much like what the life assurance industry did twenty years ago, providing opportunity for those with an entrepreneurial flair and who are willing to work.
From the Independent Financial advisors – Provide basic financial planners internships and the opportunity to learn the practical skills required to operate in the market. They can initially operate at a level below the qualified financial planner, with their objective and aspiration being becoming a fully qualified financial planner with the ability to run their own practice.
From Government – Provide a positive and enabling environment. Consideration could be given to providing these basic financial planners with a basic income; and making saving for retirement compulsory.
Our Retirement Reform Proposals - Keep it Simple;
Our ten-point plan that we believe will build a better retirement for all;
1 ) The naming convention, Retirement Annuities should be renamed Personal Pension Plans and company retirement funds, whether they are pension or provident funds, should be renamed Company Pension Plans.
Taking the jargon out of the industry and simplifying the terminology will allow members a better understanding and increase motivation to take responsibility for their own personal retirement plans.
2 ) Tax incentives should be consistent, trusted and harmonised as planned, except, capping the retirement deductions is, we believe, misguided, as the targeted tax-paying members are already paying the top tax bills and this may disincentivise future retirement savings.
In addition, this may also prejudice the new found success of a previously disadvantaged, excluded group of black members who have not had the opportunity to build significant funds over their relatively short business lifetimes, for socio-political reasons.
3 ) Introduce Compulsory Contributions; A target should be set for all tax payers to be contributing at least 9% of their taxable income into retirement savings. This can be monitored on submission of their tax returns or SITE returns over say a nine year period, starting at 1% pa and increasing annually.
This would begin to achieve a truly better retirement for all! By funding their retirement adequately, members would create a better retirement for themselves.
4 ) Regulation 28 Compliance should apply to all retirement provisions. All investment aspects of the retirement fund industry should be Regulation 28 compliant.
5 ) Investment Options; To be constitutionally correct and not prejudice the poor, all members should have access to all the available investment options;
The default option for members who do not wish to manage their asset allocation or fund manager selection should be cost-efficient lifecycle- staged portfolios. Simply, growth, balanced and defensive. No advisors required.
Whether members wish to select their own portfolio of shares or unit trusts, elect to guarantee a portion of their income or wish to use an advisor or not, this should be their own choice.
It is our firm opinion that legislating by decree that members’ retirement funds go into guaranteed annuities amounts to the life assurance industry taking advantage of the poor and is not constitutional.
6 ) Limit Options at Withdrawal; 90% of members who withdraw before retirement do not preserve their retirement funds. This represents the biggest single leakage point in the retirement industry. With immediate effect, when a member leaves a pension or provident fund, those funds should be transferred directly to that member’s Personal Pension Plan. And should only be accessible at age 55 as with RA’s (Personal Pension plans.)
7 ) Income Withdrawal Prior to Retirement. Members should, in the event of their dismissal being due to a retrenchment, be able to access their funds on the same basis as if they were retiring e.g. maximum 1/3 cash with 2/3rds as an annuity. Doing away with preservation funds would simplify the retirement funds business and save costs.
8 ) Income options at Retirement. Applicable to Pension and Provident funds and Retirement Annuities. Up to 1/3 in cash may be withdrawn with the balance of 2/3 being retained in your Personal Pension Plan, from which your income is withdrawn. A transfer to an annuity would fall away. Doing away with Annuities would save both fees and transaction costs.
9 ) Income conditions in your Personal Pension Plan at Retirement. Keeping your plan simple; 1) Regulation 28 compliance would be maintained at retirement. 2) Your Life stage risk-profiled default portfolio strategy would be maintained, giving you the best opportunity to beat inflation and providing you with a real income. Guaranteed poverty is not a viable option. 3) Retirees would be able to purchase a guaranteed annuity within their Personal Pension Plan at the appropriate investment time. 4) The minimum income withdrawal would be done away with, leaving members the option to draw an income only when they wanted to. 5) The maximum drawdown would be set at CPI +7% with a caveat that a drawdown would never be allowed to reduce a member’s capital to a level less that what would provide the equivalent of the government welfare grant for retired citizens. A real inflation-protected income is the solution.
10 ) National Treasury RSA Retail Bond Funding. We understand that the National treasury may wish to use retirement funds via the bond market to fund infrastructure in SA. National Treasury should consider registering a Unit Trust fund that held only National Treasury Bonds – RSA Retail Bond Fund. If National Treasury intends to use the retail market to raise funds they should consider obtaining FSB approval and becoming a licenced financial service provider so that we as advisors can legally support their effort to raise capital. Should National Treasury require funds, regulation 28 should be adjusted to include an allocation to this fund as a minimum?
In conclusion, we see an opportunity to build a significantly larger non-racial successful market-related financial service industry, an opportunity to simplify a complex industry, reduce both transaction costs and fees, an opportunity to double the number of workers saving for retirement, an opportunity to significantly increase the investment savings pool and the GDP of our country.
We see an African solution to an African retirement problem. As we are not living in the UK, a developed first world financial model does not fit our world. Above all, keep it Simple. Our experience is more aligned to the Chilean experience where the introduction of Personal Pension Plans triggered economic growth and the creation of many jobs.
More than anything we need to create jobs so that we can deliver on our Social Justice commitments to our people. We see the asset management business getting significantly involved in the creation of financial industry-related jobs in SA, creating a whole new class of micro entrepreneurs.
We see National Treasury committed to doing the right thing and being part of this job creation nation-building process, facilitating change in the financial service industry. Together, we are building a nation and we look forward to serving you with pride, South Africa.
Mark Thompson, CEO, Southern Charter – Financial Liberator