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Cosatu this week arguably launched its most strongly worded attack on a government policy since it helped put Jacob Zuma in the presidency in 2009.
President Zuma signed tax amendments into law over the festive season that will, over time, in effect turn provident funds into pension funds, which will force many workers to buy annuity products instead of receiving lump sums on retirement.
Zuma is “nationalising” workers’ savings, an act of “outrageous provocation” that will have “dire and lasting consequences on the relationship between government and the workers”, reads a long Cosatu press release this week after the announcement.
Cosatu’s position has some solid bases, even according to experts in the retirement fund business, which was this week generally applauding the amendments.
The problem comes in with the pitiful annuities workers near the new “de minimus” threshold would be expected to buy.
Someone just reaching the threshold of R247 000 will be obliged to put R165 000 into an annuity.
That would probably lead to a monthly pension of between R1 000 and R2 000, at best.
The annuity market did not necessarily provide good value, especially not for low earners, who would in future be forced to buy annuities, said Michael Prinsloo, head of employee benefit consulting at Alexander Forbes.
“There is a solid link between mortality and poverty. Those with the most value live longer,” he said.
This meant that the lower-income earners who started buying annuities could end up subsidising the rich because they were less likely to live long enough to claim all their funds, he told City Press.
This echoes Cosatu’s argument.
“We don’t have life expectancy of 80 or 90 years, so we will only access part of our savings in the end,” said Cosatu’s national spokesperson, Sizwe Pamla.
Another major problem is the interaction between the new requirement to buy annuities and the state’s old age grant system.
People with savings near the R247 000 threshold will be getting out annuity pensions comparable to the state pension.
But at the same time, this might disqualify them from the state pension in terms of the means test.
“Someone now getting R2 000 a month could argue that if they had saved nothing, they’d still have R1 500 a month, so there is no incentive,” said Prinsloo.
According to him, Alexander Forbes’ view was that the new reform had to go hand in hand with a scrapping of the means test for state grants – a massive overhaul of the social security system.
This is part of the “comprehensive” reform that Cosatu said should have occurred at once instead of one controversial element now getting enacted by itself.
Pamla admitted that the statement this week could be seen as a “disproportionate response”.
This is all the more so because most workers will at first be completely unaffected.
The tax amendments in essence make provident funds more like pension funds in two important ways:
- Like pension funds, provident funds will in future only pay out one-third of a worker’s savings as a lump sum. The rest has to be turned into an annuity – a monthly pension.
The annuity rule only applies if you retire with more than R247 000 in your provident fund. This will probably get increased in line with inflation into the future.
The majority of provident fund members will apparently fall below this “de minimus” threshold.
Low earnings, along with the commonplace practice of cashing out when moving jobs, meant that “a lot of people will never reach the threshold”, said Alexander Forbes’ Prinsloo.
Treasury has built in a long phase-in period, which means that it will be years before any significant number of people fall under the new dispensation. Funds that have been saved up to now remain immune.
- Provident funds and pension funds will have the same tax exemption. Workers will be able to put up to 27.5% of their wages into a fund, tax-free.
The actual practical effect of these changes are, however, hard to gauge for the majority of working South Africans.
While Treasury has insisted that the reforms will give half of the country’s provident fund members more money in their pockets because of the tax exemption, they are unlikely to really affect most people.
The average savings rate among provident fund members was about 15%, said Prinsloo.
The reforms that had just been announced might very well not actually practically affect the majority of Cosatu’s members, but that was missing the point, argued Pamla.
One the one hand, Cosatu intends to continue recruiting young workers, so the reform will hit its members further down the line.
More importantly, the new annuity rule would almost certainly be the first of many new laws, said Pamla.
“We say it has to be comprehensive, not a piecemeal approach.”
In the background is the threat of the logical next step to encourage private retirement savings that Cosatu has been fighting since literally before its own birth: compulsory preservation.
One of its predecessor Fosatu’s first major policy battles was against a 1981 bill to enforce compulsory preservation of workers’ retirement funds when they changed jobs.
That bill was met with mass mobilisations and 30 strikes – and was ultimately withdrawn by the apartheid government.
The amendments represented a patronising “colonial attitude” that the state must intervene to “save you from yourself”, said Pamla.
“It is arrogant to say workers waste their lump sums. People use it to buy houses, pay debts, school fees, start businesses ... You can’t do that with monthly instalments.
“They don’t want to do the real hard work of addressing apartheid wages. Instead, they go for the soft spot. It is only a certain class that gets affected. Think about what happens when a law hurts big business. They back down.”
Cosatu intended to apply for a section 77 protest from Nedlac, and Pamla said the political course of action really lies in the hands of workers.
The extent to which the amendments actually change anything by themselves is up for debate.
According to Prinsloo, last year, about 3 000 members of Alexander Forbes’ provident funds retired. On average, they had R1 million in savings, but the median was only R435 000, he told City Press.
That means there would be several members with savings near the threshold.
“You find that about two-thirds of members go with lump sums and a third buy annuities,” he said.
The ones going for lump sums tend to be the ones with low savings.
“Absolutely nothing” in the amendments prohibited workers from still cashing out their provident funds before retirement, Prinsloo told City Press.
This practice would only be blocked by the compulsory preservation rules Cosatu has fought since the 1980s.
Treasury also said about half of an estimated 2.5 million provident fund members would be unaffected because they retired with less than R247 000 saved.
In fact, 51% had less than R75 000 saved, according to an anonymous sample from an unnamed fund it used last year.
According to Michelle Acton, principal consultant at Old Mutual Corporate Consultants, “approximately two-thirds” of members retiring from the Old Mutual umbrella provident fund left with savings below the R247 000 level.
“The problem is that you need to set a threshold somewhere,” said Richard Carter, head of product development at Allan Gray, which manages the funds of many South African provident funds.
Treasury had apparently reasoned that it would be fine because few workers would be affected any time soon.
Carter suggested that the amendments might not turn out the way Treasury hoped.
“I suspect funds may get diverted away from provident funds in the first place,” he said.
Unions could push for reduced contributions and instead start new investment vehicles, he told City
Press.
“There’s not much of a tax benefit in it, except for high marginal tax rate taxpayers. Some small amount will go to the annuity market, but I’m not sure it will be a big deal for them.”
