Budget 2023
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Govt reviews pricey retirement annuities

Cape Town - National Treasury is to conduct a review of retirement annuity products, which it says have a reputation for "high costs and consumer abuses".

In a "policy document" released on Wednesday, it also said the retirement funds industry was "characterised by poor disclosure", which could contribute to high charges as consumers were not able to compare products.

The document said retirement annuity products served a critical role in encouraging long-term savings.

"However, they are also characterised by a reputation for high costs and consumer abuses," it said.

"National Treasury will embark on a review of the annuity market with the objective of facilitating competition, reducing costs, promoting flexibility, and enhancing disclosure and consumer protection."

It said there was a need to improve disclosure, particularly when it came to highlighting the difference between a guaranteed annuity and a living annuity.

"More effort can be made to ensure that investors are aware of the different costs upfront," it said.

In its budget review, also released on Wednesday, Treasury said it would consult with pension fund industry bodies this year to draft a code of ethics and address concerns over fees.

The policy document also said the introduction of mandatory preservation of pension funds was "critical", and it planned to consult "all relevant stakeholders" on this issue this year.

It said that a survey of workers retrenched in 2009 and 2010 showed that a mere 10.2% preserved their pensions, while 89.8% took a cash payout.

"During the same period, a dismal 2.4% preserved retirement benefits from divorce settlements against 97.6% that went for payouts."

It said individuals who used annuities were restricted from withdrawing any of their savings until the age of 55.

There had been much debate about the balance between the mandatory restrictions on withdrawals, and the need for flexibility of access to retirement annuity funds.

"Consideration is being given to enable some restricted access to retirement savings, while also promoting the need for pension fund savers to retain their savings or preserving," it said.

The document said the current requirements for collective insurance schemes to offer living annuity products - which included capital of R10m and a long-term insurance licence - seemed onerous, since living annuities did not offer any guarantee.

Enabling companies to offer living annuities without the need for a long-term insurance licence could open the market and foster competition.

"It is therefore proposed that the list of eligible living annuity providers be expanded to other intermediaries (eg collective investment schemes and government retail bond issues)."

It also said there was a need to "align and standardise" fees payable on annuity products.

"National Treasury, together with the Financial Services Board, will also be formally engaging with the industry on high and opaque charges, especially on products such as retirement annuities, to better understand their cost structures."

The document said one solution to managing retirement costs or fees was through economies of scale.

There were currently too many pension funds to allow for cost efficiencies for members, and although the number of active funds had declined to 3 200, further "consolidation" could still be achieved.

"A legal threshold can be set at which a fund will be registered by the Financial Services Board. Further, smaller employers should be encouraged or required to join umbrella funds," it said.

Treasury would look at the possibility of bringing all public sector funds into the same regulatory framework as private pension funds.
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