Treasury: Saving must become law

Johannesburg - The Treasury will next month release a discussion document to pave the way for government to lay down legislation making it harder for people to cash in their pension benefits when they change jobs.

This forms part of its plan to introduce a compulsory pension system which will force millions to save for retirement and reduce their dependence on the state when they become pensioners.

Olano Makhubela, Treasury's chief director for financial investments and savings, said this week that the legislation - which will focus on enhancing preservation of pension benefits - could arrive before the end of next June, after the government has engaged in extensive public consultation.

"The legislation will introduce some form of mandatory preservation until people retire or are disabled. Under certain exceptions, we are proposing a restricted withdrawal arrangement, but you can’t withdraw everything," he said.

The second phase of rolling out the compulsory pension system will involve the establishment of a national social security fund, to which every working South African will be forced to contribute.

Treasury is formulating a discussion paper dealing with the nitty-gritty of setting up the fund. The timeframe for the fund has yet to be worked out.

"A lot of work has taken place and we want to get it right the first time round. I am confident we will see it in our lifetime, but it is a big project," Makhubela said.

Frank Richards, head of asset consulting for employee benefit investments at Momentum, believes compulsory preservation is essential to solve the problem of people retiring without sufficient savings.

"We also need to introduce a tax legislation that supports savings. For instance, the interest that you earn on your savings must be tax-free," he said.

But South African Savings Institute deputy chairperson Dr Sheshi Kaniki has warned that rising unemployment and high levels of indebtedness could frustrate plans to force people to save for retirement.

He advised government to build flexibility into the legislation to allow pension contributers to access their benefits should they encounter hard times.

"It is not easy to preserve if you are without a job and income. I think the preservation rule should be waived in special circumstances to allow people with no income to access their savings," he said.

Kaniki encouraged government to go ahead with the pension reforms but advised that in order for the reforms to be effective, they needed to be supplemented by improved financial literacy and a culture of saving.

The mooted system has also been touted as South Africa's best hope of boosting national savings.

Makhubela said: "If we want to grow at 6%, we need to push the gross savings rate to at least 31% of the gross domestic product (GDP).

"We need to focus on households, because they are contributing less to gross savings. In the first quarter of this year, households contributed 1.5% to the country's gross saving rate of 16%, while corporates cover the bulk."

During the past 31 years, the gross savings rate has declined to 16% from 33%, making South Africa one of the poorest savers in the world.

A World Bank study noted that countries that grew at rates of above 6% over the last 18 years had average saving rates of 31% to GDP, like China at 40%, India at 23% and Botswana with 38%.

Makhubela also said higher gross savings would help South Africa to be less reliant on capital inflows to finance its savings deficit, which is financed by short-term capital inflows or pools of savings from foreign countries.

These capital inflows tend to leave the economies of developing countries during periods of financial crisis, disrupting their economies by weakening their currencies and triggering inflation. The rand lost a chunk of its value when the credit crisis hit in 2008.

Makhubela added that a country with a large pool of savings stood a better chance of staving off financial crises like the ongoing debt crisis in the US and Europe, because it can rely on its own savings.

He singled out Japan, which relied on its national savings to rebuild its infrastructure and economy in the wake of an earthquake and tsunami which struck the country earlier this year.

"You don’t need to rely too much on short-term capital inflows if you have high gross savings because short-term capital inflows can ­easily and quickly be withdrawn.”