Samantha Jagdessi, Head of Advice & Best Practice, Old Mutual Corporate Consultants (OMCC), answers this critical question.
Employers in South Africa are not legally required to offer their employees pension funds or retirement savings plans. However, many employers provide such plans as part of their employee benefits package. These employer-sponsored funds can be pension, provident, or retirement annuity funds.
Section 13A of the Pension Funds Act states that contributions must be made as provided in terms of the rules of the employer’s Fund. These contributions are deducted from an employee’s monthly salary, and the employer must pay over these contributions to the administrator of the Fund by the 7th of each month.
Employers offering pensions – is it compulsory or optional?
When a Fund is made available to Employees, all eligible Employees must be a member for the scheme to retain its favourable legal and tax status. This is the “compulsory” part referred to in the question. The definition of eligible employees is important. We recommend that Employers looking to establish a Fund or join an umbrella fund discuss with expert Employee Benefits specialists how this will impact their specific set of Employees (such as part-time, temporary, minimum wage etc.).
An Employer is not obligated to set up a retirement fund nor make a pension contribution. However, by offering retirement benefits to employees, an Employer can retain employees and help them to save for retirement. A retirement fund is a vital part of the Employee value proposition. Employers may choose to pay for the costs of administering the funds. However, that amount is automatically considered non-taxable income in the member’s hands.
It makes more sense these days to think of all the contributions (both Employer and Employee) being made by the member since any contribution that the Employer makes is simultaneously added to and subtracted from the member’s taxable income (within limits).
Our view is that total contributions from Employer and Employee should ideally be in the region of 18% of the Total Cost to Company. This will provide a member who saves for 30 years a pension to sustain their lifestyle in retirement.
Encouraging employees to save into a pension
Encouraging savings towards a pension is a positive and vital approach to bridging the gap in retirement outcomes. Companies/employers can play a valuable role in their employees’ futures by ensuring that the retirement or pension fund is designed to deliver superior benefits. There are a few ways for companies and Employers to encourage pension savings:
- Employers can encourage annual incremental increases in contribution:
This simple but impactful method is to increase employees’ retirement fund contributions by 1% annually until the desired percentage of total contribution is reached. The Employer can align the increase time with bonus or annual salary increase cycles to minimise the impact on the Employee’s take-home pay. Employers can also encourage a portion of employees’ annual bonuses to be directed into retirement savings, which are also tax deductible.
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- Employers can encourage additional voluntary contributions (AVCs) into a fund:
This allows for more significant savings over the long term. Employees can also enjoy tax benefits as they build up their fund credits with AVCs. To enhance the effects of compounding, employees can contribute up to 27,5% of their taxable income to retirement funds capped at R350 000 per tax year. The sooner you start saving, the better the outcome. If you start saving at age 40 and want a pension of R10 000 pm, you will need to save almost R6 000 per month until retirement. But if you start at age 30 and don’t withdraw, you need to only continue with R2 900 pm contributions for that same R10 000 expected pension.
- Member education tools
Understanding and assessing where members are on their savings journey is essential. Fund level and member education tools can act as enablers in the decision-making process. There are many pre-retirement tools and calculators available; members can often access these online. Tools are a simple and effective way to show members the benefits of compounding and the impact of additional contributions. They also help members understand how much they need to save to retire comfortably.
It is a well known fact that South Africans are not saving enough for retirement. OnTrack™ is Old Mutual Corporate Consultants’ proprietary consulting tool, which provides valuable insights into the retirement fund’s benefit design, the choices available to fund members and, importantly, identify how many members are on track for a comfortable retirement and how many are being left behind.