Over the last nine weeks I have detailed many of the aspects you need to consider when switching from a defined benefit to a defined contribution retirement fund. This is the final column in the series.
The series has aroused a lot of interest from readers and has highlighted the need for more adequate information about the consequences of switching to be made available to retirement fund members.
The decision to switch cannot be made on a general brochure put out by an employer and which assumes that everyone's situation is the same. Everyone is different and you need to take your particular circumstances into account.
Below is a list prepared by Sanlam Group Benefits of the major issues you need to take into account in making the decision to switch funds.
The three most important issues you need to consider are:
* Your end benefits. You need to compare conservative calculations of these benefits. In other words, you need to establish your expected income in the defined benefit fund and then do the following calculation to work out the benefit from a defined contribution fund:
The transfer amount (Accrued reserve plus portion of surplus)R
Plus: anticipated future contributionsR
Growth (keep this conservative)R
Less: taxR
Total: R
Establish what annuity (monthly pension) you could purchase with this amount.
Remember, in working this out you must also take into account what is called the present or future value of money. This takes into account inflation.
So if your pension on the defined benefit scheme is provided on today's values, the calculation you do for your defined contribution scheme should also ignore inflation.
Put another way you need to work on real rates of return (ie interest rates less the inflation rate). Probably the best figure to work on is either three or four percent compounded a year;
* Investment risk with defined contribution funds. South African investment markets have shown tremendous growth over the past 20 years but are unlikely to repeat this performance. Markets internationally are also considered to be fragile so be aware that if you swap to a defined contribution fund you are taking on the full risk; and
* Assurance against dying young or becoming disabled. Again you need to compare the end benefits of your defined benefit scheme with those of the defined contribution fund.
It is interesting that Irene Charnley, a trade unionist, who led the reform of the retirement industry along with people like cabinet minister, Jay Naidoo, said at a meeting of the Pension Lawyers Association this week that she favoured defined benefit schemes.
This is a revolutionary remark as it was the trade union movement which led the shake-up in the retirement fund industry.
The movement demanded members be given the option to choose defined contribution funds because retirement fund members had, over the years, been ripped off by employers who provided minimal withdrawal benefits from funds if you resigned before retirement. The other major reason was that fund members who returned to live in rural areas could not access their pensions because of the lack of infrastructure.
This pressure from the trade union movement led to a major revision of the way funds are administered and this can no longer be considered the private fiefdom of employers. This will particularly be the case when the phasing in of the amended Pensions Fund Act is complete by the end of next year.
However, now that retirement funds are increasingly being regarded as providing deferred compensation and not as a grant-in-aid from employers, the trade union movement has become aware of the need for people to receive an assured regular income at retirement so that they are not left destitute.
It is this reasoning that was behind Charnley's remarks.
Finally, the retirement industry is under review, under the guiding hand of the capable and pragmatic deputy Minister of Finance, Gill Marcus.
It is expected that a white paper (a government policy paper) and/or draft legislation to eradicate the tax differences between defined benefit and defined contribution funds will be presented within the next three months.
The proposed changes are also likely to stipulate that a minimum monthly pension must be paid from accumulated retirement capital.