Few people adequately plan their finances to ensure their well-being until the day they die. This was the main reason why individuals had to be encouraged to opt for a pension paid on a monthly basis rather than take a lump sum on retirement.
This was argued by Chris Newell, Old Mutual assistant general manager: employee benefits and a spokesman for the life assurance companies at a meeting this week of the parliamentary joint standing committee on finance.
The committee was taking evidence on the Smith Committee of Inquiry report into the future of retirement funding.
The argument presented by Newell represents increasing concern among retirement planners about the trend towards individuals taking lump sums on retirement.
The Life Offices' Association, the Actuarial Society of South Africa and the commission all warned that action would have to be taken to encourage individuals to take monthly pensions, rather than lump sums, or to convert a significant portion of their lump sums immediately/on retirement to monthly pensions (annuities).
The spokespeople said the trend towards defined contribution funds with members being paid out all their benefits in a lump sum on retirement had been stimulated by two factors:
* In the 80s unions had demanded that employees be given increased control of retirement contributions for a number of reasons, including the view of union members that the pension funds were savings funds rather than retirement provision funds.
* In the 90s employers saw it as a way to escape risk. Volatile investment markets, fluctuating inflation, and the threat of Aids meant that employers were taking increasing risks and could be faced with substantial increases in their contributions in providing defined benefit pensions.
By encouraging employees to change to defined contribution funds the risk of investment was swapped to the employee.
The spokespeople said the proposed changes in taxing retirement funding made by the Katz Commission of Inquiry would encourage the trend from defined benefit funds to defined contribution funds.
This was particularly the case at lower-income levels.
Niel Krige, executive deputy chairman of Momentum Life, speaking on behalf of the Life Offices' Association, said many people, on receiving all benefits as a lump sum on retirement, could either be tempted to spend the money or invest it unwisely. The result would be more people, who would otherwise have been self-sustaining, becoming reliant on the state.
The various interest groups are supporting the proposals of the Smith Committee that a national forum be appointed by government to reach agreement on a structure for retirement provision.
Reg Munro, Old Mutual general manager: employee benefits and secretary to the Smith Committee, told the parliamentary committee that government policy on retirement funding had to be aimed at:
* Drawing more people into the system of private pension provision;
* Encouraging people to preserve their pension benefits, particularly when leaving or changing jobs; and
* Encouraging people to select a monthly pension at retirement.
The Smith Committee has made proposals to achieve these targets, but there are still differences over how they should be achieved.