10X Investments had previously declined to comment on the heated public discussions on the topic because “prescribed assets is not a formal policy proposal and, therefore, it is not clear what to comment on”.
‘Prescribed assets’ refers to a policy where the government directs a portion of retirement savings into approved instruments, such as bonds of state-owned enterprises, says Eddy.
He explains that because the government provides tax benefits for investing in retirement vehicles (pension, provident and retirement annuity funds) they can place certain restrictions on these assets, such as we have currently in the form of Regulation 28.
“The issue of prescribed assets is not a new idea, having been raised before in different forms. The last time was in 2012 when the Minister of Economic Development released a discussion paper proposing that retirement funds provide ‘concessionary finance’ to help the country’s infrastructure development. That government discussion paper was roundly condemned and buried.”
Eddy adds that in its current form this policy idea, which was introduced at the 2017 ANC policy conference and formed part of the party’s 2019 election manifesto, is relatively soft. “It implies that the ANC will investigate what the introduction of prescribed assets means rather than the ANC is recommending the introduction of prescribed assets.”
“It is important to differentiate between ANC policy proposals, Government policy and the regulators who implement the policy.”
Eddy said that since the introduction of the topic in 2017 there had been no findings from the proposed investigation, certainly not a recommendation for the introduction. “Further, and more importantly, there has been no discussion document or formal policy proposal from government for the public to interrogate or comment on, let alone actually be enacted as government policy.”
He added: “If a discussion document was released by government it would be tantamount to an investigation, like we saw in 2012. Until a formal policy proposal has been put forward from the government/National Treasury it is not really worth speculating about.”
While Eddy agreed that the introduction of prescribed assets would likely lead to a sub-optimal outcome for retirement savers, he cautioned: “We cannot talk to any specifics or the probability of implementation as there is no formal policy proposal to introduce prescribed assets.”
If a discussion document or formal policy proposal was presented, he said, 10X Investments and the retirement saving community at large would have an opportunity to engage with the government on the issue.
Eddy did, however, acknowledge that it was not surprising that taxpayers, being squeezed as they were, responded with alarm to stories about a possible additional ‘penalty’ on their hard-earned savings.
Given the current tax burden that many pension fund investors in South Africa bear, Eddy said, it would be short-sighted for people to stop saving in retirement savings products and thereby pass up the tax relief provided by government in allowances on these products.
“Finally,” he said, “it’s worth keeping in mind that many investors are already paying a ‘penalty’ in high investment fees that, in all likelihood, is even more damaging than what might happen if prescribed assets did come into effect.”
He added: “Any negative effect of the redirection of a relatively small proportion of their savings would most likely not hit them as hard as the effect of paying high fees for the duration of their saving life.”
“As always, at 10X, we recommend that people focus on the things they can control. A 1% decrease in fees could increase your final retirement fund by up to 30%,” said Eddy.