The Covid-19 pandemic and resulting lockdowns saw many South Africans accessing their retirement savings as a cash withdrawal on leaving their employer due to resignation, dismissal or retrenchment, rather than preserving their accumulated retirement savings (keeping one’s retirement savings invested) as a result of the financial strain on their household finances.
In South Africa, the savings rate remains low. Our total household savings averages at just above 2% of GDP per annum, with the majority of this being allocated to contractual retirement fund savings.1 Furthermore, 34% of the Old Mutual Savings and Investment Monitor 2021 survey respondents indicated that they do not have enough savings to last more than one month if they lose their income.2 But even contributions to retirement funding is low and in the majority of cases this is the only source of saving.
This low level of savings is exacerbated by low levels of preservation when moving jobs before retirement. Data from the South African Revenue Service (“SARS”) indicates that over 700 000 individuals cashed out a ‘withdrawal lump sum’ before retirement for each of the last three years, resulting in an annual average of R78 billion being taken out of the retirement system through withdrawals made before retirement.3
Low savings coupled with low levels of preservation results in a significant portion of the South African population not being able to retire with adequate retirement funding. This is worsened in times of financial hardship, as seen with the COVID-19 pandemic, where individuals with little to no sources of other savings turn to their retirement savings as a source of emergency funding when moving between jobs.
There may be a need for a formal regulated system of pre-retirement withdrawals, that is different to what currently exists – one that enables individuals to access a portion of their retirement savings before retirement if needed, but to also ensure some prescribed level of preservation, affording one the ability to still retire comfortably without unduly eroding accumulated retirements savings before retirement.
Addressing the conflicting priorities of saving for an income in retirement (and enforcing preservation) but allowing (some) access to retirement savings during financial hardship in working ages has historically been extremely topical and ever more so considering the impacts of the COVID-19 pandemic. National Treasury released a paper in December 2021 proposing a two-pot system for retirement savings, followed by discussions and debates which are currently ongoing between the National Economic Development and Labour Council (NEDLAC), key stakeholders, trade unions and regulators. The proposed Retirement Reform would result in the restructuring of future retirement savings contributions – allowing for limited pre-retirement withdrawals from one’s retirement fund to help alleviate financial pressures, while addressing compulsory preservation.
An overview of the proposed two-pot system
In short, National Treasury’s proposal involves a two-pot system. The first pot, known as the ‘Retirement Pot’, made up of two-thirds of all future retirement fund contributions (i.e., contributions made after the implementation date of the two-pot system) plus investment returns earned on these contributions. This pot must be preserved (remain invested) until retirement and cannot be accessed before retirement.
The second pot, known as the ‘Access Pot’, would enable access to accumulated retirement savings prior to retirement and made up of the remaining one-third of all future retirement fund contributions plus investment returns earned on these contributions. It is recommended that withdrawals from the Access Pot should be permitted (provisionally) once per year only, subject to a minimum amount of R2 000.. If members access only a portion of their retirement savings in the Access Pot, the remaining amount from the previous year plus further accumulated amounts become accessible again in the following year and so on.
The cost of the withdrawal(s) will be covered by the member withdrawing. The amount withdrawn from the Access Pot will also be subject to tax at the relevant withdrawal tax rates.
Members will be required to undergo benefit counselling and/or obtain financial advice before a withdrawal is made. This aims to help ensure that individuals accessing their retirement savings early understand the long-term consequences these withdrawals may have on their future retirement goals.
Some considerations regarding the proposal
The implementation date for the two-pot system is proposed to be on 1 March 2023. However, the proposal is highly complex and requires numerous changes to processes, reporting, systems, communication, legislation and training to members, employers, trustees and intermediaries. Given the above and seeing that no final proposal has been submitted by National Treasury, the 1 March 2023 implementation date may be somewhat optimistic.
Some of the issues still under consideration include:
It is recommended that withdrawals from the Access Pot should be permitted (provisionally) once per year only. The definition of a ‘year’ (i.e., if a tax year or a rolling 12-month period from the commencement date of a member’s contributions) requires clarification to ensure consistent treatment for all funds and ease of administration.
Whether members should be able to immediately access 10% of their share of retirement fund savings, up to R25 000, at implementation of the legislation.
The retirement industry has indicated several concerns on the large sudden outflows from retirement funds should a large number of individuals decide to make use of the immediate access to their retirement savings all at once upon implementation date. The result may place significant pressure on capital markets, administrators, funds, and SARS with respect to the payment of these withdrawal benefits.
Liberty Group’s view on the proposal
As Liberty, we are in support of the proposal by the National Treasury in the view that if correctly structured and implemented, it may help improve retirement funding in the longer term and retirement outcomes for South Africans. However, it is both complex and a material change to the current retirement system, we therefore caution that the proposed timeline may extend beyond the targeted implementation date.
A balance needs to be achieved between ensuring that the size of the Retirement Pot is large enough to provide for a comfortable retirement and the achievement of long-term retirement goals, and ensuring that the Access Pot is sufficiently sized to adequately allow for continued access prior to retirement.
We believe that the proposed two-pot system could achieve a constructive outcome by supporting those in our society who are suffering financial hardships, while simultaneously boosting long-term financial savings to benefit many.