The long read: what the two-pot retirement system means for you

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Despite the potential benefits, the big challenge for us in the industry and for members themselves will be to maintain a balance between immediate and future needs. Time is your friend when saving for retirement but can also be your enemy if you’re forced to play catch-up.

National Treasury’s retirement industry reforms include a proposed ‘two-pot’ system, designed to encourage South Africans to preserve their retirement savings. What are the implications for employers, employees and fund administrators?

In mid-2022 National Treasury released a set of draft Tax Bills, which contained key amendments on retirement reform and further moves towards a so-called ‘two-pot system’ for retirement savings.

‘The amendments enable South Africans to also save for non-retirement purposes (e.g. emergencies) via their retirement funds, whilst preserving more of their savings for retirement,’ Treasury stated.

Preservation of retirement savings is at the heart of these proposals, which will have far-reaching effects on the South African retirement industry. Treasury has previously noted the retirement industry static warned that only an estimated 6% of South Africans can maintain their lifestyle and replace their income fully at retirement.

Speaking at the 2022 Old Mutual SuperFund Summit, Michelle Acton, Distribution Strategy Executive at Old Mutual Corporate, painted an even starker picture. ‘If we look at the SuperFund Provident Fund,’ she said, ‘less than 10% of members who are five years from retirement are anywhere near 45% of what they need in retirement. Those are scary numbers.’

The two-pot system – as suggested in the proposed amendments – aims to encourage retirement fund members to preserve their retirement savings. In an environment where retirement fund members are currently allowed to access all their retirement savings whenever they change jobs, the proposed system introduces partial compulsory preservation instead. This is a significant change in the retirement landscape.

At the same time, it also allows more flexibility to accommodate what Treasury calls ‘unforeseen pressures that members face during the span of their working life.

‘It makes it possible for workers not to resign from their employment merely to access their retirement funds, and would have assisted members during a crisis like the Covid-19 pandemic, when many employees faced reduced salaries or were not paid at all during that time,’ Treasury explained.

Under the proposed system, retirement fund members’ future retirement savings will be allocated to two pots: a Savings Pot and a Retirement Pot. Up to One-third of their monthly contributions can be allocated to the Savings Pot, with the remaining two-thirds going to the Retirement Pot. The member would then be able to withdraw money from their Savings Pot before their retirement in emergencies and subject to certain rules. The money in the Retirement Pot will only be accessible on retirement, at which point the amount in this pot would have to be used to buy a pension or annuity.

It is important to note that while some access is proposed, the intention is not for the Savings Pot to function like a transactional savings account, and that both pots would still be geared specifically towards long-term savings for retirement.

The draft amendments are intended to help retirement fund members put as much of their retirement savings as possible into their Retirement Pot, where the money will wait – and grow – until the day they retire.

What it means for employees

Employees – or, more specifically, retirement fund members – have some homework to do. One of the first things to understand is that these proposed regulations are still proposals, and any changes would only affect future savings after implementations of the necessary laws and rules.

Another important point is that no money will be seeded from existing retirement assets. ‘It’s all starting off as a clean slate,’ Old Mutual Corporate Consultants Managing Executive Blessing Utete says, adding that only money saved after the implementation date will be affected. ‘On the effective date your two pots will be empty, and you’ll start filling them from then on. Your existing savings will not be impacted by the two-pot system.’

Some retirement fund members might see these proposals as an opportunity to cash in their retirement savings early – and there’s been a fair amount of media buzz around such early access. Some 23% of respondents to the Old Mutual Savings & Investment Monitor 2022 said that it would ‘help with unforeseen circumstances’, while 17% said it would ‘help in paying debt, or a home loan, or car finance, or keeping policies up to date’.

But just because retirement fund members can withdraw some of their retirement savings early does not mean that they should. ‘Early withdrawal – or accessing the money in that Savings Pot – is a last resort and should not be seen as additional money that one can get once a year for any ordinary use,’ says Utete.

He emphasises that the intention of this system is to improve preservation and secure better retirement outcomes for more South Africans. In other words, it’s about enabling a better future for the 94% of South Africans who currently don’t enjoy a comfortable retirement.

What it means for fund administrators

For retirement fund administrators, the proposed changes represent significant work in the immediate term. As Treasury puts it: ‘The amendments are technically complex, as they attempt to fit a pre-retirement withdrawal scheme into existing retirement savings vehicles primarily meant to cater for long-term savings.’

‘A lot will need to change, and it’s going to mean some significant changes to the admin of retirement funds,’ says Utete. ‘

Managing the potential volume of members’ withdrawal requests will only add to that workload. ‘Take for example a company of 2 000 employees that has a staff turnover of, say, 10%. Instead of having possibly 200 people withdraw funds from their retirement savings when they resign or exit that company we may now see multiples of the normal turnover of staff now applying for access every year.’ It is these processes that need to be ironed out for efficient and smooth administration of the two-pot system environment.

Ultimately, one of the biggest needs regarding the two-pot system is simple, and clear communication on the part of all s stakeholders . Employees (or fund members) will need to know what they can access, when and how – and importantly why preserving their retirement savings remains the smartest approach. ‘Education is also going to be key to this,’ adds Utete. ‘Remember, these early withdrawals are intended for emergencies only.’

What it means for employers

If most of the admin work will be done by the retirement fund, and much of the homework will have to be done by employees, where does that leave employers?

‘The employer needs comfort that the fund administrator can handle these changes,’ says Utete. ‘Is your administrator equipped to develop their systems and make sure that they can handle this? As an employer, you don’t want more admin. You don’t want staff coming to you asking for forms, how much is available and then chasing their money every year.’

Companies, he says, are already dealing with their existing staff turnover. ‘It’s in the normal course of employment that Employers deal with people who are exiting the fund, because they’re already taking them off their payrolls and offboarding them. But they won’t want this additional admin of staff asking them to facilitate their extra withdrawals. Ultimately employers should be seen to be helping their employees do the responsible thing around retirement savings. As such, an important role that employers will need to play is in promoting good financial behaviour and enforcing the message to employees, that retirement funds are for retirement purposes, employees will need to really apply their minds in times of financial distress whether to access the savings pot or not. These initiatives become a joint effort between all the stakeholders.

Administratively, ‘as an employer, I’ll be saying: “Mr Administrator, you’d better be able to handle my employees directly, and deal with everything they need to do with this access without involving the HR staff who already have enough on their plates!” Employers will also need to ensure that any costs associated with the early access to the employees are within reason and at the least competitive.

Smaller funds may struggle in this regard. After all, the more members and the bigger the platform, the easier it is to absorb these developments at scale. ‘That doesn’t mean it comes at no cost,’ Utete says, ‘but it’s certainly easier for the bigger guys than it is for the smaller, standalone funds.’

And time is ticking. National Treasury has set 1 March 2023 as an implementation date. While many in the industry are calling that timeline ‘ambitious’ or ‘optimistic’, the wheels are now firmly in motion.

Visit Old Mutual SuperFund, our leading umbrella retirement fund, for information on the investment portfolios available to employers.

By Mark van Dijk

 

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