Changes in Retirement Funding: making new decisions

“Retirement funds play a critical role in channelling savings into productive investments. Regulation 28 of the Pension Funds Act sets out the criteria through which these funds may make investments. Changes have been proposed to these regulations to enable greater investment in infrastructure by these funds.” ~ Enoch Godongwana, Minister of Finance

South Africans are failing to save for their retirement sensibly and effectively. Often this is not directly people’s fault due to the fact that not all circumstances can be met with enough money and good sense. Sometimes situations move beyond the average earner’s reach. However, it is not helpful that people have not been able to access pension funds in situations of emergency unless they leave their job.

In the pandemic for instance, many people needed to access their funds and were then forced to resign their jobs before retirement age, adding to the negative situation. Resigning a job in order to retrieve pension money has often left people worse off than before, without a job and without security for their old age.

Therefore the Minister of Finance, has recently announced the following changes:

• Treasury has noted that a significant number of South Africans are quitting their jobs and accessing the entire, or significant portions, of their retirement savings early.
• A two-pot system has therefore been devised whereby individuals may access one third of their retirement savings at any time (with certain terms and conditions), but the remainder only once they reach retirement. two-pot system recognises that people do experience financial hardship and may need to access their retirement savings during times of crises. Currently, Regulation 28 only allows individuals to access their savings when they leave their employer, such as when resigning, being retrenched, or reaching retirement.
• The two-pot system will be implemented on 1 March 2024.
• The new system will permit limited access to retirement fund money for emergencies while ensuring the bulk of the pension remains preserved for retirement.
• Contributions made after 1 March 2024must also be preserved until retirement.
• However, existing retirement savings and contributions made prior to the implementation date will not be affected.

To clarify: retirement funds will be divided into three parts:

• the vested pot, which includes amounts accumulated before the new system takes effect
• a savings pot that allows one-third of the funds that may be accessed for emergencies
• a retirement pot that must be preserved in full until retirement.

In addition to these changes, it has been strongly punted that:

• More emphasis needs to be put on programmes that assist in ensuring healthy financial habits. There must be greater education and encouragement for people to find ways to live within their means.
• More effort needs to be made to reduce debt, and discourage debt-producing behaviour. There is a direct link between the amount of debt an individual owes, and what they can afford in terms of contributions.
• Millennials in particular, have been found to have higher financial stress. The higher the levels of debt and financial stress, the lower the amounts saved towards retirement. Meaning that a great deal of our financial problems are caused by ourselves and our lifestyles.

Providers must ensure they accommodate the changes with good effect, including:

• making use of the latest technology in engaging members
• creating investment strategies to cater for the various pots
• offering clear communication and support to members to ensure members understand their options under the new system
• considering that free-standing funds may move to umbrella funds, which would be able to cater for the changes.

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