We’ve always said that, as an industry, we cannot possibly believe that retirement is the only important financial consideration in every member’s life. Now with National Treasury’s proposed “two-bucket system” we are making some progress.
Our view has always been that employers providing retirement fund arrangements for their employees may not necessarily always be adding the real value they believe and therefore enhancing the Employee Value Proposition.
Yes, a retirement fund arrangement is a tax efficient way to save for the long-term. Further, it may be said that the employer is being “socially-responsible” in offering a retirement fund arrangement given there are also usually other associated benefits like group risk insurance. However, as we are all well aware, South African retirement fund members are also in desperate need of a means to save towards more “immediate” needs over the short and medium-term.
Although the Pension Funds Act has always made provision for some form of financial assistance with pension-backed housing loans, not all funds offer this. Even so, this is not beneficial to most members given that the standard National Credit Act regulations still apply, and members require a reasonably large fund credit to be able to take advantage of this benefit. Furthermore, those members that do have a loan of this nature in place, often leave the fund prior to the full settlement of the loan and their retirement savings end up taking a severe knock as a result.
We have always believed that, in the absence of a system such as the 401(k) plan in the USA under which some plans allow loans to be taken for specific reasons such as:
Purchasing a primary residence;
Paying for education;
Unforeseen or high medical expenses; and even
Financial assistance in the case of severe financial hardship.
Real value can be added to employees by introducing a short-term savings mechanism that augments an employees’ retirement fund savings and is easily accessible prior to retirement and does not hinder employees’ ability to save sufficiently towards retirement.
In a recent media statement, National Treasury advised that retirement fund industry stakeholders are interrogating a “two-bucket” retirement funding system which will assist South African retirement fund members in addressing both long- and short-term financial needs.
Treasury has indicated that:
“One bucket is to be preserved until retirement, and the second bucket will allow for pre-retirement access during emergencies or extraordinary circumstances.
Although what will and will not be allowed in respect of pre-retirement access remains to be seen, we support the proposal by National Treasury in its current, rudimentary form.
Understandably, this proposed system will take time to ultimately implement as there are several considerations, complexities, and challenges that such a change will present. At the absolute earliest, any change to legislation in this respect will only become effective from 2022.
It is our hope that ultimately, this type of system change could assist with:
A decrease in the number of employees resigning for the sole purpose of accessing retirement fund savings to service debt or meet daily living expenses (and being taxed heavily); and
Employees being able to save meaningfully, to meet their more immediate needs like housing, education and emergency medical (and other) expenses.
Lastly, as with all legislation changes, it is imperative that:
The impact on members is not sensationalised – we saw how quickly things can spiral out of control prior to “T-Day” a few years ago where a complete misunderstanding led to “mass cash-outs”.
Members are engaged with regularly, clearly and in a manner that is well-understood.
Section 13B Administrators adapt effectively and quickly, this will of course be challenged.