Old Mutual Corporate welcomes endorsement of two-pot retirement savings system
While the industry is waiting for full details of the proposal to boost household savings by increasing preservation and increasing flexibility, the “two-pot” system is likely to help SA address its long-term retirement savings crisis.
Finance Minister Enoch Godongwana’s endorsement of a move to a two-pot system to increase preservation and flexibility with early access to retirement savings is a welcome progression to a new era for the South African retirement industry.
This is according to Blessing Utete, Managing Executive of Old Mutual Corporate Consultants, who says that the “two-pots” system for retirement annuities, provident and pension funds would improve savings outcomes and retirement provision.
While Godongwana was sparse on detail, based on previous announcements, the proposal involves retirement savings in future being split into a smaller accessible pot with limited access for financial emergencies, while the remaining bigger pot will only be accessible after retirement age.
“Going forward, we foresee a regime where members of pension and provident funds will no longer be able to access all of their retirement savings when retrenched or changing jobs. This step is critical to offset the retirement savings crisis, which affects most workers in South Africa,” he says. “However, allowing members of private and occupational funds access to a portion of their savings in an emergency will offer some relief when needed.”
The new system is a monumental shift for the retirement sector, says Utete, as it will improve long term retirement outcomes while providing flexibility to deal with unforeseen events before retirement. The Minister said that National Treasury will shortly publish a discussion document on the details of this proposal to obtain input before further announcements are made in the 2022 National Budget in February.
Utete says that the industry is eagerly waiting on this document to clarify the amount of money available for immediate access when the new legislation comes into effect. “Other issues the discussion document must address include the frequency of access; the conditions of access; how potential abuse will be mitigated; what measures can be practically implemented; what the practical constraints to SARS are; and what the tax implications will be,” he says.
Concerns of liquidity
Utete is also pleased to see that Treasury has taken concerns over fund liquidity and affordability seriously. “It is important to understand early on in this journey that the initial allocation to the accessible pot will be manageable for retirement funds. How National Treasury attains this delicate balance to aid South Africans without breaking the bank is a critical part of the conversation,” he says.
Current savings must remain unaffected
Utete says the discussion document must give insight into the treatment of vested rights, which is the retirement savings accumulated before the new laws take effect.
“This step will go a long way to guarantee members and the market that there is no need for concern about the accessibility of current savings accumulated before the law is enacted,” he concludes.