Will the proposed two-pot retirement system help SA savers?
System is a positive step towards meeting short-term needs and enhancing benefits at retirement, but not a silver bullet
Richard Carter, head of Assurance at Allan Gray
The proposed ‘two-pot retirement system’ is a plan to amend the retirement fund system in South Africa with the dual aim of creating limited access to retirement fund assets to help savers cope with short-term emergencies and improving the preservation of retirement savings. Recently Treasury announced that its implementation would be postponed from March 2023 to 2024.
“There are issues in the current system that these changes aim to address. While any changes mean additional layers of complexity, the hope is that these will allow access for those who desperately need it and improve outcomes for pensioners,” says Richard Carter, head of Assurance at Allan Gray.
He explains that, under the new system, it will be compulsory for all retirement funds to split contributions received between two notional ’pots’ – one-third will be allocated to a ‘savings pot’ that will allow early access to funds, while the remaining two-thirds will be allocated to a ‘retirement pot’. At retirement, whatever is left in the savings pot will be available as a cash lump sum. The portion under the retirement pot will have to be used to purchase an annuity at retirement.
“Offering partial access will, over time, see the money in the system grow, and will hopefully lead to better retirement outcomes for most savers,” Carter explains, noting that COVID-19 shone a spotlight on the issues in our retirement savings system.
“The COVID-19 pandemic and associated lockdowns forced many around the world into economic hardship. Several countries responded with measures to supplement incomes so that people who were out of work could continue to provide for themselves and their families. In some instances, this included allowing people some form of access to their accumulated savings in their retirement fund accounts. Importantly, in most cases, these countries did not historically allow access to these funds prior to retirement, on retrenchment or resignation. This meant that there were meaningful assets accumulated and the exceptional access could be justified.”
There were calls in South Africa to allow similar relief, but this didn’t make sense with full access already being available to pension and provident fund members on retrenchment or resignation.
“This situation highlighted a twin problem: Retirement savings are inadequate, and access is skewed only to loss of employment; no access is available for other emergencies. The changes will be an improvement, but the test will be in how the system withstands another crisis like COVID-19,” says Carter, adding that changing the rules around preservation and access to cash will not be a panacea.
“The retirement fund system cannot solve many of society’s pressing needs. While a robust savings pool should contribute to economic growth, it doesn’t by itself solve the unemployment problem: If people don’t even have jobs, they cannot be asked to save for retirement.”
Changes will apply across the board
The changes will apply across the spectrum of retirement savings products, including to retirement annuities (RAs).
“RAs currently provide no early access to funds. The changes contemplated will apply to RAs as well. This means that, in future, RA members will receive the same treatment as occupational fund members, including the envisaged rights of early access,” says Carter.
He explains that one of the main reasons people use retirement savings vehicles is the tax break available on contributions. And while there will still be tax benefits, there will be some changes.
“Withdrawals from the new savings pot will be treated as income. If a member contributes to a retirement fund and then withdraws the money again, it will be tax-neutral – the tax deduction received on the contribution will equal the tax paid on the withdrawal. This should be a fairer system,” he says.
Under the new system, says Carter, one of the issues still under discussion is around ’seeding’.
Given that changes will only apply to contributions made from the implementation date, contributions made before such time, will remain in a ‘vested pot’. Seeding would involve allowing people to take some of the funds that have accumulated in their vested pot prior to the new system being implemented and to transfer those funds to the new two-pot system, thereby allowing some immediate access to historic funds.
“While there could be merit in allowing this, if the seeding is too generous, the cost in terms of leakage from what has been saved to date could be material,” he cautions, adding that these and other questions will need to be answered before ’go live’.
“As things stand, we are fairly certain that implementation will not be before 1 March 2024, but even that is ambitious, given the pending decisions and approvals,” he concludes.
For more information, listen to Allan Gray’s recent podcast on this topical subject.