Progressive reforms in the local retirement sector loom as the government implements the two-pot retirement system in 2024.
“The uniqueness of the system is its tailored design for the South African retirement market, where more than 90% of fund members opt to cash out their full retirement benefit on leaving formal employment,” says 10X Investments CEO Tobie van Heerden.
“Unfortunately, many members rely on retirement savings to sustain their families and themselves through periods of unemployment,” says Danie van Zyl, head of the Smooth Bonus Centre of Excellence at Sanlam Corporate: Investments.
“Some members resign solely to get access to their savings, which defeats the purpose of saving for retirement and leads to poor retirement outcomes due to a lack of preservation.”
“These trends result in significantly lower net replacement ratios at retirement and an increased reliance on government grants during retirement,” adds Van Heerden.
While South Africa has the 11th largest pension system globally, Allan Gray head of retail Tamryn Lamb says the country ranks among the lowest in the 2023 global pension index of the Mercer CFA Institute in terms of the level of benefits and outcomes provided by the pension system for retirees.
“Through the two-pot system, the regulator is trying to give individuals in financial distress some flexibility to obtain a portion of their savings without them being forced to resign or retire, while also promoting the long-term preservation of retirement savings,” says Lamb.
“Hopefully, knowing that they can get access to a portion of their retirement savings in future, even if they are still working, will alter members’ behaviour when changing jobs,” adds Van Zyl.
The regulations will affect the contributions people ... must make to meet their capital requirements in retirement
Once implemented, one-third of contributions will go towards a savings pot and two-thirds will be directed to the retirement pot for mandatory savings. Members can make one taxable withdrawal annually from the savings pot, provided the balance exceeds the R2,000 minimum threshold.
However, the potential implications for the sector are far-reaching. With a revised implementation date of September 1, all stakeholders are preparing for the deadline by updating back-end administrative systems despite requiring greater clarity on the proposed regulatory amendments.
“Finalising these amendments is the most critical factor now influencing the successful implementation of the system,” says Van Heerden. “The persistent delays and unanswered questions hinder the industry’s ability to prepare adequately.”
The amendments will also materially affect the contributions those investing for retirement must make to meet their capital requirements in retirement.
Van Heerden explains that retirement investors need to contribute a recommended 15% of their monthly income over 40 years to maintain their current lifestyle post-retirement.
“Models indicate that members who use the full available withdrawal limit from the savings pot component annually will need to increase contributions beyond the 15% rule to achieve this goal, and we foresee significant use of the savings component, especially in the corporate umbrella environment.”
Van Heerden highlights the importance of ensuring that all parties thoroughly understand the implications related to this level of use.
“Taking a proactive approach that communicates the implications aligns with the industry’s commitment to empowering investors with the knowledge they require to navigate the evolving landscape of the two-pot system effectively.”
Lamb says balancing the ability to gain access to funds in the short term if required in an emergency with the need to promote better long-term outcomes is tough to get right.
“However, achieving this balance is critical for these reforms to have their intended impact. While regulations alone cannot fix the multifaceted problems we face in an economy with high unemployment levels and wide income disparities, these legislative changes can help improve investor behaviour, which ultimately influences outcomes.”
In a country where only 6% of South Africans can afford to retire while still maintaining their current lifestyle, Van Heerden says the two-pot system will make important strides in improving long-term retirement outcomes.
“The sector is actively pursuing a comprehensive strategy to enhance consumer education regarding the two-pot system through various communication and educational tools, including extensive member communications, dedicated member sessions and the dissemination of information through online platforms,” he explains.
“Ultimately. it is incumbent on all industry players to understand the implications of the new rules, design solutions that comply with them and continue promoting long-term retirement savings,” says Lamb.
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