The pandemic has shown up many fault lines in SA society, not least the financial stress that salaried individuals are buckling under. Yet 61% of retirement savers have, on average, just R37,000 stashed away, according to data from the Association for Savings and Investment SA. That will buy a retiree a life annuity of only about R210.90 a month.
Shrinking disposable income has also prompted many employees to quit their jobs, cash in their retirement savings and pay off debt over the past few years. In fact, as Jaco van Tonder, director of advisor services at Ninety One, tells the FM: “In many sectors, such as mining and retail, retirement funds are seen as saving funds by contributors.” When an employee leaves their job, they cash in their retirement savings, as the law allows for it.
This has led to calls for the National Treasury to ease up on retirement funding regulations. So last week, it released draft legislation on reforming the retirement saving system.
The Treasury put some figures to the much-awaited “two-pot” system that will characterise future retirement savings.
Up to a third of retirement contributions will be allocated to a “savings pot”, while the balance goes to a “retirement pot”. Retirement funds will be allowed to set their own limits on how much money ends up in the savings pot. Undeniably, those with a bigger cut allocated to savings will be in higher demand by savers, creating an incentive for all retirement funds to maximise the allocation to savings. The Treasury proposes that a single withdrawal from the savings pot be allowed in a year.
The Treasury's real aim is to disincentivise retirement savers from pulling all their savings when they quit or change jobs
Yet its real aim is to disincentivise retirement savers from pulling all their savings when they quit or change jobs. However, the jury is still out on whether the introduction of a savings pot will do the trick. Not even punitive tax rates on retirement savings withdrawals stopped the “leakage” of retirement savings in a country where only about 6% of retirees can afford to do so.
“SA’s retirement fund system had many mistakes and was very fragmented,” says Van Tonder. “Treasury has spent a lot of time over the past 15 years to fix it. The last hole in the system was retirement savers being allowed to take their whole savings in cash. There is no developed nation in the world that allows for this to happen. The proposed two-pot system will bring SA in line with international norms.”
Retirement industry professionals believe the leakage can be stopped — to an extent. “Retirement savers already have access to their savings; it is just mostly occurring whenever they change jobs — the leakage when this happens undermines and weakens the system,” says Richard Carter, director of assurance at Allan Gray. “The change to preserve a portion, while improving access to a portion, is a welcome innovation. Over time, it will lead to improved retirement outcomes for many.”
Alexforbes, one of the largest back-end managers of retirement funds, also supports the two-pot system. According to research done by the company, only 9% of retirement fund members preserve their retirement savings when they change jobs. “This in turn leads to very poor retirement outcomes as the average replacement ratio is only 31%,” says John Anderson, executive for investments, products and enablement at Alexforbes.
In other words, for every R1,000 earned by a member, they will only replace R310 of income in their retirement, he says. A benchmark replacement ratio in the financial advice industry is about 75% of pre-retirement income — so if an employee earned R30,000 a month while working, they should receive a pension of R22,500 a month in retirement.
Anderson’s company modelled for different outcomes related to retirement savings: when a person preserves their retirement savings; when they use the current system; and when they use the two-pot system (see graph). “Our modelling has demonstrated that the two-pot system will result in a new member accumulating more than double their fund value at retirement as compared with the current system, while providing access to a portion of their savings annually,” Anderson says.
The question now turns to whether the retirement fund administrators will be ready to implement the two-pot system by March 1 2023, the date earmarked by the Treasury.
The implementation date isn’t feasible. There are a phenomenal number of changes that need to be made
— Jaco van Tonder
“It will take a lot longer than the envisaged implementation date allows for,” says Carter. “And it is not only IT changes — we require amendments to legislation to be enacted first.”
Van Tonder agrees. “The implementation date isn’t feasible. There are a phenomenal number of changes that need to be made.”
Alexforbes differs from this view. “Alexforbes will be ready for the March 1 2023 implementation date as proposed,” Anderson says.
The Treasury admits timing is tight. “The implementation date is optimistic, because fund rules need to be changed, there will be systems changes within retirement funds to enable the two-pot system and Sars [the SA Revenue Service] also needs to create capacity to cater for the new pots and track withdrawals,” the Treasury said in a media statement explaining the retirement fund changes.
The Financial Sector Conduct Authority especially will be bombarded by pension, provident and retirement annuity fund rule changes to allow for the savings pot mechanism. “If you throw 4,500 rule changes on them, I don’t know how long it will take to approve them,” says Van Tonder.
Despite the tight deadline, industry insiders are hopeful SA’s retirement outcomes will improve.
Van Tonder says SA’s pension fund assets have been declining for the past 10 years, partially due to withdrawals from savers.
Asked whether mandatory retirement savings, as mentioned by the Treasury in the statement accompanying regulations on the two-pot system, might improve South Africans’ retirement outcomes, Carter is sceptical.
“Mandatory contributions would make little difference at the moment in a system where there is so much leakage,” he says. “The problem is not participation or contribution rates — the problems are unemployment and preservation. The proposed changes are a step in the right direction, though they will take many years to have an impact.”
Kanyisa Mkhize, CEO of Sanlam Corporate, agrees. “Economic growth is probably the key long-term solution to the challenge,” she says.
“While we might strive to get to coverage levels of the highest-ranked retirement savings systems worldwide, such as Iceland and the Netherlands, our realities are very different and this laudable aim might, rightly, not be our country’s highest priority, given many other challenges.”
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