It’s unfortunate that much of the focus on the two-pot retirement system is on members’ ability to access their savings. As National Treasury has stated, the aim of the two-pot system is to prevent the leakage of savings, to enhance the likelihood that members will retire financially secure.
The shortcomings in South Africa’s retirement system have been repeatedly identified and discussed. They include low contribution rates, voluntary participation, and the lack of preservation.
For at least a decade, the government has been pushing for compulsory preservation, but it has run into opposition, mainly from organised labour, says Gary Mockler, the chief executive of financial advisory business GTC, which specialises in retirement fund administration and consulting.
The government has conceded access to one-third of contributions to make mandatory preservation of the balance palatable. If the trade unions accept this, it will result in an improvement in retirement savings, unless there are further concessions or trade-offs, Mockler says.
He says the principle of diluting part of retirement saving into short-term savings is “fundamentally, arithmetically wrong”. However, “pragmatism should see this system being more universally acceptable, with more people adopting long-term retirement savings because of the two-pot concession”.
Rowan Burger, the head of strategic finance at Momentum Metropolitan, says most commentators do not properly understand what the two-pot proposals are trying to address.
Currently, each time a person changes jobs, they are generally able to cash in their retirement savings. A person is likely to have about seven jobs over his or her working life and tends to cash in 90% of the time. This is the main reason for poor retirement outcomes, Burger says.
Assets in the system are about a third to a quarter of what they need to be because of non-preservation, leading to the much-quoted statistic that less than a tenth of fund members retire with an adequate pension.
The unfortunate reality is that members will treat their savings pots as a transactional account. But, over the long term, the contributions in the retirement pot will grow, at least doubling the assets in the system, Burger says. Members who access their savings continually will retire with at least some level of savings because long-term preservation will enable the contributions to their retirement pot to benefit from compound interest, he says.
Burger presents what seems to be the consensus view in the retirement industry: two pots will, over the long term, go a long way towards ensuring that most fund members reach retirement with significantly more savings, even if they access their savings pots regularly. For example, Alexforbes believes the two-pot system will improve retirement outcomes by 2 to 2.5 times. According to Sanlam Corporate, a member who enters the two-pot system at the age of 24 will be five times better off at retirement even if he or she regularly accesses his or her savings pot until the age of 50.
No matter whose numbers are cited, they are comparing outcomes under the current system with the projected outcomes under two pots based on the behaviour of “the average fund member”, who is prone not to preserve, says Richard Carter, the head of assurance at Allan Gray. When it comes to retirement planning, the question members should ask is whether they are content to achieve an outcome in line with that of “the average member”. They should aim to do better than that.
No withdrawals are good
The retirement industry and financial advisers need to drive home the message that any withdrawal from retirement savings will impact members negatively at retirement, says Lorraine Mekwa, the managing executive for client experience at Sanlam Corporate.
Mekwa and Mockler believe mandatory retirement benefits counselling should precede a withdrawal from the savings pot, so members are made fully aware of the consequences.
But Mekwa says it’s likely that counselling won’t be a requirement when the two-pot system goes live next year because of the myriad other issues that must still be addressed by then.
Both Mekwa and Carter are concerned about how accessibility may impact the behaviour of members who would otherwise not have withdrawn their savings. The perception could be created that because the system gives them the permission to withdraw, it is a good idea to award themselves an “annual bonus” that could be spent on non-essentials.
Mekwa points out that someone who withdraws R25 000 a year for 20 years from their savings pot will forfeit R1.6 million at retirement, assuming an investment return of 10% a year.
On the other hand, Michelle Acton, the executive for retirement reform at Old Mutual, says it’s possible that the flexibility to use the savings pot as a sort of bank account could have a positive impact on members’ contributions. Knowing that they can withdraw once a year may give members an incentive to contribute more to their retirement funds – and two-thirds of those contributions will automatically go into their retirement (preservation) pots.
Complexity is the price of accessibility
The introduction of the two-pot system will increase the complexity of the retirement system not only for administrators but also for members, many of whom find it difficult to understand the existing system.
The term “two pots” to describe the system has stuck, although the system consists of five components (pots): the new savings and retirement components, and the vested component, which is made up of three components: pension funds, provident funds, and (non-legacy) retirement annuity funds. Each of these components is subject to different rules regarding withdrawals, contributions, annuitisation, and taxation.
Carter says complexity is not conducive to fostering trust in any system. He is concerned the short period that administrators have been given to implement the system will result in administrative problems come March next year, which will undermine people’s confidence in the retirement system, perhaps resulting in lower participation rates.
Not enough time to communicate with members
What concerns Carter is that there is not enough time for funds, administrators, and financial advisers to communicate to members about how the new system works and to manage their expectations.
Burger shares Carter’s concerns in this regard.
“We [Momentum Metropolitan] have made numerous representations to warn Treasury we may not be ready, but more importantly, this significant change needs time for advisers and their clients to understand the implications and plan their future savings plans.”
He says Momentum Metropolitan is concerned that many retirement funds may not be aware of the complexity and fraud risks. For example, very few funds have their members’ identity numbers or bank account details. A project to collect and verify all this information is critical and has not yet started.
Mockler says that because of the magnitude and complexity of the changes, GTC believes implementation of the two-pot system should be postponed to at least 1 March 2025, so the many unresolved issues can be attended to.
A postponement will give the industry and trustees time to complete the extensive administrative and technological work, change fund rules, train staff, communicate with employers and members, and implement advice or counselling frameworks, he says.
Mekwa and Blessing Utete, the managing executive of Old Mutual Corporate Consultants, say it’s highly unlikely Treasury will grant another extension.
Utete says there has been an increasing clamour since Covid-19 in 2020 to grant access to retirement savings. Considering the financial hardships experience by many consumers because of high inflation and interest rates, another extension will not go down well with the public.
Both Old Mutual and Sanlam say they will be ready come 1 March next, but not as ready as they would like to be.
