“Are you ready?” – the catchphrase made famous by Anne Robinson on The Weakest Link – is a question intermediaries should be asking themselves as the implementation date for the two-pot retirement system rapidly approaches.
The FSCA has confirmed that 96.3% of retirement funds submitted, by the deadline of 31 July, amendments to their rules to align them with the two-pot legislation, Nathalie Burrows, the editor of Ebnet, told a webinar yesterday.
Starting 1 September, retirement fund members will be able to access part of their savings annually without resigning.
Funds will be divided into three components:
- Vested pot: holds pre-reform savings, with no new contributions from 1 September.
- Savings pot: receives one-third of contributions (from 1 September), plus seed capital from the vested pot – 10%, up to R30 000, of the fund value as of 31 August.
- Retirement pot: receives two-thirds of contributions (from 1 September) and must be preserved until retirement and used to purchase an annuity.
Members can withdraw from the savings pot once per tax year, with a minimum of R2 000, subject to tax and fees. At retirement, the remaining savings can be taken as a lump sum or transferred to the retirement pot for the purchase of an annuity (pension).
These are the basics. But for intermediaries, says Duane Naicker, the head of Retirement Solutions at Alexforbes, a deeper understanding is crucial.
One for all and all for one
Naicker notes that the collaboration among stakeholders in the industry in preparing for the two-pot system has been remarkable.
He says this is the first time he has seen the entire industry come together.
“The professional bodies – ASISA, BATSETA, ASSA, IRFA, FIA – all of those bodies have always been in place and there has always been collaboration but this is significant for the industry. It just feels like it’s such a collaborative effort to get this done well. The engagement with Sars, the FSCA making sure the rules were amended well ahead of the deadlines – it’s been phenomenal.”
And according to Naicker, that’s exactly how it should be.
“I think we all hold responsibilities – whether you’re an administrator, whether you’re a consultant, whether you’re a trustee, whether you’re an employer, and as a member – to make sure that we educate each other on the legislation and its practical implementation.”
He says the responsibility of the administrator is to have the right infrastructure and the right operational environment in place to ensure it complies with two-pot legislation.
“Which is essentially saying, if you’re an administrator of a retirement fund, the first thing you’ve got to do on 1 September is ensure you take a portion of the members’ vested component and transfer it to their savings component, so they have seed capital. Secondly, you need to ensure that members face no barriers to making a claim and that the claim is paid out as efficiently as possible. And that talks to the A-to-Z processes, from the time the member submits a claim, to getting SARS to produce a tax directive, to the money landing in the member’s bank account.”
The role of intermediaries is to offer advice to their clients, whether they are employers, from an employee benefits strategy perspective, or members, from a personal financial advice perspective.
Naicker says it is incumbent on intermediaries to understand every aspect of the two-pot legislation.
“As an intermediary, you must make sure that you understand every element of two pots. You’re going to have to have conversations with the employer – your client, as well as their staff-members – and educate them about the rules because, as a consultant, you are generally the first port of call for queries. Making sure that your knowledge base is up to scratch is important.”
He notes that it will be crucial for the independent market, which advises clients on products, to be well-versed in all the nuances, rules, and sub-rules related to tax consequences.
“You’ve got now a new regime that kicks off on 1 September with a whole different tax regime for savings, one which operates at your marginal tax rate. This involves understanding the tax tables, the annuitisation implications across the various components, as well as how the de minimis rule will now be applied.”
This means intermediaries need a partner who thoroughly understands the legislation and can effectively translate it seamlessly and clearly to members.
Second, he says, intermediaries are going to have to partner with a provider that’s ready for two pots.
“We’ve scoured the market, and, of course, we’re competing against other providers, but we’re hoping everybody’s ready. That’s the ideal situation because we worry that if it’s not dealt with effectively in the industry, you could have some form of contagion and some form of lack of trust in the system.”
Naicker says how a provider will handle two-pot claims will be vital.
“For example, are you completely electronic, or are you submitting paper-based claims? Can you handle the volume?”
Modelling by Alexforbes predicts a fivefold increase in claims.
“It’s unprecedented,” Naicker remarks. “If you belong to a retirement fund for 40 years, we might have seen just a handful of transactions – if you had a maintenance claim, got divorced, retired, or exited. Now, we could be engaging with members annually, potentially processing payouts from their savings component. We’re now transitioning from institutional into a bit of retail transactability.”
He adds that fees are also quite important. He says getting ready for two pots meant massive operating and capital expenditures for administrators.
“It’s an immense amount of investment in people and technology. We’ve got 60 workstreams working on two pots; system changes have been significant. Training, equipping staff. We as a business had to write some tough assessments to ensure that we’re ready for two pots. So as an intermediary, what we are respectfully saying is that you have to go through your own processes and ensure that you are ready to take this on – and we’re happy to support you on this journey.”
Having the right mindset
Naicker advises that it’s crucial to prevent members from viewing the savings pot as an ATM, which it is not intended to be.
“We need to disparage that type of thought process in the market, discourage that to an extent, but also understand that we’ve got people that really don’t have much disposable income. And the savings pot is potentially a source of income that can set them on a new trajectory, either by paying off high-interest rate unsecured debt, or perhaps funding education for their kids.”
He says the savings pot needs to be positioned as a valuable reserve, similar to a goal-based savings plan.
“And you don’t have to use it, and I think that’s one of the misnomers in the industry is that people think, ‘Okay, it’s a savings pot. I’ve got to draw it every year.’ No, you don’t. In fact, if you don’t need to, it’s even better because that supports your long-term objective of retiring comfortably.”
The two-pot system marks the most significant change in South Africa’s retirement landscape since the shift from defined benefit (DB) to defined contribution (DC) funds in the 1980s and 1990s.
Naicker believes that individuals who start contributing to a retirement fund from 1 September under the two-pot system are likely to achieve some of the best retirement outcomes the country has yet seen.
The current legislation enabled members to access their retirement savings whenever they changed jobs. Naicker notes that this practice adversely affected retirement outcomes, because each job change often meant cashing out and starting savings from ground zero.
“Members rarely have enough time to recover or contribute sufficiently to make up for the money withdrawn and spent. The two-pot system addresses this by mandating that members retain two-thirds of their savings for the next 40 years,” he says.
For information on the two-pot system, visit Alexforbes’s open-source My Money Matters website.
