The implementation of the two-pot system marks a transformative shift in South Africa’s retirement landscape, aiming to balance liquidity and preservation. However, it has introduced significant complexities, particularly in providing members with the appropriate advice they need to navigate this new system effectively.
This was one of the main points to emerge during a panel discussion at the Actuarial Society of South Africa’s recent annual convention.
The panel consisted of Michelle Acton, Old Mutual’s executive for retirement reform; Andrea Bezuidenhout, a product development actuary at Alexforbes; Brian Karidza, the Government Employees Pension Fund’s head of actuarial and benefits administration; and Johan Prinsloo, the head of retirement fund administration services at Sanlam Corporate. The moderator was Joanna Combrink, a consulting actuary at Willis Towers Watson.
The two-pot system requires members to manage their retirement savings in three distinct components:
- Vested component: funds accumulated before the system’s introduction.
- Savings component: accessible funds, allowing limited withdrawals.
- Retirement component: preserved funds intended for retirement.
Each component has specific rules and tax implications, significantly increasing the complexity of decisions at resignation, retrenchment, or retirement.
Prinsloo explained that previously, members made a single decision about their fund credit. Now, they must navigate choices for all three components.
He illustrated his point by referring to the withdrawal options at resignation or retrenchment.
In terms of a SARS Interpretation Ruling, if a member makes a partial withdrawal from the vested component, the balance cannot be preserved in the vested component in the fund; it must be transferred to another fund. And, because the three components cannot be separated, the savings and retirement components must also be transferred to another fund.
Where a member makes a full withdrawal from the vested pot, the credit in the other components can remain in the fund. However, some providers take the view that the Interpretation Ruling also applies when a full withdrawal is made from the vested component.
This complexity underscores the need for advice.
Bridging the advice gap
Feedback from the industry highlights that members prefer face-to-face interactions when making important retirement decisions. According to Combrink, these interactions allow members to ask questions and clarify issues they don’t understand.
However, providing such personalised advice remains challenging.
Bezuidenhout said, when it comes to retirement advice, “one of the trickiest things the industry has tried to get right and is still working on is this almost crossover between institutional and retail”. Historically, service at institutional funds has occurred at the level of the board of trustees or the employer. The members were effectively automated into default contribution and investment strategies, and there was a limited number of things they could do during their working lives. Effectively, advice and engagement were required only when they joined or left the fund.
With two pots, this has changed – members need to understand their options, and they need ongoing advice.
But, Bezuidenhout said, the advice remuneration framework is largely based on assets under management. Advisers typically tend to want people who have lots of assets under management as clients because that is that how they earn their fees. As a result of this structure, “the reality is that despite best efforts to put salaried advisers or educators in front of members, we’re very much in the situation where every institutional member does not have an adviser, and the retail advice sector is currently not necessarily geared to service that membership base in its entirely”.
“We have to do more to get the retail and the institutional servicing to sync up better. It’s not an easy thing to solve for, and it’s going to be a critical one.”
Combrink said that under the current legislative framework, there is either “advice” (as defined by the FAIS Act) or retirement benefit counselling (RCB). There is no room for “a kind of intermediate adviser” – someone who is not fully regulated by the FAIS Act but who can assist the member to a greater extent than what is currently permitted by RCB. In her view, the current legislative framework has created a gap that cannot be filled.
Acton added the other big problem facing the industry is how to fill this gap cost-effectively.
Before two pots, particularly among large employers, 80% to 90% of members took their entire fund credit in cash when they left the fund, she said.
But there is no longer a 100% cash option. Members need to understand they have “a max cash option” whereby there is a maximum amount they can take in cash and the balance must be preserved.
“How do you explain that to a member who used to understand that I just take my pension money in cash when I leave?”
This shift requires significant education. Acton shared an example of miners who were unaware they could leave their funds invested instead of withdrawing in cash. “They always thought they had to take it all out, so they just did,” she said.
The challenge facing the industry is how best to provide the massive amount of education and support members need to understand their options – and deliver this education and support at the point when the members need it.
Impact on low-income members
The two-pot system presents unique challenges for low-income members.
Bezuidenhout said the industry potentially faces having to manage members with fund credits as little as R150 or R250 remaining in their retirement components when they exit. “It’s not feasible to maintain those records. It’s in no one’s best interest.”
Prinsloo said that, as in coming years, members who exit before retirement could end up with four or five retirements components in different funds. The industry is potentially looking at a new class of unclaimed benefits member – someone who has forgotten about the retirement components they have accumulated during their working life.
“But I also think as we get used to this new system, we can apply ourselves on how to address that.”
Acton said the fact that members can no longer withdraw their entire fund credit highlights the need for employers and fund advisers to revisit benefit structures, particularly for low-income members. Previously, a fund could decide to set contribution levels at, say, 5%, which would cover death and disability premiums and retirement-funding. When the member changed jobs, they could just cash it all out.
“We’re moving away from that, which is the right thing.”
The question was whether this is suitable for low-income members – for whom the state old-age grant might be feasible replacement ratio – who resign after or three or four months of service with R5 000 or R6 000 in their retirement component, which must remain there for the next 30 years until they reach retirement.
“We need to start looking at funds with very small contributions […] because we need to be increasing those contributions to make sure it’s viable in the long term.”
The other issue is whether members whose retirement component is below a certain amount should be forced to keep that amount in the fund when they exit. In the early years of the new system, there are going to be small balances the retirement component, and the industry has to find a way to manage this, Acton said.
Karidza said, in his view, it did not make sense for a retirement fund to provide a pension that is below the state old-age grant.
Opportunities for the future
Despite these challenges, the two-pot system represents a significant opportunity to improve retirement outcomes. Acton described compulsory preservation as a “phenomenal breakthrough” that will transform retirement savings for future generations.
“We’re not going to have the retirement outcomes we have now, but it will mean we’re going to have a lot of teething issues as we move into what this new normal is.”
