Allowing retirement fund members access their retirement components if they are retrenched could undermine long-term savings goals and place additional pressure on trustees, says Danie van Zyl, the head of the Smooth Bonus Centre of Excellence at Sanlam Corporate Investments.
In terms of the two-pot system legislation, members must preserve the funds in their retirement component until they retire, when it must be used to purchase an annuity.
Even before the system’s implementation, there was significant pressure from the Congress of South African Trade Unions for members to be granted access to the retirement component in cases of retrenchment. The argument was that while members could tap into their savings component for short-term relief, they might not have other savings to rely on.
Read: Treasury agrees to three of Cosatu’s responses to the proposed two-pot system
In the 2025 Budget Review, National Treasury said it is working on measures that could permit fund members to access to their retirement components if they are retrenched and in financial distress.
During a presentation on Sanlam Corporate’s two-pot update, Van Zyl discussed how this measure could shape retirement outcomes, as well as other retirement-related proposals.
He emphasised the importance of preserving retirement savings.
“The main cause of poor retirement outcomes, according to several benchmark surveys and industry reports, is that members don’t preserve their savings. Too many members take all their retirement savings in cash when they change jobs, and they end up only saving for retirement in the last 10 years of their working life. That’s not enough to build a substantial retirement fund.”
Van Zyl said it did not make sense for people with retirement savings to go hungry when they are unemployed. However, allowing access to the retirement component would defeat one of the main purposes of the two-pot system: better preservation.
He said National Treasury is considering permitting access to the retirement component subject to strict conditions. One suggestion, for example, is to limit withdrawals to a percentage of a person’s income before they were retrenched.
“They want to see that members don’t have an alternative source of income, whether it’s UIF or anything else.”
Van Zyl questioned whether this would be practical. “How is it going to work? Will they give the full amount? When is it limited? […] How do you decide who’s in financial distress?”
There is also the impact on trustees to consider.
“Is it really up to them to determine who still has other income, who’s receiving UIF, who is in financial distress? I don’t think that’s practical, and I’m concerned about how much work and pressure this will place on our trustees.”
He noted that before the two-pot system was implemented, there was also discussion about allowing withdrawals from the savings component only in cases of financial distress.
“The pushback from the industry was that it’s nearly impossible for trustees to decide that, and that people are adults and need to take responsibility for their own retirement savings. That’s why no such criteria were placed on savings pot withdrawals,” Van Zyl explained.
Industry watching GEPF contribution holiday talks
Although not mentioned in the Budget, Van Zyl pointed out that the industry is closely monitoring ongoing discussions regarding the Government Employees Pension Fund (GEPF).
Before the Budget, there were calls for the government to pause its contributions to the GEPF, essentially suggesting a contribution holiday. Van Zyl noted that discussions had suggested potential savings of between R30 billion and R60 billion in just one year.
“Now, obviously, this is something that could be considered, but there are some downsides that we need to highlight,” Van Zyl said. “Firstly, there’s no legal framework for a contribution holiday for the GEPF – that’s something that will need to be created.”
He also pointed out that the GEPF aims to maintain a long-term funding level above 100%.
“Remember, the GEPF is a defined-benefit fund. If this is a short-term measure, it is funded by the government. Unfortunately, that means it falls to us as taxpayers.”
Van Zyl explained that with less money flowing into the GEPF, the fund would need to sell existing assets to cover retirement payouts.
“We need to think about what the impact will be on markets as well, given that it could be quite a substantial amount that needs to be sold.”
He noted that although a contribution holiday might provide short-term relief, it would not address the underlying issues.
“But it’s not really going to solve any of the issues in the long term,” he said. “Fortunately, this is not included in the Budget speech… It’s very clear that there should be a bit more thinking about how you want to do it and what the impact will be before something like this is implemented.”
Early retirement in public sector: a costly choice?
The Budget announced that R11bn will be allocated over the next two fiscal years to an early retirement initiative in the public sector. The aim is to allow people to retire early to attract younger employees to the public service. According to the government, this will save R7.1bn a year over the medium to long term.
Van Zyl said employees who are considering taking up this offer need to think carefully about the implications.
“It might sound like a big lump sum they’re getting, but will this be enough to see them through their retirement?”
Another downside, he said, is that the public sector might end up losing its most competent and experienced staff.
“They have the skills that they can easily transfer to the private sector, so they can take the retirement benefit here from the public sector, move over the private sector, and continue working there, and that might have an impact on your service delivery.”
Pushback on 45% offshore investment limit
Since 2022, retirement funds have been allowed to invest up to 45% of their assets offshore. However, Van Zyl noted there has been some pushback in the market, particularly from certain trade unions, which argue that the 45% limit might be too high and may not have been fully considered.
He said research by the International Monetary Fund raised concerns about how the increase was implemented, suggesting it could have been phased in more transparently rather than being introduced all at once.
However, despite these concerns, the research concluded that given the depth of South Africa’s financial markets and the limited impact on currency and bond markets, they do not support reducing the offshore investment limit. This stance is driven by concerns over reputation risk, implementation challenges, and potential administrative costs.
Van Zyl said, “That is pleasing for everybody in the industry. There doesn’t seem to be any serious thought about reducing the limit to how much we can have invested offshore.”
