Two-pot retirement legislation must provide for immediate relief, says Cosatu

Cosatu has called for fund members to be allowed to access their accumulated savings when the two-pot retirement system takes effect, to prevent them from resigning and cashing out their savings.

This was one of three key changes to the draft two-pot legislation proposed by Cosatu during its presentation to the National Assembly’s Standing Committee on Finance on Tuesday.

The committee heard presentations from stakeholders on the draft 2022 Rates and Monetary Amounts and Amendment of Revenue Laws Bill and the 2022 Draft Revenue Laws Amendment Bill, which amends the Income Tax Act to create the two-pot system.

Read: Treasury publishes draft two-pot retirement system legislation

Read: Administrators, funds will need 18 months to prepare for two-pot system, says Asisa

Matthew Parks, Cosatu’s parliamentary co-ordinator, told the committee that workers were “drowning in debt” and wanted immediate financial relief once the legislation was enacted.

In its current form, the draft legislation allows retirement fund members to withdraw up to one-third of their savings in the savings pot once a year. However, savings will start to accumulate in the savings pot only once the legislation takes effect. According to the draft legislation, this will be on 1 March next year.

Treasury rejected calls made in the lead-up to the release of the draft bill in July for members to be allowed to seed their savings pot using their existing savings.

In a statement, Treasury said: “While there were many public requests for immediate access to accumulated retirement funds, it would not be in the best interest of members or the stability of retirement funds to do so, particularly at a point when the value of accumulated assets is already under pressure. These products were not designed to accommodate such a withdrawal, and it is members who will suffer if their retirement interest is diminished by large lump-sum withdrawals.”

Treasury’s stance is supported by the Association for Savings and Investment South Africa.

Parks said that if financially hard-pressed members were not provided with immediate relief, they would resign so they could withdraw their savings from what the legislation calls the vested pot. If this happened, it would undermine the progressive objectives of the bill, he said.

The vested pot will house the savings members have accumulated before the legislation comes into effect.

For members to have savings available to withdraw immediately on implementation of the two-pot system, Cosatu wants the draft bill to be amended so that members are allowed to transfer their existing savings into their savings and retirement pots when the legislation is enacted.

‘Allow members to withdraw from the retirement pot’

Cosatu’s second objection to the draft legislation is that it prohibits fund members from withdrawing savings allocated to their retirement pot.

Members will not be able to access savings in the retirement pot before they retire, even if they are retrenched or resign. The savings in this pot must be preserved and used to buy an annuity at retirement.

Parks said members should be allowed to withdraw from their retirement pot if they are retrenched or forced to resign because a spouse finds work in a different province.

He said removing the right to access savings in the retirement pot would result in retrenched members losing their homes, because they would not be able to pay their mortgage bonds, and their families being condemned to poverty, even though they had retirement savings.

To prevent the right to access retirement savings from being abused, Cosatu proposed that members should have to provide proof that they have been retrenched or that they resigned in order to relocate.

‘Access to the savings pot should be guaranteed’

Cosatu also wants the legislation to be amended so that access to the savings pot is guaranteed.

In Cosatu’s view, the draft bill gives trustees of each fund the discretion to decide whether or not to establish the two-pot system. If a fund’s trustees decide not to establish the two-pot regime, members of that fund will not be able to access their savings in the savings pot.

Parks told the committee that fund administrators profit from retirement fund investments, and some boards of trustees have “an unhealthy relationship” with administrators – for example, in the form of kick-backs. Cosatu was concerned that some administrators may veto giving members access to their savings pot.

Responding to a question from Moonstone, Parks said Treasury has indicated that retirement funds that decide not to establish the two-pot system will forfeit the favourable tax regime for retirement funds. Treasury believes this will be a powerful incentive for funds to opt in.

Cosatu said the draft bill should be amended so that the decision to implement the two-pot system was not left solely to the discretion of trustees.

To address the liquidity constraints that could make funds reluctant to allow members to access their savings, Cosatu proposed that the bill sets criteria for members who must be given priority when allocating savings – for example, those who have lost wages, are highly indebted, or have financial or medical emergencies. These could be verified through bank statements, credit bureau profiles or invoices from medical practitioners.