When the two-pot retirement system rolls out on 1 September, will withdrawals from the savings component cost the same for members of defined-benefit (DB) and defined-contribution (DC) funds?
In the latest Sanlam Benchmark Survey, Ryan Campbell-Harris, a consulting actuary at Simeka, said determining the withdrawal benefit amounts for DB members is likely to involve additional costs and time.
Vickie Lange, the head of Best Practice at Alexforbes, said withdrawal claims from a DB fund are generally likely to take longer to pay out.
“In terms of cost, this depends on the specific arrangements in place with each fund. At Alexforbes, the transaction fee is the same for DB and DC funds. However, the extent of any additional costs would be fund-specific, and it is therefore not possible to generalise.”
The two-pot system marks the most significant change in South Africa’s retirement landscape since the shift from DB to DC funds in the 1980s and 1990s. Employers transitioned to DC plans to manage financial risks, achieve cost predictability, and accommodate a more mobile workforce.
Although most private sector funds have adopted DC plans, many public sector funds – such as the Government Employees Pension Fund (GEPF), the Transnet Pension Fund, the Telkom Pension Fund, and the Eskom Pension and Provident Fund – retained their DB structures because of union agreements and their public employment nature.
A few private sector funds still include a DB section. Some large corporations also kept DB plans to attract and retain employees, although the trend is towards DC plans for new hires.
The two-pot system under DC funds
Once the two-pot system is active, DC retirement fund members can annually access a portion of their savings without resigning.
A fund member’s account will consist of three notional components: vested, savings, and retirement.
The vested component will hold savings accrued until the two-pot system’s implementation, with no new contributions allowed from 1 September.
Starting 1 September, one-third of contributions will go into the savings component, which will also receive a lump sum (seed capital) from the vested component – 10% of the member’s fund value on 31 August, capped at R30 000.
The remaining two-thirds will go into the retirement component, which must be preserved until retirement and used to purchase an annuity.
Members can make one withdrawal a tax year from the savings component, with a minimum withdrawal of R2 000. Withdrawals will be taxed at the individual’s marginal rate, and an administration fee will be deducted.
At retirement, any remaining balance in the savings component will be available as a cash lump sum or can be transferred to the retirement component and used to purchase an annuity.
Campbell-Harris says, for a DB fund, the administration of the accumulation of and a withdrawal from the savings component will be more complex because a member’s withdrawal benefit will first have to be calculated by an actuary. Furthermore, a member’s withdrawal benefit is related to the number of years of service, as opposed to the contributions made, as is the case in a DC fund.
He says, unlike a DC fund where the administrator only needs to track the size of each component, the DB fund administrator will need to keep a record of the different pensionable service dates of each component, which will change based on the number of months since the implementation and the number of withdrawals the member makes.
He argues that these withdrawal calculations could take up to an hour of an actuary’s time, potentially costing up to R5 000 per withdrawal request.
Withdrawals from DB funds will also be taxed at the individual’s marginal rate, and an administration fee will be deducted. However, the added cost of an actuary’s time will further reduce the payout amount, he says.
The two-pot system under DB funds
Lange confirms that in a DB fund, the calculations are usually done by an actuary and involve a value based on the member’s pensionable service.
“In simple terms, one-third of future service will be allocated to the savings component and two-thirds to the retirement component. In terms of the initial balance (seeding) in the savings pot on 1 September 2024, this will be a calculation by the actuary essentially reflecting 10% of the pensionable service to 31 August 2024, subject to the equivalent value thereof, as determined by the actuary, being no more than R30 000.”
The DB member’s withdrawal benefit after 1 September will then comprise total pensionable service to the date of withdrawal, comprising of savings component service (unless this has been withdrawn) and retirement component service.
“In total, the withdrawal benefit is no different in value than the current system – the difference is that the value corresponding to the retirement component cannot be taken in cash before retirement. Members can also access their savings component by cashing in the relevant portion of their service from this component,” says Lange.
According to the GEPF, when it comes to processing its members’ savings component claims, the current methodology for determining a DB member’s withdrawal benefit will largely remain the same “but will be adjusted to reflect the different service periods allocated to the vested, savings, and retirement pots”.
“The calculation process will continue to follow the same principles, with the main difference being the service periods used for the respective pots,” the GEPF states.
What members of DB funds can expect
The government fund adds that, as with its current process, calculations will be performed in the background by its system, and there will be no direct additional charges to members.
“The GEPF does not charge a per-member-per-month fee, and therefore there will be no increased fees per transaction. The processing time will also not significantly differ from the current timelines. Our administrator will be adding back-office capacity for anticipated increase in volumes in the initial stages,” the GEPF states.
At Alexforbes, funds are provided with a quotation for actuarial services. Lange says the actuarial fee to the fund covers the cost of performing the calculations.
“If certain claim volumes are exceeded, then funds are provided with quotations for the additional actuarial work. The cost of withdrawing a savings component will be a transaction fee, per Alexforbes’ sliding scale, together with any actuarial fees that may apply for the calculation. However, this is dependent on the specific arrangements with the fund,” she says.
Lange adds that Alexforbes has developed a house-view approach to the calculations, streamlining the process to ensure the calculations are as efficient as possible.
“We also anticipate that very few DB members, from funds administered by Alexforbes, will claim from their savings pots. However, this anticipated experience may differ across the industry,” Lange states.
