It’s not easy to save – not just for retirement, but also for unexpected emergencies. So when South Africa’s National Treasury released a paper in December 2021 outlining its proposals for retirement reforms that would allow South Africans to withdraw some of their pension money before they retire, industry insiders praised it. As Andrew Davison, Head of Advice at Old Mutual Corporate Consultants, says, ‘It has the potential to significantly alter the savings patterns and retirement outcomes of a wide swathe of the South African population.’

The paper, titled ‘Encouraging South African Households to Save More for Retirement’, details how Government aims to address the dual challenge of South Africans not having enough money in their pension or retirement funds to retire financially secure, while also having limited access to their savings before retirement.

How will South Africa’s proposed two-pot retirement fund system work?

The proposed two-pot system is in line with the existing arrangement that allows you to withdraw a third of your savings as a lump sum at retirement. The rest is used to provide you with a monthly income based on your annuity strategy.

Under the new system, your retirement savings will be split into two pots at the point that you pay your monthly contributions:

• an accessible pot in which a third of your contributions will be invested; and
• a retirement pot, where the other two thirds will be invested.

How much of your retirement savings will you be able to access before retirement?

‘The paper sets out the considerations in granting such emergency access,’ says Davison, ‘based on a proposal of allowing, say, 10% of accumulated savings up to a maximum of R25 000.’ These changes have to be carefully considered and designed so that fund members won’t be left in a financially insecure position the day they retire, and an important pillar of a strong financial system won’t be weakened.

How would early access to retirement funds work?

Treasury has therefore asked the public for ideas on how best to allow access to retirement savings without overwhelming retirement fund administrators and SARS, and without placing pressure on financial markets. ‘One possible suggestion in the paper is to allow 10%, up to a maximum of R25 000, to be immediately transferred to the accessible pot, effectively seeding this pot for all current members,’ says Davison. ‘It would allow them to withdraw from it whenever they wanted and hopefully avoid a mad scramble.’

In terms of timing, Davison says people will have to be patient as they are unlikely to get access to this money very soon. Although it might seem simple, it requires changes to legislation and retirement fund rules, and to fund administrators’ systems and processes to be implemented first. Investment strategies possibly will have to be adjusted too to facilitate this.

Automatic pension enrolment for contract workers

Another group who may be happy to hear about the proposals are temporary, contract and seasonal workers, as well as the many people who’ve joined the gig economy since the national Covid lockdown began. National Treasury proposes widening retirement coverage to include them by introducing auto enrolment that would require employers to enrol all employees into a retirement fund.

‘In this regard, various challenges will require careful thought and planning. This includes:

• the infrequent and variable contributions due to inconsistent earnings;
• the absence of a clear ‘salary’ on which to base contributions and benefits (especially for self-employed and gig workers);
• whether to allow opt-out at individual level;
• affordability; and
• the possible need for a wage subsidy,’

says Davison. But at least non-permanent staff are on the radar.

The two-pot system will take time and effort to implement, but Davison believes it could give South Africans greater control over their savings, while also ensuring that their retirement savings remain dedicated to their retirement plan.

‘The proposals will require a lot of work and involve significant operational challenges for the retirement industry,’ Davison concludes. ‘Will it be easy? Certainly not. Are there risks? Absolutely. Is it worth it? Most definitely.’

Read Malusi Ndlovu’s article in MiNDSPACE that explains why these changes are on the table now and what the impact of allowing South Africans early access to their pension funds is likely to be.