In the run-up to and at the implementation of the Two-Pot Retirement System on 1 September this year, a significant amount of focus fell on the Savings Pot and withdrawing from it.
On the first day of September alone, Old Mutual received almost 100 000 queries on its WhatsApp channel, and more than 4 500 enquiries by phone. By Tuesday, only two days after the new system had taken effect, SARS had processed 2 424 tax directives for claims worth R103 million, according to EBNet.co.za.
The urgency with which many South Africans sought access to their retirement fund savings is understandable in our current economic climate. We are a society in which many members face daily financial challenges – the 2024 Savings & Investment Monitor, for example, showed that a third of surveyed South Africans have taken on more debt this year, 31% have cut down or given up important protection such as car or household insurance, and 36% are even gambling regularly to try and pay debt or expenses.
Access to extra cash is, for many, not a luxury, but a much-needed opportunity to fill a financial gap.
Yet access to the Savings Pot is only half of the Two-Pot story. In fact, with a third of a member’s contributions going into the Savings Pot, it’s only a third of it.
The larger, much less discussed, intention of Two-Pot is partial but compulsory preservation.
Early access vs locking in
With 67% of future retirement savings going into a Retirement Pot, which will only be accessible at retirement age, we now live in a world where everyone who saves into a retirement fund needs to preserve at least some of their money.
It’s a significant change for the better to the way the country’s retirement funds will work, and how many South Africans will be a step closer to retiring comfortably.
As Prabashini Moodley, Old Mutual Corporate’s Managing Director, recently wrote in a special edition of our MiNDSPACE publication, Old Mutual Corporate’s Retirement Reality research showed that – for most people – retirement expectations fall well short of reality.
Vast portions of our population are excluded from the retirement system, says Prabashini, and are left to either fend for themselves or rely on the state for support. At the same time, retirement outcomes across the board for those who do have access to the retirement system are not what they should be.
The Two-Pot Retirement System, and specifically the preservation component, is the latest initiative in a series of retirement industry reforms rolled out by the National Treasury aimed at solving the problem.
Will it work?
In the most recent Mercer CFA Institute Global Pension Index, South Africa’s pension system was rated 38th out of 47 pension systems worldwide, with a C grading (out of a possible A to E) and a score of 54 out of 100.
According to Dr David Knox, a senior partner at Mercer, the reasons behind South Africa’s grading showed that it can be improved through a number of relatively simple interventions, such as:
• increasing the minimum level of support for the poorest, aged individuals
• upping the coverage of employees in occupational pension schemes
• introducing a minimum level of mandatory contributions into a retirement savings fund; and
• introducing preservation requirements restricting members from withdrawing funds from occupational pension funds before retirement.
(Read his full article on the topic in MiNDSPACE)
The last recommendation is exactly what compulsory preservation does, while also including members who save outside of occupational funds, for example into retail retirement annuities, in the preservation fold.
Old Mutual’s modelling of future contributions and outcomes has also shown that in every scenario, whether a member withdraws some, all or none of the accessible Savings Pot funds over their lifetime, their income in retirement will improve compared to the previous system, in which they could withdraw all of their funds when resigning or changing employers.
The opportunity for intermediaries
The world of compulsory preservation introduces both challenges and opportunities for intermediaries in the retirement fund space.
Employers, trustees, human capital specialists and members have a lot more questions than before, which creates a renewed opportunity for intermediaries to provide the critical education and advice needed around the new system.
There are some advice risks to be aware of, but more than that there’s an opportunity to guide clients and retirement fund members toward refreshed thinking when it comes to where and how to preserve savings when one’s circumstances change. Because ultimately, in a Two-Pot world, where before members would have been able to leave their employer with all of the money they had saved into the organisation’s retirement fund, most or all of those funds will now have to be preserved somehow.
Many people, including intermediaries, don’t know, for example, that members of the Old Mutual SuperFund can preserve their funds within the SuperFund itself, with the same administration fee and in the same investment, if they leave their current employer.
One such option, the Protektor preservation fund, has both a pension and provident fund preservation option, so members can transfer their benefits tax-free from an employer fund. Funds are furthermore invested in Old Mutual’s Absolute Stable Growth portfolio, which provides an 80% capital guarantee for long-term capital protection.
Another such option is the Superfund Preserver, which also makes it possible for employees to continue their SuperFund membership even though they’ve left their employer. This also means members will have the same benefits and fees as when they were active members of the fund, and keep their investment options open for the future.
If you’d like to know more about Old Mutual’s preservation options or Two-Pot in general, get in touch.