The largest reform of South Africa’s retirement system is at risk of not being appropriately implemented due to the aggressive timeline set by the government, potentially resulting in the system being unsustainable.
This is feedback from Coronation product development actuary Rael Bloom, who wrote in a research note that the stakes are very high in reforming the retirement industry.
Ultimately, the imminent rollout of the two-pot retirement system will address key deficiencies in the country’s current retirement framework and deliver better results for South African retirees.
However, an unsuccessful or rushed implementation risks destabilising the retirement industry and undermining confidence in a crucial part of the economy.
The proposed “two-pot” retirement system aims to balance future-proofing your finances with emergency access to the funds.
Your contributions are split into a locked “retirement pot” for long-term growth and a “savings pot” for occasional withdrawals in times of need.
While the retirement pot secures your golden years, the savings pot offers tax-advantaged early access compared to the traditional withdrawal option.
This reform aims to create better outcomes for retirees by promoting higher levels of savings and by preventing South Africans from withdrawing all of their retirement savings early.
Under the current system, individuals are allowed to cash in their occupational retirement savings when leaving employment, which most members do.
The result is that only a tiny minority of individuals have sufficient savings when they retire.
Currently, the two-pot system is set to be implemented on 1 September 2024 after being pushed back from the initial date of 1 March 2024.
However, major hurdles need to be overcome before that can happen.
In particular, a raft of regulatory changes is required to give legal effect to this new system and clarify the necessary changes. This includes changes to the Income Tax Act and Pension Fund Act.
SARS will have to adjust its systems to manage additional tax requirements, and other financial sector regulators must approve amendments to their rules governing retirement funds.
Furthermore, retirement fund managers themselves must make preparations to ensure they can implement the new system and educate their members about the changes to their existing savings.
Bloom warned that these changes are at risk of being rushed by the aggressive timeline set by the government to implement the largest retirement system reform in South African history.
He also said there is a real risk of savers being unhappy with the sudden changes to their retirement funds and general confusion.
There are also risks to the long-term sustainability of the retirement industry in South Africa if lump sum withdrawals result in large sums of money flowing out of the system.
To prevent this, Bloom said the industry would have to strictly adhere to keeping the two pots separate and not eventually allow early access to the retirement pot.
If the industry is not disciplined, then there will be severe negative impacts on retirement savers and the broader economy, Bloom warned.