Solidarity retirement fund warning

Trade union Solidarity issued a serious warning about the new two-pot retirement system, saying it risks considerably reducing the retirement money available for South Africans who choose to withdraw.

Solidarity’s comment comes after President Cyril Ramaphosa signed the Amendment Bill on Income Laws earlier this month, establishing the “two-pot” retirement system.

This system will allow members of retirement funds to access a portion of their retirement savings while still employed – an action that will require feverish preparation from pension funds and fund administrators before the system takes effect on 1 September 2024.

From this date, employees can access their pension funds’ savings pot, providing a balance of at least R2,000 in the fund to withdraw. 

The savings pot represents one-third of the total fund, while two-thirds are preserved for retirement and must remain untouched. Only one withdrawal per year is permitted.

Solidarity’s deputy chief secretary for strategy, Marius Croucamp, said that, although the system also aims to give employees access to funds for emergencies, it carries risks.

“The biggest risk is that there will be considerably less retirement money available on the day of retirement for the person who has withdrawn money from their savings pot,” he said. 

“They may then need to find additional income somewhere to support themselves in their old age. The temptation to easily take money from the savings pot will be great since it can be done annually.” 

Another important consideration is that any money withdrawn will be taxed at a person’s marginal tax rate because it is considered income. “This can push the person into a higher tax bracket,” Croucamp said.

He cautioned people to ensure their tax affairs are in order and up to date before withdrawing money from the savings pot. 

In addition, in cases where home loans have been granted through these funds, he warns funds to ensure there is enough money to cover the specific loan or guarantee before considering savings pot payments.

“Retirement funds must also amend their fund rules to comply with the requirements of the two-pot system,” he said. 

“Since there are hundreds of retirement funds in South Africa, the authorities will have to work hard to approve all the amendments before 1 September 2024.”

“The biggest concern, however, remains retirement provision, with only 6% of South Africans able to retire comfortably and more than 70% needing to find further income after retirement to survive.”

Croucamp calculated that you need to work for 41 years and save at least 15% of your income every month in a retirement fund just to receive an amount equivalent to 75% of your last salary on a monthly basis at retirement. 

He explained that regular withdrawals of retirement money before retirement would make it nearly impossible to provide adequately for your retirement, and thus, poverty in old age could be a foregone conclusion.

It remains extremely important to handle retirement money responsibly and judiciously despite this legislative change.

Other warnings

In issuing this warning, Solidarity has joined a chorus of asset managers and retirement specialists who have warned about the implementation of this new system.

For example, product development actuary at Coronation Rael Bloom said a major risk with the tight deadline for the implementation is that it will be rushed.

This increases the chances of delays, errors, and savers’ lack of understanding of the system changes. It may also result in discontent among retirees and undermine confidence in the retirement industry. 

He also highlighted risks relating to the initial seed capital lump sum payment that will be made available to members when the system is implemented, stressing the importance of ensuring that this initial seed payment is allowed only once, and that after the seeding has taken place, the only amounts accessible to members should be the balances available in their savings pots.

Bloom outlined what happened in the Chilean retirement market during the Covid-19 pandemic to highlight the risks of creating an expectation for recurring lump sum withdrawals. 

Prior to the pandemic, Chile’s pension system was generally well-regarded. However, its retirement system was decimated following a series of Covid-19-related withdrawals, with over $50 billion flowing out of the system.

In contrast, Australia also allowed emergency withdrawals from Superannuation funds during Covid, but only under very specific and limited means-tested conditions. 

This protected the integrity of the Australian system, allowing it to recover once the immediate needs of the pandemic had passed.

Old Mutual CEO Iain Williamson also warned of significant outflows and the potential impact on the retirement fund industry. 

Williamson said implementing this system will inevitably result in material outflows from retirement funds in the short term. 

“We expect to see material outflows from the effective date for a few months and then a gradual slow down to a steady state,” he said. 

This has the potential to significantly impact the earnings of asset managers who are heavily exposed to retirement products. 

Not all bad news

However, Williamson said the reforms will likely be positive for the industry in the long run as it will encourage South Africans to leave most of their savings invested for retirement.

Old Mutual has welcomed the signing of the Revenue Laws Amendment Bill, which it described as a significant step forward for retirement savings in South Africa.

“There are significant long-term benefits of this new system, which will bolster financial well-being and provide more flexibility,” said Old Mutual Corporate Consultants managing executive Blessing Utete.

Institute of Retirement Funds Africa (IRFA) President Geraldine Fowler has also said the two-pot system offers retirement fund members an opportunity to think more about their retirement savings.

“This system provides flexibility for fund members that were not available in the past. Members will now need to engage with their retirement funds more often and consider the long-term impact and the taxation of benefits,” she said.

IRFA spokesperson Wayne Hiller van Rensburg said the organisation has consistently endorsed retirement reform and the impact the establishment of the system will have in assisting members in the short term while securing future benefits.

Fowler also said, “Members will need information and guidance to better understand their options in terms of the two-pot system and the impact of their decisions to take advantage of the legislation.”

“We are, however, waiting for the Pensions Bill and look forward to its signature, which is necessary for full clarity but not necessary for the implementation of this reform,” Hiller van Rensburg said.