Politics at play? Slow down, our savings are at risk here …

The retirement industry has been caught off guard – politicians voted on Tuesday that the proposed two-pot pension fund regime be implemented on 1 March 2024, instead of 1 March 2025 as National Treasury advised only a few weeks ago.

Treasury decided to delay the implementation as many financial service providers expressed concern that their systems would not be ready by March 2024. It is of the opinion that the South African Revenue Service (Sars) and the retirement industry need until 2025 to adapt to the proposed changes on how SA retirement funds are to be invested in future.

Read: Government will allow early access to pension funds from March

The operative word here is ‘proposed’, as changes to the Pension Fund Act to implement the new system have not been finalised and passed into law.

In addition, there is still a lot of confusion about the new system. Financial advisors, pension fund members and the general public are still not up to speed on how the new two-pot system will work – especially as there are actually three pots in the new two-pot system.

Read: Two-pot system will not make any pension savings immediately available

Most people have heard about the two-pot system, which was proposed a few years ago, and would probably agree that it is a good idea to keep a pension fund safe for retirement – not to be withdrawn and spent every time somebody changes a job.

The proposal was two separate retirement funds into two pots, one of which would have a tight lid that can only be lifted at retirement.

The second, a savings pot, can be accessed from time to time to grant temporary financial relief in cases of emergencies. The Covid-19 pandemic was often cited as such an emergency, and people were quick to ask how much of their retirement fund they will have access to, and when.

Eventually a three-pot system evolved, compromising a vested component, a savings component and a retirement component.

Why the rush?

Richard Carter, head of assurance at Allan Gray, says he is concerned about what this means for the industry and investors, and that there are significant risks to rushing through the legislation needed for the system to operate.

“We are surprised by [Tuesday’s] vote in favour of bringing the two-pot implementation to less than four months from now. This is a tough ask as most retirement funds and their administrators will simply not be ready in time,” he says.

“Given that consultations on the detail are still in progress and that regulation is still being finalised, we believe that moving it forward is premature.”

Carter points out that some of the changes can only be made once the regulation is finalised, because it is the legislation that governs the required changes.

“There must be time for the industry to make the administrative changes and make them properly so that people retain their trust and confidence in the system.

“If you push the legislation through too fast and rush the changes that must be made and then cannot pay people what they expect, it can be dangerous and end up doing more harm than good,” he says.

He believes the two-pot system is likely to positively change behaviour, if it delivers on its intention.

“Overall, if the idea is implemented well, it will move us in the right direction. However, as with everything, the devil will be in the detail, including in the legislation,” he says.

Read: Two-pot system: Will we be able to access money already accumulated in the current pot?

“We understand the broad strokes of the expected changes, but not the exact details. Administrators need to amend [their] systems based on precise requirements, funds need to process rule amendments based on finalised legislation and the Financial Sector Conduct Authority (FSCA) needs to process all those amendments prior to implementation.

“Members and their advisers also need to receive clear and accurate communication about how the changes will affect them.

“None of this can be done until the uncertainty is resolved,” says Carter.

“The industry has repeatedly said that the expected length of time it will need to implement the changes – once legislation is promulgated – will be 12 to 18 months.”

New contributions

The new system will require all new contributions made to retirement funds to be split into two portions:

• Two-thirds will be allocated to a retirement component, which must be preserved until retirement; and
• The remaining third will be allocated to a savings component, allowing one withdrawal per year prior to retirement.

At retirement, whatever is left in the savings portion will be available as a cash lump sum. The retirement portion will have to be used to purchase an annuity.

The third pot, the so-called vested component, will unlock 10% of the existing pension fund immediately, up to a maximum of R30 000 – to alleviate financial difficulties.

Good move, but …

The retirement industry has welcomed the proposed changes to the existing pension funds system and its intention to allow access to money for people who desperately need it, while at the same time improving the preservation of retirement savings.

The consensus view is that access to a bit of people’s pension will see the amount of money in the system grow and lead to better retirement outcomes for most savers over the longer term by removing the access to pension funds every time a person changes their job.

Read: ‘Two-pot’ system expected to double retirement outcomes for new members

When considering it, National Treasury mentioned in its discussion papers that there is enough evidence that people would often resign only to get access to their retirement savings in times of need. That leaves them unemployed, and very soon without any savings too.

According to Carter, there are other concerns that legislators still need to work out, such as how to handle defined benefit funds.

“There seems to be agreement that defined benefit funds should be included in the new system, but that is easier said than done,” he says.

“Defined benefit funds work differently – it is not a simple matter to split contributions into two portions, given that the rights and benefits of members are not defined in terms of contributions, but rather in terms of a formula often based on factors such as salary and years of service.

“These benefits must be adjusted fairly whenever a withdrawal is paid out,” he says.

A full analysis of the regulatory aspects and challenges of the two-pot system can only be properly undertaken once the final legislative amendments have been published – for which parliament has only given itself a few months, and with very little time thereafter for the industry to implement them.

Read: Two pots of gold: What you should know about the ‘two-pot’ retirement system