Allow withdrawals from pension funds to increase retirement savings

Allowing limited withdrawals from pension funds will actually help people save more for retirement, according to a National Treasury study. Research has found that people sometimes quit their jobs just to access their pension fund in an emergency, and end up spending it all.

The proposal to split retirement funds into two “pots” and allow people to withdraw from one should solve the problem.

The Treasury recently released more information on this and other proposals in a paper titled “Encouraging South African Households to Save More for Retirement”.

The document discusses the main outstanding proposals from the pension reforms initiated in 2012 which aim to promote a higher level of savings, widen coverage and promote better preservation and consolidation in the sector in order to reduce costs. and charges for members of pension funds.

“The proposed restructuring of retirement savings aims to remedy the situation where many members of the funds find themselves short of cash (because they do not have alternative or sufficient forms of short-term savings) and then quit their jobs to access their retirement savings. These withdrawals must not compromise the long-term goal of building up savings for retirement; hence the design of the two-pot system which includes a preservation requirement to improve retirement outcomes and maintain the integrity and sustainability of retirement funds,” the document states.

“While workers who are formally employed and who belong to a union tend to be covered by the current exemption, this is not the case for workers who do not belong to any union, nor those in the small economy. jobs.

“In addition, consolidating the pension fund industry into fewer large pension funds could bring some cost benefits to funds and members, including economies of scale, improved governance and disclosure. “

The Treasury notes that the government will also introduce legislation to allow automatic or compulsory enrollment of employees in a pension fund to extend coverage to the most vulnerable workers, such as contract and temporary workers. The document specifically mentions domestic workers and super drivers as examples.

Insufficient savings

The authors of the article claim that South African households are not saving enough for their retirement, nor for their short or medium term needs. “Household savings average just over 2% of GDP per year, most of which is contractual savings for pension funds.

“However, aside from the low level of savings for retirement, members tend not to preserve their savings and typically access them when they leave their jobs. As a result, retirement replacement values ​​are low.

The Treasury cites figures from different studies to drive the point home. The Sanlam Benchmark Survey 2021 found that people have to make do with around 25% to 30% of their usual post-retirement salary, with retirees concluding they ‘cannot survive’ on the severance pension offered by a guaranteed annuity .

“Discretionary savings are also low, for example, one in three respondents (34%) to the annual Old Mutual Savings and Investment survey (2021) said they did not have enough savings to last longer. month (at most) if they lost their income/job.

“Furthermore, the survey indicated that 56% of respondents had ‘high and overwhelming’ levels of financial stress in 2021,” the authors say, concluding that most South Africans are vulnerable even though they are still working. .

According to the SA Revenue Service, around R78 billion is withdrawn from the pension system through pre-retirement withdrawals each year, compared to annual pension fund contributions of around R246 billion.

Proposed two-pot system

The Treasury hopes the two-pot system will help people in financial difficulty withdraw money from their retirement funds, while keeping most of the retirement money invested. The idea is that one-third of a person’s pension fund would be in an accessible pot and only two-thirds available in retirement.

The proposal will apply to pension and retirement funds, as well as retirement annuities.

Pension fund administrator Alexander Forbes expects the proposed two-pot system will allow pension fund members to accumulate more than double the value of their fund in retirement compared to the current system , while giving them access to a portion of their savings each year.

“Ultimately, the two-pot system offers employers and funds the opportunity to rethink their benefits and investment strategies to impact people’s lives by striking a meaningful balance between short-term and long-term needs. term,” said John Anderson, Chief Investment Officer. , products and enablement at Alexander Forbes.

“The proposals also place greater emphasis on the need for pension funds to better connect with members to provide information, education and advice at critical life stages to optimize their financial results in the short and long-term.

“Lack of preservation is the main driver of poor financial performance in retirement. According to the Alexander Forbes Member Insights for 2021, only 9% of members preserve their retirement savings when changing jobs. This in turn leads to very poor outcomes in retirement, with the average replacement rate being only 31%.

“This means that for every R1,000 earned by a member before retirement, it will only replace R310 of income upon retirement.

“For this reason, the proposed reforms are necessary to balance members’ long-term retirement savings goals with meeting short-term financial needs,” says Anderson.

Blessing Utete, a senior executive at Old Mutual Corporate Consultants, says the “two-pot” system for superannuation, provident and pension funds would improve savings and retirement outcomes.

“In the future, we are planning a scheme in which members of pension and provident funds will no longer be able to access all of their retirement savings in the event of dismissal or change of employment. This step is essential for compensate for the pension savings crisis, which affects most workers in South Africa,” he says.

“However, allowing members of private and professional funds to access some of their savings in an emergency will provide some relief in times of need.

“The new system is a monumental change for the retirement industry, as it will improve long-term retirement outcomes, while providing flexibility to deal with unforeseen events before retirement,” says Utete.

Utete says the industry has been eagerly awaiting this document to clarify the amount of money available for immediate access when the new legislation comes into force. “Other issues the discussion paper should address include frequency of access; the conditions of access; how potential abuses will be mitigated; what measures can be concretely implemented; what are the practical constraints of Sars and what will be the tax implications,” he says.

However, the Treasury indicates in the discussion paper that the government recognizes the need to proceed with caution, given the macroeconomic problems facing the country, and also notes the need for care as the pension system is a key pillar of the South African economy.