Actuarial modelling by the Retirement Matters Committee of the Actuarial Society of South Africa (ASSA) shows that National Treasury’s proposed “two-bucket system” is likely to result in significantly higher monthly retirement income for pensioners.
The proposed plan would allow a portion of savings to be accessed ahead of retirement while the balance is reserved for the longer term. This results in the so-called “two bucket system” where one bucket is accessible, and the other is preserved for future retirement benefits, said Natasha Huggett-Henchie, a member of the Retirement Matters Committee and principal consulting actuary at NMG Consultants and Actuaries.
The actuary said that a well-designed, actuarially sound two bucket system would solve two problems for retirement fund members:
- They will have access to emergency funding when needed;
- Their savings will benefit from compound growth, leaving them with a substantially bigger nest egg on retirement.
This system has the potential to triple pensioner income and should allow for early access of funds, the nation’s Actuarial Society said. If two-thirds of the funds are put away for longer that should improve the outcome threefold, Huggett-Henchie said.
What it will mean for your money
To illustrate the impact of the new system, the members of the Retirement Matters Committee modelled the following scenarios:
- Scenario 1: A retirement fund member who joined a fund at age 20 changes jobs every seven years and withdraws the full benefit every time. However, once the member reaches age 50, they will focus on saving for their retirement and start preserving their benefits until age 65.
- Scenario 2: The two buckets system has been implemented and the member, who joined a retirement fund at age 20, has access to one-third of their benefit in the access pot. The member withdraws the full available amount in the access pot every five years until they reach age 65.
The member in the first scenario is likely to retire with a net replacement ratio (NRR) – the ratio of the member’s pension expressed as a percentage of their pre-retirement salary – of around 15%, which means that they will have to learn to survive with a monthly pension equal to 15% of what they earned in the year before they retired.
Huggett-Henchie said that if this member further reduced their retirement benefit by taking another cash portion at retirement, their NRR would drop to 10%.
Therefore, someone earning R20,000 a month before retirement would now have to survive on R3,000 a month, reducing to R2,000 if they take a lump sum at retirement.
By contrast, the member in the second scenario will retire with an NNR of 36% on their full benefit, or 32% if the cash portion is accessed. In other words, their monthly income is more than three times higher than if they had been allowed to follow the path of the person in the first scenario.
Huggett-Henchie said that despite withdrawing their full one-third over their working years up to retirement, the remaining amount would benefit from compounding. Staying with the example of someone earning R20,000 a month before retirement, this person would have access to a monthly pension of R7,200, reducing to R6,400 if they take a lump sum.
Huggett-Henchie stressed that the best outcome is achieved by retirement fund members who never access their retirement savings, thereby enabling the power of compounding.
“Someone who doesn’t access their benefits ever could end up with an NRR of almost 52% if they don’t take cash at retirement, or 32% if they do. The rand equivalents are a pension of R10,400 per month, or the same R6,400 if they take a lump sum, relative to the salary of R20,00o.”
For this reason, all retirement fund members should be provided with meaningful information about the impact of accessing their emergency bucket on their long-term retirement aspirations, she said.
Rules regarding access
The pension reforms have been on the agenda for almost a decade, noted Bloomberg, but gained momentum after coronavirus lockdowns battered the economy and pushed the unemployment rate to a record high. That’s led to mounting calls on the government to make retirement provisions more readily accessible – a step that could have dire consequences if mishandled and pensions are squandered, Bloomberg said.
National Treasury is still working out the details of how a new system will work. The Retirement Matters Committee has made several recommendations for consideration based on its modelling work, especially regarding the rules and restrictions regulating the accessibility of the emergency portion.
Huggett-Henchie said the committee feels strongly that there should be absolutely no need-based rules, as this is open to abuse and very onerous and costly to administer.
“Our modelling indicates that forcing the compulsory two-thirds preservation actually improves outcomes at retirement, and members are going to find a way to borrow against or spend their one third anyway. Access to the one third should therefore be available to all retirement fund members regardless of need.”
She further pointed out that the frequency of withdrawal from the access pot does not affect the ultimate net replacement ratio at retirement. “If you withdraw more frequently you just get a smaller cash amount each time as it doesn’t have time to build-up, but the preservation part remains unchanged.”
The actuary added that there will, however, be an administrative burden to pay the cash amount, and therefore some restrictions would be needed to reduce frequency.
Huggett-Henchie suggested putting some initial controls in place, including limiting the number of withdrawals and capping the rand amount.
“Here we would suggest that the regulators allow annual withdrawals, with a free once-off withdrawal every five years. Additional withdrawals should be subject to an administration fee deducted from the benefit.”