National Treasury has published further details around a new retirement system proposed for South Africa that will allow people to access a portion of their savings early in times of a financial emergency.
Treasury has described it as a ‘two-bucket’ system:
- The first bucket for longer-term financial security – Members must preserve their contributions and the compounded growth invested. They will not have access to this portion of their funds until they retire.
- The second bucket for short-term financial relief – Members may access the fund value for emergencies even while they are employed and a member of the fund.
While the changes have largely been welcomed, analysts have warned that the system will require significant changes to existing legislation as well as an in-depth public consultation process.
Rosemary Lightbody, a senior policy advisor at Association for Savings and Investment South Africa (Asisa), said changes to the current retirement benefit access rules would require amendments to the Income Tax Act, possibly also the Pensions Fund Act, and various other legislation.
In addition, administrators of retirement funds would need to make extensive system changes before a “two-bucket system” can be facilitated.
“We are sympathetic to the hardships endured by South Africans because of the Covid-19 pandemic and the lockdowns, but regrettably, there is no possible “quick fix” within the current legislative framework.
“We support a solution that will ultimately help retirement fund members during times of need while at the same time requiring preservation until retirement.
“However, it will be important to ensure that vested rights of current retirement fund members are protected.”
Lightbody said Asisa members have been inundated with queries from concerned retirement fund members and shareholders. “People are concerned that their current ability to access retirement benefits will be impacted.”
She said members of pension, provident and preservation funds must understand that their current access rights are highly unlikely to change.
“Future changes to access will in all probability only be applied to contributions made after the new legislation has taken effect.”
The flaw in the current system
Insurance company Alexander Forbes welcomed the new system, saying it provides a practicable and responsible solution to the real needs faced by members.
“In this way, the retirement fund industry can unlock the opportunity to play both a meaningful role in contributing to the financial resilience of members through their working lives as well as providing financial security into and through retirement.”
Currently, contributing members of employer-sponsored retirement funds do not have access to their savings while they are employed, even though they may be experiencing significant financial strain and may not have any short-term savings, Alexander Forbes said.
Fund members do, however, have access to their full savings when leaving their employer.
“As a result, most members then withdraw their full fund values to address their short-term financial needs, inadvertently weakening their ability to generate long-term financial well-being.
“Lack of preservation is the critical driver of poor financial outcomes at retirement. For this reason, we applaud recent innovations introduced by National Treasury such as retirement benefit counselling, which has had a marked impact on improving preservation behaviour at withdrawal.”
Alexander Forbes said that much clarification and consultation is also needed with the National Treasury on how the ‘two-bucket’ system will work. Any change to legislation will only be effected from 2022 at the earliest.