New retirement system in South Africa raises red flags

South Africans are failing to effectively save for retirement, especially when changing jobs, and the new proposed ‘two-pot’ retirement system does not account for all the possible improvements to savings, says financial services company Alexforbes.
According to the group, only 9% of its members preserve their retirement savings when changing jobs.
The minister of finance announced during his budget speech on 22 February that the two-pot system will be implemented on 1 March 2024, despite concerns about the readiness of the systems to accommodate the new structure, said Alexforbes.
The new system will permit limited short-term access to retirement fund money for emergencies while ensuring the long-term preservation of savings for retirement. The Income Tax Act will be amended to include definitions for “savings pot,” “retirement pot,” and “vested pot” to effect these changes.
In terms of the proposed amendments to the Income Tax Act, retirement funds will be divided into three parts: the vested pot, which includes amounts accumulated before the new system takes effect, a savings pot that allows one-third of the funds to be accessed for emergencies, and a retirement pot that must be preserved in full until retirement.
Contributions made after 1 March 2023 must also be preserved until retirement.
The new rules will also not have a retrospective effect – which means that existing retirement savings and contributions made prior to the implementation date will not be affected.
“While the two-pot proposals go some way to address the issue of preservation, at least in respect of contributions made after 1 March 2023, there are other factors that need to be considered to improve retirement savings.”
Alexforbes said further improvements could be made in the following:
Increasing contributions
At present, the average contribution rate of 12.9% (after costs and risk benefits) by members of retirement funds is generally insufficient to achieve the ideal 75% income replacement at retirement, said the group.
Levels of debt
More emphasis needs to be put on programmes that assist in ensuring healthy financial habits and for people to live within their means.
Alexforbes said that there is a direct link between the amount of debt an individual is in and what they can afford in terms of contributions.
Alexforbes Member Insights showed that the debt-to-income ratio of the members was 69%, with 6% of members at high risk of financial stress.
“Millennials”, in particular, had higher financial stress. The higher the levels of debt and financial stress, the lower the amounts saved towards retirement, Alexforbes said.
Coverage
There are still people that are not covered by any form of retirement savings despite most formally employed workers belonging to a retirement arrangement.
The following changes could be made in regard to coverage:
- Auto-enrolment for formally employed and contractual workers.
- Scrapping the means test for the State Old Age Pension at retirement. This acts as a disincentive to save at present, said the financial services company.
- Separate interventions should be thoroughly explored for the informal sector, taking the specific dynamics of this sector into account to ensure a sustainable and workable solution rather than destabilising the integrity of the existing retirement funding system. Many other countries have also grappled with coverage in relation to the informal sector – with limited success in practice.
Although the group proposes some changes, it is overall in support of government plans over the long term.
“In the short-term, however, there will be pressure on administrators to process significant amounts of small claims given that a portion of accumulated savings to 1 March 2024 will be immediately accessible.”
It is imperative that retirement funds ensure that they can accommodate the changes, including:
- Significant changes to systems making use of the latest technology in engaging members;
- Investment strategies to cater for the various pots;
- Member communication and support to members to ensure members understand their options under the new system;
A further implication may be that free-standing funds consider moving to umbrella funds which would cater for the changes.