Government must think twice about ’emergency’ access to South African pension funds
Both South Africans and the national fiscus face financial risk if the government follows through on its floating idea to allow limited access to the locked position of the retirement pot.
This is the warning from Ronald King, Head of Public Policy & Regulatory Affairs at PSG Financial Services.
He explained that South Africa’s retirement reform was designed to give consumers limited access to cash in times of need without destroying their long-term savings.
However, the National Treasury is considering allowing limited access to funds that are currently strictly preserved until retirement under “very strict” conditions.
Chris Axelson, deputy director-general for tax and financial sector policy, said that discussions around potential reforms to the two-pot retirement system are expected to begin later this year.
“There were some requests for refinement for the two-pot regime. We do aim to initiate discussions later this year to talk about potential access to the retirement pot, but only under very strict financial distress conditions,” he said.
However, speaking in an interview with 101.3FM, King warned that the government must be extremely cautious about going any further.
King said the success of the new two-pot retirement system relies on the fact that not all of a member’s pension savings are available for withdrawal.
“The thing that really made this access in the two-part system work was the fact that it came with a provision that the other two-thirds would remain,” he said.
He argued that the safeguard is what prevents the system from becoming a slow-motion collapse of retirement security.
According to King, the entire purpose of the reform was to improve preservation after years of South Africans cashing out retirement funds when changing jobs or resigning.
“This kind of struck that balance saying, well, you can access it a little bit, but two-thirds were off limits, and you’d have to annuitise that,” he said.
Sanity will likely prevail
King stressed that the true cost of early access is often badly underestimated because the loss actually stretches far beyond retirement age.
“Your retirement date is not the actual date that you need to quantify this loss to. If you’re going to live to 95 or 100, and you’re currently 40, you’re talking about damage that is quantified over 50 years,” he said.
He explained that for every R1 you take out of your retirement savings, you are hurting your future retirement by R7.
That pain is worsened by the tax. King said South Africans are effectively penalising themselves twice.
“If you withdraw R15,000 from your retirement fund, R5,000 of that is in any way not going to reach your pocket. Only R10,000 is going to reach your pocket, but you’ve lost R15,000, and you’ve lost that R15,000 multiplied by seven.”
King warned that easier access to pension savings could have serious economic consequences.
He explained that the retirement industry’s large pools of capital are essential to South Africa’s long-term investment needs.
“This money that is in the retirement fund industry is the money that is currently being focused on redeveloping our infrastructure,” he said.
“The moment that those funds do not know whether you are going to draw that money next year or not, they cannot make long-term investments.”
This uncertainty would force retirement funds to hold more conservative, short-term assets. “They suddenly now need to put the money in the bank because you might draw it tomorrow,” King said.
He also warned that weakening retirement preservation now could eventually become a major fiscal problem for the state.
“If more and more people end up at retirement without retirement savings, you can just see that the number of people that would need a subsidy from the government will just increase,” he said.
Additionally, weaker growth and fewer long-term investments would mean lower tax revenue, which could create a debt spiral for the country as a whole.
Despite the public pressure for relief, King said he still believes Treasury will hold the line. “I have a lot of faith and trust in our National Treasury and our Reserve Bank,” he said.
“I think that the National Treasury is doing what it should do, listening to everyone out there. But I do believe that sanity will prevail, and I don’t think this will happen.”
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