Allowing withdrawals from pension funds to increase retirement savings

Overall savings expected to more than double under the proposed ‘two-pot’ system.
The idea of the two-pot system is that a third of a person's pension fund would be in an accessible pot and two thirds only available at retirement. Image: Shutterstock

To allow limited withdrawals from pension funds will actually help people to save more for their retirement, according to a study by National Treasury. The research found that people sometimes resign from their jobs for the sole reason of accessing their pension fund in emergencies, and end up spending everything.

The proposal to split retirement funds into two ‘pots’ and give people access to withdraw from one is expected to solve the problem.

Treasury recently published more information on this and other proposals in a paper entitled ‘Encouraging South African households to save more for retirement’.

The paper deals with the key outstanding proposals of the retirement reforms initiated in 2012 which aim to promote a higher level of savings, expanding coverage and promoting better preservation and more consolidation in the industry to reduce costs and charges for pension fund members.

“The proposed restructuring of retirement savings aims to address the situation where many members of funds find themselves cash strapped (because of not having any alternative or sufficient forms of short-term savings) and then they resign from their jobs to access their retirement savings. Such withdrawals should not undermine the long-term objective of building 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,” states the paper.

“Whilst workers that are formally employed and belonging to a labour union tend to be covered under the current dispensation, this is not the case with workers not belonging to any labour union, nor those in the gig economy.

“Further, consolidation of the retirement fund sector into a smaller number of large retirement funds could bring a few cost advantages to funds and members – including economies of scale, improved governance and disclosure.”

Treasury notes that government will also introduce legislation to enable automatic or mandatory enrolment of employees to a pension fund to expand coverage for more vulnerable workers, such as contract and temporary workers. The paper specifically mentions domestic workers and uber drivers as examples.

Insufficient savings

The authors of the paper say that South African households do not save sufficiently for retirement, nor for their short- to medium-term needs. “Household savings average just above 2% of GDP per annum, most of which is contractual savings for retirement funds.

“However, aside from the low level of savings for retirement, members tend not to preserve their savings, and commonly access them when leaving their jobs. As a result, replacement values at retirement are low.”

Treasury quotes figures from different studies to drive home the point. The Sanlam Benchmark Survey 2021 found that people have to get by on around 25% to 30% of their usual salary after retirement, with retirees concluding that they “cannot survive” on the starting pension offered by a guaranteed annuity.

“Discretionary savings are also low, for example, one in three (34%) respondents to the annual Old Mutual Savings and Investment survey (2021) stated that they do not have enough savings to last more than a month (at most) if they lost their income/jobs.

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

According to the SA Revenue Service, around R78 billion is taken out of the retirement system through withdrawals made before retirement each year, compared with annual contributions to retirement funds of around R246 billion.

Proposed two-pot system

Treasury hopes the two-pot system will help people in financial distress to withdraw some money from their retirement funds, but still keep most of the pension money invested. The idea is that a third of a person’s pension fund would be in an accessible pot and two thirds only available at retirement.

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

Pension fund administrator Alexander Forbes expects that the proposed two-pot system will result in pension fund members accumulating more than double their fund value at retirement as compared with the current system, while providing access to a portion of their savings annually.

“Ultimately, the two-pot system provides the opportunity for employers and funds to re-imagine their benefits and investment strategies to impact people’s lives by finding a meaningful balance between short- and long-term needs,” says John Anderson, executive of investments, products and enablement at Alexander Forbes.

“The proposals also place further emphasis on the need for retirement funds to better connect with members to provide information, education and advice at critical stages in their lives to optimise both their short- and long-term financial outcomes.

“The lack of preservation is the critical driver of poor financial outcomes at 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 retirement outcomes as the average replacement ratio is only 31%.

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

“For this reason, the proposed reforms are necessary to ensure balancing members’ long-term retirement savings goals and to meet short-term financial needs,” says Anderson.

Blessing Utete, managing executive of Old Mutual Corporate Consultants, says that the “two-pot” system for retirement annuities, provident and pension funds would improve savings outcomes and retirement provision.

“Going forward, we foresee a regime where members of pension and provident funds will no longer be able to access all of their retirement savings when retrenched or changing jobs. This step is critical to offset the retirement savings crisis, which affects most workers in South Africa,” he says.

“However, allowing members of private and occupational funds access to a portion of their savings in an emergency will offer some relief when needed.

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

Utete says that the industry was eagerly awaiting this document to clarify the amount of money available for immediate access when the new legislation comes into effect. “Other issues the discussion document must address include the frequency of access; the conditions of access; how potential abuse will be mitigated; what measures can be practically implemented; what the practical constraints to Sars are and what the tax implications will be,” he says.

However, Treasury says in the discussion document that government recognises the need to proceed with caution, given the macro-economic issues facing the country, and also notes the need for care because the pension system is a key pillar of the SA economy.



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Who owns the government debt? The majority do not pay taxes because they are unskilled, unemployed, and dependent on social grants. It is up to the minority to service the debt. Those are people who have pension funds. The size of the government debt plus contingent liabilities is larger than the pot of pension savings. People don’t save because the government spends their money faster than citizens can save it. Eskom has already consumed a large chunk of the GEPF.

Add the effects of all the various forms of stealth taxes, like the inflation tax and the BEE tax, and it is clear that the government consumes the major part of people’s salaries. A small group of savers is supporting the entire wasteful redistribution effort. If you keep on redistributing assets for long enough, at some stage you will run out of stuff to redistribute.

Compliments of the season Sensei.

People are waking up slowly and are starting to realise what the Zondo commission was all about and added to that the last 22 months of global lockdown – effectively any government on the planet can do whatever it wants. If the law does not allow it, the law is changed or it is introduced “temporarily” under an emergency measure determined by our rulers.

For many relying on surviving on their pensions in retirement and now in their late 40`s – they are right to be seriously worried. Whatever the projected amount might be today – will it even buy a can of coke when they are able to access it.

There will be those that will recall the Cyprus overnight “once off” 90-95% tax on savings. I believe that was a balloon – as in 2015/16 the EU and the UK quietly passed legislation making it perfectly legal to do exactly the same – effectively confiscate savings, in an “emergency”. I believe we are currently living through the final foundation building process of this, whatever this turns out to be, i think you will have a very good idea of what i am rambling on about. This time it appears Australia and Canada have been selected as the balloons.

End of comments.



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