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How bizarre: three pots in a two-pot system

26 June 2023 Gareth Stokes

You have to admire the South African retirement fund industry for its valiant attempts to inform the public, and retirement fund members, of National Treasury’s proposed 24 March 2024 implementation of its two- or possibly three-pots retirement system. For months, the country’s leading financial services providers have struggled to communicate the changes and implementation pathways that the proposed regulatory reforms will introduce due to the final regulatory roadmap still being up in the air.

Pitfalls and possibilities, with disclaimer

Case in point, the Sanlam Benchmark Survey 2023 had to share its assessment of ‘pitfalls and possibilities’ of the new retirement system with a weighty disclaimer: “This article was written on the basis of the 2022 Draft Revenue Laws Amendment Bill; some aspects of the article may become redundant with the publication of an updated Revenue Laws Amendment Bill”. The ink on this disclaimer had hardly set when National Treasury published its revisions to the draft legislation for the two-pot system for retirement funds, dated 9 June 2023. This newsletter will share Sanlam’s assessment of the pre-June 2023 scenario before commenting on the latest revisions. PS, the changes do not detract materially from the insurer’s presentation. 

To begin with, Sanlam set out the rationale for the latest round of retirement reforms. “The objective of the retirement fund industry is to ensure members can retire comfortably with enough income in retirement to live with confidence; but less than10% of retirees can maintain their pre-retirement standard of living due to under-saving and not preserving their assets,” said Lorraine Mekwa, Managing Executive: Client Experience at Sanlam Corporate, during the survey launch. Sanlam singled out poor preservation rates when retirement fund members change jobs and the move from defined benefit to defined contribution funds as partly responsible for poor retirement outcomes. For those who could not attend the live event, the in-person benchmark launch followed the script published in the Benchmark Survey more or less to the letter. 

Preservation not a popular intervention

It has been more or less impossible for National Treasury to force through the changes necessary to address the preservation issue, with historic proposals being met by strong opposition from trade unions. “The closest the National Treasury has come to improving preservation rates has been through the default regulations [which] aimed to nudge members to preserve their retirement savings when changing jobs,” Mekwa said. But the stand-offish approach to the preservation matter seems over thanks to the significant changes proposed in the 2022 Draft Revenue Laws Amendment Bill. It described a two-pot retirement system for implementation from 1 March 2023 to increase preservation and provide limited, emergency access to some of a member’s retirement savings. 

Sanlam’s explainer of the two-pot solution prompted today’s LOL headline. It is, after all, billed as a two-pot retirement system that involves apportioning members’ retirement savings into three pots, a vested pot; a retirement pot; and a savings pot. The retirement pot is a ‘new’ pot to which two thirds of retirement contributions will be allocated post-implementation of the reforms. The savings pot is also a ‘new’ pot to which a maximum of one third of a members’ contributions will be allocated, again post-implementation of the reforms. And the vested pot will house the accumulation of all retirement savings prior to the implementation of the two-pot system. 

The vested pot will be subject to the current rules of the fund whereas a members’ retirement pot will only be accessible upon retirement. The big change is that members will be able to dip into the savings pot for emergencies, with the frequency and size of withdrawals subject to regulation. 

The two known unknowns

According to Sanlam, the biggest two-pots ‘unknowns’ around the time its Benchmark Survey 2023 was launched included whether the proposed launch date would be pushed back and whether a portion of members’ vested pots could be transferred to their savings pots. The financial services giant warned that the looming effective date of 1 March 2024 would place retirement fund administrators “under great pressure to ensure their systems could cater for various member pots”. 

We turned to a Webber Wentzel media release to determine whether National Treasury’s revisions to the Draft Revenue Laws Amendment Bill and Draft Revenue Administration and Pension Laws Amendment Bill addressed Sanlam’s unknowns. According to Joon Chong, a Partner at the law firm, the main changes contained in these drafts are that they: 

  1. Introduce the planned implementation date of 1 March 2024;
  2. Allow retirement fund members on that date to access “seed capital” in the fund, calculated as 10% of the vested value on 29 February 2024, up to a maximum of ZAR25 000, which would be subject to normal tax;
  3. Provide for equal treatment of defined benefit funds;
  4. Exempt legacy retirement annuity funds from the two-pot system; and
  5. Replace the phrase ‘two-pots retirement system’ with a more formal ‘two component retirement system’. 

“In the second phase of implementing the two-pot system, the legislation will deal with the potential for withdrawals by members who are retrenched and have no other form of income,” Chong writes. “National Treasury wants to allow access to retirement savings only as a last resort”. Another comment window has opened, with a deadline of 15 July 2023, so FAnews readers best sharpen their pencils and air their grievances, if any. 

Potential to revolutionise retirement outcomes

“Our models, with the assumptions discussed, reveal that the two-pot system has the potential to achieve both the objectives that have been set for it; a great win for an industry that has been struggling with less than desirable retirement outcomes,” concluded Mekwa, with an important caveat: “Counselling and financial advice partners are crucial in educating and encouraging members to view [dipping into] the savings pot as an option and not an obligation”. Never a truer word spoken! As the many financial and risk advisers among our readership will tell you: financial restraint is in short supply among South African consumers and households. 

Writer’s thoughts:
No matter how you shape an ounce of clay, you are still left with the same measure. Do you believe the proposed re-jigging of the retirement fund system will improve South Africa’s retirement outcomes, or should the focus be on creating jobs and / or growing the economy? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Thulani Ngcongo, 24 Jul 2023
When are we getting the final after submissions from the public
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Added by Gareth Stokes, 27 Jun 2023
Thanks for sharing your thoughts @Debra. I think the 'tweak', if properly applied, could produce improvements - of greater concern is that most of these pots (two, three or however many) simply contain too little money to fund a meaningful pension.
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Added by Gareth Stokes, 27 Jun 2023
Too complicated may be an understatement, @David. Ironically, that is what you get when you try and keep too many stakeholders happy - or re-jig a single-purpose financial instrument to serve many purposes!
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Added by Gareth Stokes, 27 Jun 2023
Noted, thanks @Humphrey. There is some sound financial advice in the Good Book. The long-term outcome on the current pension reforms will hinge on how strictly withdrawals are controlled (my guess) ... it will also be interesting to see whether there is a flood of resignations around the implementation date. Bottom line; more jobs / growing economy is a salve for most financial ills.
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Added by DEBRA ANN BADENHORST, 26 Jun 2023
I agree with what everyone else says. We're already a country with a low savings culture, massive debt issues and the bulk of the population reliant on something or someone else later on in life due to little or no retirement provision being made. How is this going to help? Perhaps in the short-term there'll be a bit of relief, but long-term the problems emanating from all this will be worse!
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Added by David Thomson, 26 Jun 2023
Too complicated. Hopeless if the idea is to address low savings in SA. Including discretionary savings (retirement annuity) in the system is ridiculous. This will discourage savings. What a fiasco.
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Added by Humphrey, 26 Jun 2023
Bad, bad, bad idea. The result will be more reliance on old age social grants. The result of this will mean higher taxes and more debt. The result of higher taxes will mean those with skill and ability will emigrate - the result of this will mean a lower tax base and this will result in a need for more debt. All crazy indeed but indicative of a brain-dead self-centered government (and unions) with no vision.

I always refer back to what i call my owner's operating manual (the Bible). In there it says:
1. Don't do debt (in many places)
2. You don't work you don't eat (so to answer your question - yes grow the economy and create jobs)

Our government does exactly the opposite (on these 2 points and just about every other issue contained in the Bible) - the result - a country that is not exactly blessed with a thriving growing economy (or anything else for that matter at this point in time) - go figure

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Added by Gareth Stokes, 26 Jun 2023
Interesting comment, @Hein. There are 'safety measures' built in - so you are not guaranteed access to the money; but can you imagine the uproar if the fund's / public's view of what constitutes an emergency are mis-aligned!
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Added by Gareth Stokes, 26 Jun 2023
@Stephen and @Cynical Simon: agree 100%. Economic growth and job creation are the only long-term solutions for SA Inc. The comment re retirement age is important too - although SA chose to drop the age to 60, we are going to have to work deep into our 60s and beyond (assuming we are blessed with the good health to do so).
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Added by Gareth Stokes, 26 Jun 2023
Thanks @ Paul for your comments; I agree that 'early access to retirement savings' is a political issue; and there is certainly some irony in the fact that early withdrawal (and lifetime ongoing access to savings) was built into a solution aimed at ensuring preservation. We can only hope that it will be successful on balance.
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Added by Paul, 26 Jun 2023
This is politically motivated. It allows more people to live the good life now during the 'dying' years of the ANC era only to kick the can down the road and create legacy issues for the incoming next era...
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Added by STEPHEN ROBERT POVERELLO, 26 Jun 2023
In the years to come we will sit with a bigger social welfare problem for retirees and crime levels will increase if the unemployment situation is not tackled head-on!
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Added by Cynical Simon, 26 Jun 2023
Compulsory retirement age of 65 is no longer viable.
A worker should work for as long as he is able to.
Growing the economy and creating jobs should be the priority.
The two pot or three pot system proposed is no solution.
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Added by Keith Ernest Morrison, 26 Jun 2023
They should rather concentrate on Job creation and growing the economy.
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Added by Hein van Rooyen, 26 Jun 2023
This will be bad for your lower income class. They will simply access the max retirement funds every year an thereby never reach their retirement goals. It will be a massive burden on administrators. SARS will collect more tax but GOV will sit with a bigger welfare problem.
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Added by Paul , 26 Jun 2023
Well this should another disaster in the making.
Union pressure behind this mybe?
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