How bizarre: three pots in a two-pot system

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.