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Two-buckets versus the 12% NSSF malarkey

06 September 2021 Gareth Stokes

Asset managers plying their trade in South Africa are holding a watching brief over a number of retirement fund proposals that, if implemented, will have a significant impact on retail clients’ disposable incomes and retirement savings outcomes. Their vigil is joined by members of the country’s financial planning community who are justifiably concerned about the impact such changes will have on their clients’ retirement journeys. “We have received many questions [from advisers] on the recent retirement fund proposals,” said Sangeeth Sewnath, Deputy MD at Ninety One, during an interview with the asset manager’s Advisor Services Director, Jaco van Tonder.

Two-buckets and a bleeder hose…

The two proposals commented on during the interview were National Treasury’s two-bucket retirement fund system and the Department of Social Development’s green paper on mandatory contributions to a state-run national social security fund (NSSF). 

Under the so-called two-bucket system, Treasury is investigating allowing retirement fund members to have access to one third of their accumulated retirement funds during periods of genuine financial hardship, regardless of when their retirement date is. “Retirees will be able to access this bucket based on specific rules that have not been detailed as yet,” said Sewnath. The remaining two thirds will be held in a second bucket and only be accessible upon retirement, at which date retirees will have to use all the funds in the second bucket to purchase a life or living annuity. 

Which brings us to the NSSF malarkey. If the Department of Social Development has its way, retirement fund members could soon face a bleeder hose [our phrase] that will divert as much as 12% of their monthly income before they can even consider topping up their retirement funding buckets. “The NSSF proposal is in very early stages of conceptual discussion [and involves] a mandatory pension and insurance system that will see employed workers contributing up to 12% of their earnings into a state-run fund,” said Sewnath. There is broad consensus that it will take years for this populist green paper to materialise, if at all, with the result that both interviewer and interviewee chose to focus on the more immediate two-bucket proposal. 

Sticking with the common sense solution, for now

Van Tonder said that the two-bucket system would extend the liquidity on offer at retirement across the entire retirement savings journey. “The proposal is to fast-forward a member’s access to the one third balance [to a point] earlier during the lifetime of the retirement journey,” he said. This sounds simple enough; but the product and regulatory complexity of the South African retirement fund industry will make it difficult to implement the proposal overnight. The solution will have to apply equally to savers in pension and preservation funds and retirement annuities. It will also take some time to ensure that the complex and interrelated financial services regulation is properly aligned with the proposal. 

The main concern with giving people early access to their retirement funding is that savers will abuse their newfound freedom. National Treasury is therefore engaging with industry stakeholders to ensure that the solution allows early access to funds for genuine financial emergencies without compromising the preservation of retirement capital. “People will [be required to] demonstrate that they are experiencing a financial emergency, otherwise they will just draw the maximum amount they can,” said Van Tonder. The flip side of the coin is to ensure that the process in proving such financial emergency is not overly complex. Imagine, if you will, the additional administrative burden on retirement fund trustees in ruling on ‘emergency access to fund’ applications alongside their myriad other tasks. 

Strict rules for early access

Ninety One expects that there will be strict rules around the frequency of withdrawals and the amount of funds that can be accessed each time, among others. They are also adamant that National Treasury will have to apply a grandfathering clause when implementing the two-bucket system. In other words, retirement savings up and until the date of a two-bucket system implementation will remain invested under the old rules, with the new rules applying from that date onwards. “Whatever assets you hold in the retirement fund system under the current rules of access will be preserved; people will not lose the rights associated with their current pension fund assets and the new rules will only apply to new contributions,” suggested van Tonder.


It seems likely that National Treasury will leverage the two-bucket system to engineer better preservation outcomes across the retirement funding industry. They will argue that since savers have access to one third of their accumulated retirement pot at any time, the two thirds must remain invested until retirement date without exception. This would allow them to prevent retirement savers from drawing out their accumulated savings every time they change jobs. “Preservation was identified well over a decade ago as a major weakness in the South African retirement fund system as people can get easy access to their provident and pension funds whenever they leave employment,” said van Tonder. He added that compulsory preservation was an important step on the country’s journey to a healthy retirement fund system. 

Advising clients during the two-bucket transition

Sewnath asked whether advisers or their clients should take any steps to prepare for the proposed two-bucket system. “There is no need for people to take steps [such as] trying to move assets, resign from a fund or cease their contributions because the existing rules will continue to apply to those assets,” said van Tonder, before tackling a final question on optimal offshore allocations for South African investors. 

Offshore allocations in a retirement funding context are dealt with under Regulation 28, and there is no active industry consultation on increasing the allocation at present. According to van Tonder, the pressure to raise the Regulation 28 offshore allocation limit has increased significantly in the past 12 to 24 months. He concluded that the retirement fund industry needed to get closer to a 40% offshore cap to enable fund members to benefit from more realistic long-term offshore exposures. 

Writer’s thoughts:
The most recent proposed amendments to Regulation 28 focus on another retirement fund intervention that had financial advisers up in arms, namely government’s desire to reintroduce prescribed assets. It seems government has opted for a soft approach because the amendments will allowing, but not force, retirement funds to invest up to 40% of their assets in infrastructure funds… What, we wonder, would financial advisers have preferred for their clients: An increase in the offshore limit to 40% or the new 40% SA-based infrastructure cap? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

Comments

Added by Gareth Stokes, 06 Sep 2021
A quick update to the above article. The Department of Social Development has since withdrawn its NSSF paper. For now...
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Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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