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Two buckets to help your clients with financial bailouts

24 August 2021 Gareth Stokes

There are plenty of painful similarities between your client’s retirement savings arrangements and the ill-fated maiden voyage of the Titanic. The journeys, one an Atlantic ocean crossing and the other a four-decade-decade long bumble to retirement, flash by at breakneck speed. Both the captain of the cruise liner and your client valiantly cling to their respective vessels, a ship and a retirement plan respectively, long after the evidence demands that they let go… And if South Africa’s oft-reported retirement savings outcomes are anything to go by, then your client’s savings plan, just like the Titanic, may be doomed to a watery grave.

A Titanic metaphor, mainly for fun

We dashed into this article with a Titanic metaphor so that we could have some fun with National Treasury’s recent media statement that it is considering a two-bucket retirement system. Our headline response could read something like this: “HMS SA Retirement Saver takes on water; Treasury offers two-buckets for rapid bailout”. On a more serious note, we have been reliably informed, via a Treasury statement issued 11 August 2021, that government and other stakeholders are debating whether a two-bucket system could be used to address retirement fund members’ conflicting needs for financial security in retirement and short-term financial relief during periods of financial stress. 

“We wish to provide more details on the approach and planned timelines concerning the proposal to allow for greater preservation with limited pre-retirement withdrawals from retirement funds,” began the two-page explainer, titled ‘Process and approach to preservation and access to retirement savings’.  According to Treasury, the financial hardship caused by the Covid-19 pandemic has once again shone a spotlight on the need that individual savers might have to make emergency withdrawals against the accumulated capital in their retirement or provident funds. The solution, raised by the minister of finance in both the 2020 Medium Term Budget Policy Statement and the 2021 National Budget, may be to “allow limited pre?retirement withdrawals from retirement funds under certain conditions”. 

Could this be a ‘one dip only’ policy?

The high price that Treasury will demand from a retirement saver in return for this emergency access appears to be a promise of preservation when next the saver resigns from a job. “The government has been engaging with trade unions, retirement funds, regulators and other stakeholders to discuss how to increase savings and improve preservation [as well as] allow limited withdrawals, without creating liquidity and investment risks,” writes Treasury. 

Participants in these discussions will have to think long and hard about the best solution to the dilemma, because the negative impact of early withdrawal from retirement funds is on naked display courtesy the industry’s dismal preservation track record, among other factors. “Lack of preservation is the critical driver of poor financial outcomes at retirement,” said Vickie Lange, Head: Research, Best Practice & Academy at Alexander Forbes in a media release issued shortly after the Treasury statement. “For this reason, we applaud recent innovations introduced by National Treasury such as retirement benefit counselling, which has had a marked impact on improving preservation behaviour at withdrawal”. 

The latest plan is to introduce a two-bucket system that will enable the restructuring of future contributions to retirement funding vehicles. “One bucket is to be preserved until retirement, and the second bucket will allow for pre-retirement access during emergencies or extra-ordinary circumstances,” writes Treasury. As currently proposed, the solution will cover pension and provident funds, with a harmonised approach on withdrawals for retirement annuities. “Members must preserve their contributions and the compounded growth invested [in the first bucket]; they will not have access to this portion of their funds until they retire,” said Lange. The second bucket, which is there for short-term, emergency financial relief, will allow members to access a portion of their fund value even while they are employed and a member of the fund. 

Rapid change to regulation unlikely

Rosemary Lightbody, senior policy advisor at the Association for Savings and Investment South Africa (ASISA) said that the proposal would take time to implement because any changes to the current retirement benefit access rules would require amendments to the Income Tax Act, possibly also the Pensions Fund Act and various other legislation. As we studied the statement we felt another brief moment of compassion for the retirement fund administrators who only recently had to build solutions to split retirement savers’ accumulated capital into pre- and post- T-day ‘pots’. Readers can check ‘A T-day dividend in store for brokers’ for a refresher. Lightbody was sympathetic too, noting that the administrators of retirement funds would need to make extensive system changes before a two-bucket system could be facilitated. 

Lange concluded that Treasury still needs to share more details around how the two-bucket system might work. “We await further detail from Treasury,”  she said. “Rest assured that we shall apply our research, expertise and insight to ensure that the public interest continues to be maintained in decision-making”. The industry will also be holding a watching brief as to the legislative and fund rule amendments necessary to make early access to retirement funds possible. Treasury, meanwhile, is making no hard and fast promises except that the new system will take time to design and implement. “Government provides generous deductions and benefits to encourage all working people to save and preserve more for their retirement; redesigning the retirement system to allow for limited withdrawals with mandatory preservation is complex and requires thorough consultations,” they write. 

Vested rights should remain intact

ASISA is adamant that the changes be made without negatively impacting the vested rights of current retirement fund members. “We are sympathetic to the hardships endured by South Africans because of the Covid-19 pandemic and subsequent lockdowns; but regrettably there is no ‘quick fix’ within the current legislative framework,” concluded Lightbody. “We support a solution that will ultimately help retirement fund members during times of need while at the same time requiring preservation until retirement”. 

The association added that current access rights of members of pension, provident and preservation funds “were highly unlikely to change” and that future changes to access would most likely be applied to contributions made after the new legislation had taken effect. In practical terms, this would mean that pension, provident and retirement annuity contributions made up to the point when the two-bucket system becomes effective will be treated according to the systems currently in place. A similar situation occurred following the 1 March 2021 implementation of the provident fund annuitisation provisions, with the amendments only relevant to contributions made from that date. 

Advisers will have to wait and see…

There is not much for financial advisers to do, beyond being aware of the pending change. The current legislation remains in-force and your clients will not be able to access their retirement capital outside of the legal tax and pensions regulatory framework. “Members of retirement funds are advised not to contact their retirement funds to withdraw funds unless they are retiring, resigning or being retrenched,” concluded Treasury. “These retirement funds are legally not empowered to allow pre-retirement withdrawals until the law is enacted and it is expected that any changes to the law would only become effective next year at the earliest”. 

Writer’s thoughts:

Everyone in the retirement funding industry is aware that failure to preserve retirement capital is among the largest drivers of poor savings outcomes in South Africa. Today’s question centres on whether it is fair to prevent a retirement fund member from accessing his or her pot of capital during periods of genuine financial hardship. In your experience, would it be wise to allow retirement fund members early access to their capital in a genuine emergency? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts



Added by Gareth Stokes, 31 Aug 2021
Thanks for the comment Marianne. Indeed, there are some inconsistencies in the tax system. At the very least SARS could do better than the current tax free interest portion… Around R30k per annum is inconsequential in this day and age.
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Added by Marianne Ackerman, 25 Aug 2021
Taking all of the above into consideration, our government really does not practice what it preaches - saving for retirement.
i have just completed my tax assessment and have to pay almost half of my interest earned on savings (having used the tax fee option to the limit of R36 000 per annum) to SARS.
What is the use of saving? I feel I have already paid PAYE when earning my salary and by saving, I have to pay additional tax thereon.
Part of my saving is a Provident Fund that I had invested and had paid tax thereon when withdrawing from the Fund.
I really feel that the tax on interest should be revisited and people making the effort to save and not spend on luxuries, should be rewarded for waiting for SASSA benefits.
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