By Rob Rose
“We’re two weeks away from the biggest change in our pension system, so there are not a lot of people in the industry who’re sleeping soundly at the moment,” Michelle Acton, retirement reform executive at Old Mutual, tells Today’s Trustee.
From September, South Africa will implement the new “two-pots” regime, designed to give individuals in a financial bind access to some of their pension savings, while ensuring most is kept for retirement.
Pension contributions will be split: two-thirds going into a pot that can be accessed only at retirement, and a third going into a “savings pot”, which can be withdrawn once a year. There’ll be a third “vested pot” of savings accumulated to now.
The implementation date was accelerated to September from March next year after trade unions demanded that cash-strapped South Africans be given access to pension savings. As a result, there’re many balls still in the air.
Most notably, the regulator, the Financial Sector Conduct Authority (FSCA), is still furiously working through the rule changes that must be approved for each pension fund first. And new enabling tax legislation, which will clarify how the SA Revenue Service (SARS) will deal with anomalies, must also be finalised.
“On the tax legislation, there is still uncertainty,” says Acton. “We’re praying this gets finalised quickly.”
Lack of knowledge
But perhaps the biggest risk is the chasm between what the new system will bring and what pension-fund members expect.
There’s been a flurry of resignations from funds from people who wanted to cash in their pensions before September. Others expect that, once the system is implemented, they’ll be able to somehow withdraw millions from their “savings pot”, without realising that this pot will be seeded only with a maximum of R30 000 from accumulated savings.
“Member expectations are our biggest concern,” says Acton. “This is complicated legislation and still very new, so people haven’t had time to get a proper understanding of it – including people in the industry.”
Fiona Rollason, head of legal and insurance at Alexforbes, the country’s largest pension-fund administrator, says that, barring unforeseen disasters, the industry will meet the deadline.
“This will be the pension system that will be in place for most people for the rest of their lives, so I’ve learnt that we can’t overestimate how complex and far-reaching this change is,” she tells Today’s Trustee. “The industry has largely planned well, but there are things we don’t know yet, like how much money will people choose to withdraw once they have access to their pension savings.”
‘Unknown unknowns’
Rollason says there are many “unknown unknowns”, including how funds will cope with the as-yet-undetermined quantum of withdrawal requests. “There are likely to be snags, but we don’t think there’ll be major problems,” she says.
Industry experts have fretted that allowing people early access to their pension risks their becoming a burden to the state later, since only 6% can retire comfortably, according to Association for Savings and Investment South Africa (Asisa) data.
New research released by the SA Reserve Bank (SARB) shows that, contrary to expectations, the system could strengthen South Africa’s economy.
“Over the short term, the partial, pre-retirement withdrawal will boost consumption and growth somewhat, whilst over the longer term, the reforms are expected to raise the pool of retirement savings, as employees will be unable to withdraw all their pension-fund savings on resignation.”
The Reserve Bank paper says that, in the most likely scenario, pension-fund members will withdraw R40bn in the first year after the system is implemented, which they’ll use partly to settle their debts, and partly to boost their consumption. This would then lead to a small increase in demand, spurring imports.
As a result, gross domestic product (GDP) would be boosted by 0.1 percentage points in 2024 and 0.3 percentage points in 2025. The fiscus will benefit, too, as personal income taxes will increase by R19.9bn in 2024/25 and by R16.3bn in 2025/26. Helpfully, this would lower South Africa’s debt-to-GDP ratio by 0.2 percentage points.
Of course, a lot depends on how much will be withdrawn, and this figure is, as Rollason says, something of a guess at the moment. “We have models for what we expect will happen, but we’ll only actually know for sure after September,” she says.
Grim realities
South Africa has mitigated the risk of seeing large-scale pension outflows by limiting the amount that can be withdrawn.
It’s aimed at avoiding the debacle seen in Chile – a country with pension funds comparable to South Africa’s – which allowed significant withdrawals from pension funds in 2020 to support cash-strapped households.
The move sparked a deluge, with Chileans pulling out $50 billion, or 16% of GDP, in just two years. Although tax revenue initially surged by 40% in 2021, pension-fund assets quickly plummeted. Concerns about further political pressure for increased budget funding contributed to a downgrade of the country’s ratings by Fitch in 2020.
As it is, the grim reality in South Africa is that people are withdrawing money from their pensions anyway, and paying huge tax penalties to do so. SARS data between 2016 and 2018 showed that 700,000 people withdrew an average of R78bn per year from their pension fund before retirement, and paid R12bn each year in tax. This is nearly a third of the R246bn in new pension contributions each year.
“For younger people, more than 80% are withdrawing their pensions when they resign from a job, which shows it has just become an expensive savings scheme for them. This is why we desperately needed this retirement reform,” says Acton.
According to SARB researchers, annual withdrawals are expected to range between R40bn and R50bn in the first decade, a manageable impact that won’t break the system.
As Acton argues, the longer-term outlook is unequivocally more positive.
“Two-pots will strengthen the system hugely, because we’ll have a system of compulsory preservation,” she says. “Over 10 years or longer, that’s an immense benefit, not just to the investment market, but to people’s lives too.”
