By Laura du Preez

The two-pot retirement fund system is the most significant reform that the retirement fund industry has seen in recent times, says Astrid Ludin, the deputy commissioner of the Financial Sector Conduct Authority (FSCA).

In case anyone was in any doubt, the annual Pension Lawyers Association conference in Cape Town in April, which Ludin addressed, gave the new regime much airtime, as the deadline nears to implement the system by September.

Trustees, administrators and lawyers are furiously scrambling to prepare for the system, which will give members access to their savings through a savings pot seeded with existing savings and topped up with one third of all future contributions. The remaining two-thirds of contributions in the retirement pot must be preserved until retirement.

Besides getting a handle on the legal changes — including the Revenue Laws Amendment Bill and the Pension Laws Amendment Bill —funds will also have to amend their rules to handle the new regime. Ludin said the FSCA will be inviting funds to submit rule amendments from May 1.

All other rule amendments and section 14 transfers between funds will be put on hold while the FSCA focusses on the two pot changes. Rule amendments have to be approved or funds won’t be able to seed the savings pot or pay out withdrawals, said Leanne van Wyk, director of ICTS Legal Services.

Claims to increase fourfold

If that wasn’t enough to spook funds, AlexForbes’ executive John Anderson said that funds should expect savings pot withdrawals to be four times as many as the claims and queries they normally get about withdrawals.

The volume of interaction with members will be huge, he said, warning that administrators will have to ensure there are enough staff to answer queries. Failing this, Anderson said he feared that next year the Pension Funds Adjudicator, which currently spends most of its time on withdrawal complaints, will find two-pot related issues to be the largest source of conflict.

Anderson and other speakers urged the industry not to miss this opportunity to engage with members, who are often otherwise apathetic. It’s an opportunity to help
them make better financial choices. Tackling misinformation about the new system will also be tricky.

Some members mistakenly believe they need to resign and withdraw their savings before the new system is implemented or they won’t get the chance again, said Itai Mukudira, an actuarial specialist for the engineering and metal industry pension funds.

Correcting these sorts of misconceptions will require funds to reach out directly to members, rather than communicating through employers. Brenda Penny, managing director of Verso Trustee Services, said retirement benefits counsellors could educate members with factual information that shows them the impact of any decision to withdraw.

Blessing Utete, managing executive at Old Mutual Corporate Consultants, encouraged trustees to try different forms of communication including widely-used digital channels — a route which would also help minimise fraud too.

Think through early access

While many funds are understandably obsessed with how the new system will be implemented, speakers at the conference urged funds to look beyond this, at the implications of allowing early access to pension savings.

Himanshi Jain, senior social protection specialist at the World Bank, said providing early access to retirement savings has many benefits such as improving welfare during disasters, and lowering the need to use expensive credit.

But Jain warned that allowing early access can also compound the problem where a pension isn’t adequate to cover someone’s retirement. Rowan Burger, head of strategic advice at Momentum-Metropolitan, said that members who save the typical 15% of their income for retirement should be able to save 18-times their annual income by the time they reach retirement.

The problem is that the two-pot system could reduce that 15% saved to just 10%, which would result in members who do not withdraw their vested savings reaching retirement with just 12-times their annual income. Burger said the industry ought to think about whether it should recognise that retirement funds are now catering for other financial needs.

In that case, it may need to consider whether to advocate for people saving 22.5% of their income, or whether to promote tax free savings accounts to meet those other needs.

Look out for the vulnerable

Jonathan Mort, director of Mort Inc, and Evance Kalula, a University of Cape Town law professor, described the two-pot system as a bold step towards introducing greater flexibility in retirement arrangements.

But Mort and Kalula said the industry should be wary of unforeseen consequences for those in vulnerable positions, like security guards. Typically, security guards are hired when their company lands a security contract, then laid off when that contract ends. Until their firm lands a new contract and they’re rehired, many security guards then survive on their retirement savings.

Here, it’s a tricky balancing act between allowing people to access savings to prevent them falling into absolute poverty, and ensuring they have enough for later. Another vulnerable group are non-member divorcees since the two-pot system will complicate the splitting of pension benefits, said Teron Rikhotso, a lecturer at the University of Limpopo.

When pension fund members withdraw their benefits ahead of a divorce, non-member spouses aren’t protected.

The Pension Funds Amendment Bill proposes that withdrawals from savings pots be restricted only when divorce proceedings have been instituted formally.

It’s a critical issue — one of many — which pension lawyers and trustees will need to thrash out as the deadline ticks down over the next four months.

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