By Rob Rose

There are so many balls in the air that it’s hard to know quite what to make of the two-pot retirement regime set to launch in September.

The new system divides pension savings into three parts: a retirement component, accessible only on retirement; a savings pot, from which between R2 000 and R30 000 can be withdrawn annually under specific circumstances; and a vested pot, which includes contributions made before September.

With less than two months to go, there’s much angst in the pension-fund industry about how this will play out. The known unknowns include the precise tax implications of the new regime and the collective sum that’ll be withdrawn from the pension-fund system once members can access part of their savings.

So, what exactly are trustees of pension funds fretting about?

At a webinar in early July, Ann Leepile, chief executive of Alexforbes Investments, revealed the top three questions trustees are asking:

  • Will we have enough cash on hand to cover withdrawals from the savings pot?

  • What happens if many members decide to take their savings out all at once?

  • Should our retirement fund’s investment strategy change?

While some of this remains unclear, the good news is that it seems most of this anxiety appears to be unnecessary.

On the first question, Leepile said that about 1% to 2% of assets are expected to flow out of funds once people can access the savings pot. Overall, she said, the industry is confident there will be enough liquidity to meet withdrawals.

Regarding the second concern, it’ll be important for funds to ensure they have readily available cash, as none of them will want to sell off large long-term investments in a hurry. After all, asset values are never protected in a fire sale.

When it comes to a fund’s investment strategy, Leepile pointed out that there have been no legislative changes that require an overhaul. “The long-term purpose and objective of retirement savings remains unchanged,” she said.

As you’d expect, pension-fund members have just as many questions, including how the savings component of their fund should be invested, how often they should withdraw from that savings pot, and the impact of withdrawals on their long-term retirement plans.

Fundamentally, these questions remain interlinked, because the more someone takes out of their pension fund, the less they’ll have to live on later.

Withdrawing savings should be “a last resort”, said Leepile. This is especially important as any withdrawal will be taxed at that individual’s marginal rate – a not-inconsiderable bite out of what they’ll have for their golden years.

Nonetheless, John Anderson, an executive for enablement and solutions at Alexforbes, said the new two-pot regime is likely to lead to “improved retirement outcomes” for pension-fund members, striking a balance between “long-term financial security and immediate financial needs”.

This is because the new savings pot provides flexibility to help individuals squash their unsecured debt, or save for a child’s education. The old notion that nobody should have access to pension-fund savings before retirement is “unrealistic and removed from reality”, he said.

If these are the main concerns for members and trustees, the industry itself is closely monitoring the likely outflows.

It was always expected that the outflows from funds, once individuals can cash in part of their savings, would be substantial. In June, Alexforbes said it expected about R55bn in outflows from the industry during the first year, based on an extrapolation from the funds it administers.

Anderson, however, suggests this figure could go up to R100bn. “We’ll only know when we get there,” he said.

This illustrates how tricky it is to model accurately when so many variables depend on human behaviour. What is clear is that these numbers will vastly change the economics of the retirement fund industry – and the extra costs implied in this new system will have to be absorbed somewhere.

Related Articles

Share this article