The Actuarial Society of SA (Assa) says the “two-bucket” pension system proposed by the Treasury, which would see pension savings split into one pot that must be preserved until retirement and another that can be accessed in emergencies, will boost long-term savings.
Actuarial modelling by Assa’s retirement matters committee shows that a two-bucket system that allows savers to allocate a percentage of their monthly retirement savings to a pot that is accessible in emergencies, would discourage them from cashing out all their savings when changing jobs. That would result in significantly higher monthly income when people retire, as the other bucket earmarked for long-term preservation would continue to benefit from the power of compounding.
Natasha Huggett-Henchie, a consulting actuary and director at NMG Benefits and a member of Assa’s retirement matters committee, says analysis of fund data shows that more than 80% of retirement fund members cash in their benefits when changing jobs. That is despite the punitive taxes levied on such withdrawals, which also reduce the tax-free lump sum normally available to savers upon retirement.
“Members are making bad choices by prioritising their short-term needs and wants, sacrificing future investment growth on their benefits and risking double taxation resulting in lower pensions at retirement,” says Huggett-Henchie.
Government has been working on a two-bucket system that would allow savers to apportion their monthly retirement savings into one bucket that can only be accessed at retirement while the second bucket will be accessible in extraordinary circumstances. The impact of the Covid-19 pandemic has put this proposal under the spotlight as the more than 1-million job losses that occurred in 2020 left many people without an income.
Assa’s retirement matters committee modelled the scenario of a retirement fund member who began saving at age 20 years but changed jobs every seven years, whereupon the member withdrew their entire fund benefit each time. Under this scenario the modelling exercise assumed that upon turning 50, the member had a change of heart and began preserving all their benefits until retiring at age 65.
Actuaries then compared this to a second scenario where a member who joined a retirement fund at age 20 years was able to access one third of their benefit, which they withdrew entirely every five years until age 65. Under this scenario the saver would enter retirement with more than double the monthly retirement income than if they’d withdrawn all their money every seven years until age 50.
The committee has made several recommendations on the proposed two-bucket pension system to the Treasury, which is still working out the details of how it might work. One such recommendation is that there should be no needs-based rule on accessing funds during an emergency as it is costly to administer and open to abuse.
“Our modelling indicates that forcing the compulsory two thirds preservation actually improves outcomes at retirement, and members are going to find a way to borrow against or spend their one third anyway,” says Huggett-Henchie. “Access to the one third should therefore be available to all retirement fund members regardless of need.”
Instead of a needs-based assessment, Huggett-Henchie says a rand-based limit should be placed on the withdrawal amount to discourage abuse of the system by higher income earners. She also recommends that some initial safeguards be put in place should the two-bucket system be adopted to avoid all retirement fund members withdrawing their emergency funds at the same time.
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