Plans to allow financially distressed contributors early access to their retirement savings must also focus on improving SA’s savings culture and retirement outcomes, according to Old Mutual, one of the largest players in SA’s retirement space.
Though it supported a proposal for the limited withdrawal of retirement savings to help households weather the ravages of Covid-19, this must come in conjunction with efforts to increase preservation and improve coverage, said Malusi Ndlovu, director of Large Enterprises at Old Mutual Corporate.
Moves to let embattled households access a portion of their retirement funds early have been under discussion between labour, business and the government for more than a year. But the matter gathered impetus last week after the National Treasury said it was proposing a limited system of withdrawals, together with mandatory preservation and wider coverage, including for people such as contract workers.
“We support National Treasury’s approach of a package of reforms, addressing various aspects in one go — early access, preservation, increased coverage — as it will alleviate the short-term financial pressure and increase long-term retirement outcomes,” Nlovu said in a statement on Wednesday.
The proposal must also confront immediate challenges, notably the liquidity issues facing retirement funds, Ndlovu said.
Should early access be granted, a large amount of money would be disinvested in a short period “potentially harming asset prices and causing members and other investors to realise poor value in the short term”, he said.
The plan must also grapple with practical implications, starting with clear access rules, he said, such as who decides if a member qualifies, and likely tax implications.
SA has a poor savings record, with only 6% of people able to retire with adequate savings, according to the Treasury. Contributing to this is the problem of poor preservation as fund members can cash out retirement savings when changing employers before retirement.
Early access is limited for people saving through retirement annuities or for members in employment-based pension and provident funds while remaining employed, said Ndlovu.
“Given the widespread economic devastation caused by Covid-19 ... we support calls to extend access for these groups,” said Ndlovu. “However, whatever access provisions are made, we need to focus on improving the savings culture and retirement outcomes in the long term as well.”
Retirement funds are not designed to allow for ad hoc withdrawals of savings for a large proportion of the membership, he said. Administrators, retirement funds, employers and other stakeholders would need time to prepare for any changes in regulation, he added.
This comes as the 2021 Old Mutual Savings and Investment Monitor, released on Wednesday, underscored the financial distress many have experienced in the past 18 months.
More than half of consumers surveyed have had to dip into their savings to make ends meet, while a third have cashed in savings and investment products as households still reel from the effects of the pandemic.
Indebtedness is likely to continue to rise, the survey found, as 34% of respondents have fallen behind on household bills, 32% have fallen behind on credit card payments and 19% on rent or home loan payments.
The research also showed that one in three respondents does not have enough savings to last more than a month if they lost their jobs or income.
In a presentation on the findings of the survey, Izak Odendaal, an investment strategist at Old Mutual Wealth, said that household wage incomes had returned to pre-pandemic levels for those with jobs. But unemployment “remains substantially below” the onset of the pandemic, worsening already deep inequality.
The proposal to allow limited access to retirement savings made sense to relieve financial distress but it is a “double-edged sword”, Odendaal told Business Day. Pension coverage was low across SA, while preservation remained a problem.
“The bulk of your retirement capital is going to be from the growth on the contributions you’ve made and not the contributions themselves,” he said. Any halt in contributions or early withdrawals meant fund members will miss out on that growth.
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