Parliament’s finance committee has rejected as undesirable a proposed DA bill that would have allowed pension fund members to take out loans against a guarantee of a portion of their pension fund assets.
The rejection comes as the Treasury moves towards the publication of a paper on pension fund reform, which is expected to be released next week for public comment. This is in line with the undertaking given by finance minister Enoch Godongwana in his medium-term budget policy statement in November. The minister said a discussion document on the details of the reform proposal would be published shortly to obtain inputs before further announcements are made in the 2022 budget.
The bill tabled by DA MP Dion George initially proposed that up to 75% of the individual’s pension fund could be used as a guarantee but after concerns were raised during public hearings that that was too high, he proposed to reduce that to 30%. He motivated the bill on the grounds that people in financial distress which was worsened by the Covid-19 pandemic should be able to access what is often their sole remaining asset to relieve their situation.
ANC members of the committee who were initially supportive of the idea for greater flexibility for pension fund members voted four against the two DA MPs and one Freedom Front Plus MP, who were in favour of the bill.
ANC MP Gijimani Skosana objected to the bill on the grounds “that there is a serious lack of comprehensiveness in the bill because any pension fund amendment bill requires a feasibility study with options, and taking into consideration tax implications especially where guarantees are applicable against a pension fund. None of this accompanies the amendment bill. Instead the amendment bill seeks to bring about fundamental change through the insertion of a single clause, just a single clause. Parliament cannot be expected to consider draft legislation that lack the comprehensiveness that is required for such a serious matter.”
Second, he said no socioeconomic or financial impact study had been conducted to accompany the bill, which meant that parliament was expected to make a decision without the necessary evidence being placed before it.
Cosatu initially said it would support George’s proposed bill if the Treasury did not make progress in coming up with its own pension fund reforms, which would allow workers access to a portion of their pension funds. The federation’s parliamentary liaison officer, Matthew Parks, said on Wednesday that Cosatu didn’t mind whether measures were put in place as a result of a DA or a Treasury initiative, but was pleased that the Treasury had made progress. Parks said the DA’s bill did need significant enhancement.
For more than a year, business, labour and the government were in discussions in the National Economic Development and Labour Council on a proposal to allow withdrawals due to hardship brought about by Covid-19. But no draft amendment bill emerged, which frustrated Cosatu.
In his speech, Godongwana said the Treasury’s proposed retirement reforms were intended to boost household savings by increasing preservation before retirement and to increase flexibility through partial access to retirement funds through a “two-pot” system.
“In terms of this system, individuals would be able to access contributions to the one pot while contributions to the other pot would be saved until retirement. These measures would require legislative changes and further consultation. Limited withdrawals would depend on affordability and liquidity of funds.”
In terms of the Treasury’s initial thinking on the two-pot system, up to on -third of the pension fund would be accessible before retirement and two thirds would be locked into compulsory preservation for retirement, when it would only be accessible through an annuity. A phased-in approach to implementation was proposed, with contributions starting soon after the law is enacted, but actual withdrawals would only possible after a few years. It would be compulsory for everyone who works to contribute to retirement savings including people such as Uber drivers and contract workers.
Under existing rules, pension fund members can cash out their entire pension when they resign, but with a penalty that tax that has been withheld becomes due.
Only 6% of South Africans retire with adequate savings, the Treasury estimates, and 49% of people have no retirement savings at all, says a 2020 industry survey.
The implementation of the proposed changes would introduce challenges for the retirement savings industry, reducing assets under management and requiring that more assets are held in cash. There is also the risk of a “liquidity event” if large numbers of people withdraw savings at a similar time. Funds would have to hold more cash as the access pool would have to be liquid, but they could gain from compulsory preservation.
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