The Treasury’s proposals for a two-pot retirement system to cater for preservation and access to retirement funds in case of financial need would also apply to retirement annuities and defined benefit funds.
This is according to a Treasury policy document on the proposal released on Tuesday for public consultation. Also released was a paper aiming to improve the governance of commercial umbrella or multi-employer funds to address their prevailing weak governance and ensure members’ interests are served.
The paper on retirement reform — “Encouraging South African households to save more for retirement” — proposes the previously announced “two-pot system” aimed at boosting household savings by increasing preservation before retirement while introducing more flexibility through partial access to retirement funds.
Two-thirds of the fund would have to be preserved until retirement and one third could be withdrawn at any one time, thereby avoiding the need for workers to resign from their jobs to gain access to their retirement savings.
With regard to retirement annuities (RA), Treasury said that if they were are not included in the two-pot system and no access was permitted before the age of 55, as is now the case, then there would be no way to assist individuals in financial distress who are probably self-employed. “There would then be no progress on the objective to allow for greater access and flexibility for RA fund members,” the Treasury said.
“A further consideration is simplicity and the harmonisation of retirement funds, which would make it easier for the public to understand and increase the potential for future consolidation and reduced administrative costs. If RAs were included in the two-pot system, it would be theoretically possible (because of tax harmonisation and the introduction of compulsory annuitisation for provident fund members) for each person to combine all their retirement fund holdings generated beyond the implementation date into a single retirement fund.”
Each fund would, however, have to cater for several “pots” and vested rights.
Including RAs in the two-pot system would mean that pension funds, provident funds and RAs will all be identical in terms of tax treatment, pre-retirement preservation and post-retirement preservation, it said.
“Given that there would be greater discretion related to the use of RA funds if a portion of contributions were accessible before the age of 55, this may lead to greater demand for RAs. But it is unlikely that preservation would be increased overall due to this higher demand as contributions to RAs would need to increase by more than 50% (from about R40bn to R60bn each year),” Treasury said.
The Treasury also proposed include all defined benefit funds, including the Government Employees Pension Fund, in the two-pot system since they are already required to value benefits before retirement and already make large preretirement payouts to employees who resign or are retrenched.
The paper said that the value of the benefit for each member of defined benefit funds is based on a formula rather than actual contributions, in contrast to defined contribution funds which have separate accounts with specific assets allocated to each individual that have been purchased from their contributions.
For defined benefit funds to be included in the two-pot system they would need to calculate a value for the one-third contribution at the time the employee asks for access and then sell assets from their wider portfolio to meet that obligation.
“Excluding defined benefit funds will weaken the harmonisation objective as implemented over the past few years, and this will be weakened further if the tax treatment of contributions to funds in the two-pot system is adjusted,” Treasury said.
The Treasury is also considering introducing automatic or mandatory enrolment into the retirement system to ensure that all workers, whether they be contract or temporary workers, are members of retirement schemes or have similar benefits. For now, not all employers provide a retirement benefit for their employees, so unless these employees self-enrol in a RA fund, they have no provision for retirement.
The paper raised the danger of an immediate run on retirement assets as soon as the amendment allowing access to retirement funds is passed. It said this could create liquidity problems or even harm asset prices.
The potential amount to be withdrawn from the retirement sector is R175bn out of R2-trillion in aggregate assets in privately administered funds. This might put significant administrative pressure on funds to be able to accommodate these requests, increasing overall costs. Treasury suggested various options to mitigate this risk but did not propose a definite solution.
“Government agrees with the need to proceed with caution, given the macroeconomic issues facing the country, and also notes the need for care because the pension system is a key pillar of the SA economy,” the paper said.
The Treasury said it would investigate alternatives on the tax treatment of contributions and withdrawals under the proposed two-pot system.
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