Compulsory preservation has been up for debate throughout the 25 years that I have been covering the employee benefits industry, and it is finally here.
The two-pot retirement system is a compromise. In many jurisdictions, retirement capital can’t be accessed until at least age 55. Pension funds are certainly not designed as vehicles for emergency savings. But such a rigid rule is a developed country’s luxury, and we live in the Global South, even if SA qualifies at least as a middle-income country.
Much has been written about two pots already, but as a former pension fund trustee and long-time attendee of events such as those of the Institute of Retirement Funds and the Pension Lawyers Association, I can’t ignore it.
For years there was debate about whether to allow members to withdraw funds in emergencies. As an unpaid member trustee, I would have had to spend time deciding whether a member’s case was deserving enough to merit a withdrawal. This process would have been rather like a banker deciding whether the member merited an overdraft — except of course that’s part of a banker’s day job.
There would have been a long list of circumstances meriting a withdrawal — would paying for the funeral of an uncle or aunt justify a withdrawal, or just that of a parent, spouse or child?
Trustees already spend enough time with Section 37C of the Pension Funds Act that gives them discretion to decide who qualifies for death benefits.
So in the end the two-pot system makes sense. People have access to one-third of any of their retirement capital that they have accumulated since September 1 but in no circumstances can they touch the rest until retirement.
Alexforbes executive John Anderson says the firm’s projections are that members will retire 2.5 times better off than they would have done under the present system. And bear in mind that Forbes boasts more actuaries on the payroll than you can shake a stick at.
Paying down
The basis for this projection is that on average people have six employers in their careers. They have the option to preserve their capital, but most prefer to take the cash. Who can blame them; they have needs to meet such as paying down their credit cards or settling school fees.
Under the new system members will have access to one-third of their capital and will no longer need to resign to access it. It can be withdrawn at any age, though only once every tax year. The remaining contributions will continue to build up, and as it’s in a pension fund it is free from income and capital gains taxes.
Anderson says members shouldn’t make a habit of withdrawing from their savings pot, and he is quite right. Withdrawals should only happen in genuine emergencies.
Yet Forbes has had as many inquiries from clients since the two-pot system went live on September 1 as it has had in normal circumstances over six months. It expects there to be a total of R1.5bn in withdrawals, of which R270m will be paid in tax.
People who are fortunate enough to have a regular income should set aside money in unit trusts, whether equity, balanced or income funds. Just remember that pension funds have that name for a reason.
It’s not just individuals who will benefit from increased preservation but the financial markets too, and above all the JSE. Pension funds can invest up to 45% globally, but on average it is about 30%, given that much of the JSE is made of shares that hardly operate in SA, such as AB InBev, Naspers and Richemont. Counting these shares, portfolios could easily be 45% or more offshore on a “see-through” basis.
The savings culture in SA is poor, even though by Global South standards — and even compared with many European countries — SA has a highly sophisticated financial services industry. If anything, the industry is somewhat over-engineered, with financial advisers, discretionary fund managers and asset managers who often have overlapping areas of responsibility.
This could change with the launch (discussed in my previous column) of more exchange traded funds (ETFs), and in particular multi-asset ETFs, which are ideal defaults for savers.
As part of the new rules, the rigid rule around retirement annuities will be relaxed. Since they were launched in the early 1960s capital could not be touched until 55. Now they will be treated the same way as other pension funds, with one-third contributed after September 1 accessible.
• Cranston is a former associate editor of the Financial Mail.
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