Impending changes to South Africa's retirement framework

Impending changes to South Africa's retirement framework

Finance minister Enoch Godongwana has announced that draft legislation stemming from government proposals for significant retirement reforms entailing a 'two-pot system' will be published in the middle of the year.

The proposals involve enabling pre-retirement access to a portion of an individual's retirement assets, with the remainder being preserved for retirement only.

Currently Regulation 28 of the Pension Fund Act stipulates that savers are only able to access their retirement saving when leaving their employment.

Speaking during his inaugural Budget Speech on the 23rd of February 2022, Godongwana said that government has "proposed a fundamental restructuring of the retirement system for individuals to allow for greater preservation and partial access to funds".

"Part of this proposal includes the possibility of short-term access, which would be dependent on the approval by trustees of each fund".

Consultations are proceeding following the release, last year, of a government discussion paper outlining the proposal, he added. Meanwhile, proposed changes to the investment criteria for retirement funds governed by regulation 28 of the Pension Fund Act are due to be gazetted this month. These changes are intended to enable retirement funds to make greater investments in infrastructure.

"Retirement funds play a critical role in channelling savings into productive investments," said Godongwana, while "Regulation 28 of the Pension Funds Act sets out the criteria through which these funds may make investments".

"Changes have been proposed to these regulations to enable greater investment in infrastructure by these funds. After consultation on these changes, the amendments will be gazetted next month."

The Two-Pot System

In December last year National Treasury published its discussion document "Encouraging South African households to save more for retirement," which described key outstanding proposals stemming from a retirement reform process initiated in 2012.

Chiefly among these, it outlined the design and structure of a two-pot system for retirement savings, intended to address the problem of insufficient retirement savings, and poor levels of discretionary savings, among most South Africans.

"Aside from the low level of savings for retirement, members tend not to preserve their savings, and commonly access them when leaving their jobs," reads the document.

This retirement savings crises had been further exacerbated by the local outbreak of the COVID-19 pandemic, and the subsequent strain experienced by businesses and individuals.

"The COVID-19 pandemic has demonstrated the fragility of households, and the need to proceed with more speed with government's initiatives to increase household savings and make households less vulnerable".

Treasury had requested public comments on the proposals by 31 January.

Two pots are better than one.

On the one hand, the two-pot system recognises that people do experience financial hardship and may need to access their retirement savings during times of crises - a reality exacerbated by the Coronavirus pandemic.

"In a high-risk environment, some level of pre-retirement access to retirement savings enables households to reduce unexpected financial hardships and may lead to a greater willingness to save through retirement funds," reads the document.

Currently, however, Regulation 28 only allows individuals to access their savings when they leave their employer, such as when being retrenched, or reaching retirement.

Treasury has noted that this has led to a significant number of South Africans quitting their jobs and accessing the entirety, or significant portions, or their retirement savings early.

On the other hand, the proposed system seeks to address the retirement savings shortfall by encouraging people to preserve their retirement savings, until retirement to "improve retirement outcomes and maintain the integrity and sustainability of retirement funds".

To achieve these conflicting goals, it sets out a two-pot system whereby individuals could access one third of their retirement savings at any time, but the remainder can only be accessed once they reach retirement.

"In effect, government is trying to apply a stick to promote the preservation of retirement savings, but they can't apply it too harshly because we are faced with certain realities in the country," said Guy Chennells, head of products at employee benefits.

"To balance these conflicting ambitions, they have come up with a creative solution," he says, "the issue with the proposed system is that people would have a much lower barrier to access their retirement savings early, though they will be able to access less of it".

As the proposed system may increase the temptation, for many, to access a one-third portion of their savings before retirement, this may have a detrimental impact on retirement outcomes. This highlights a heightened need for behavioural incentives to keep employees on-track to reach their retirement goals, says Chennels.