KELIN POTTIER: Two-pot pension system ticks some key boxes

Critics of the National Treasury’s proposed two-pot system have largely failed to acknowledge that the proposal goes some way to resolving the conflict workers experience between providing for immediate, often-urgent financial needs and making provision for their retirement.

As the 2022 edition of the 10X Investments SA Retirement Reality Report shows, the country’s retirement preparedness crisis is escalating, with millions unemployed and many of the employed also struggling to cover even their most basic needs.

While there may be limited scope right now to increase the amount individuals can afford to save towards retirement, something can be done to tackle the preservation crisis.

SA Revenue Service statistics show that between 2018 and 2020 almost 2.15-million of the 6.8-million retirement savers cashed out some or all of their retirement savings before retirement.

In some respects the Covid-19 pandemic highlighted the incentive the current retirement saving framework in SA creates for a worker to leave employment to access retirement savings when in financial distress. It is difficult to imagine how a retirement saver will not be driven to make poor choices, such as resigning to access their savings, when they have hungry children to feed and there are debt-collectors or other wolves at the door.

The proposed two-pot system aims to balance savers’ need for access to retirement savings in emergencies and to pay their bills in retirement. The 10X report, which was released on September 30, is based on the Brand Atlas survey, which tracks the lifestyles of the 15.4-million economically active South Africans (16 years or older, living in households with a monthly income of more than R6,000pm, with access to the internet). 

Not preserving savings on leaving a job is not the domain of just the desperate. As the report shows, cashing out savings is the default choice: 60% of corporate members who left a scheme cashed out their savings, rather than ring-fencing them and the tax benefits in a new employer’s fund or preservation fund. The report notes that other surveys suggest as many as 80% of retirement savers cash out on leaving jobs.

People cashing out their savings when they change jobs is a significant contributing factor in SA’s retirement savings crisis. With the introduction of the “two-pot” system, that option would be two-thirds off the table for people joining the workforce.

After March 1 2024, when the proposed two-pot system is scheduled to take effect, retirement saving contributions will be divided into two pots: a retirement pot and a savings pot. Up to a third of retirement fund contributions can be invested in the savings pot, which can be accessed once a year without resigning from employment.

An accessible savings pot removes the harmful incentive for workers to resign to access retirement savings in times of distress, while also allowing individuals to build up emergency savings within their retirement fund.

Those who have retirement savings invested before the new regulations take effect will have a third pot containing existing savings, the so-called vested pot, which will continue to be available on exiting the fund on leaving a job.

The current rules, which allow for emptying out of a corporate retirement savings fund on leaving a job, enable this basic but damaging retirement saving error. As detailed in the report, the retirement saver loses not only the funds they have withdrawn but also the growth those savings would have generated over the years to retirement, often the significantly greater loss over time.

Cashing out is a choice that is often made lightly but has severe consequences. It really should be a last resort. If fund members were properly informed on the consequences of cashing out, many more might avoid it altogether, or at least limit the damage by cashing out just a portion.

Compelling members to preserve some of their savings until retirement will hopefully improve the situation beyond measure for many. However, the concept of separate pots for emergencies and retirement could have the unintended consequence of leading some to think of the smaller pot as purely a savings pot but, if it also means that some of their savings are ring-fenced for retirement, the gain is surely bigger than the loss.

The inclusion of retirement annuities in the proposed system may improve retirement saving in general as the lack of access to funds has historically been a key obstacle preventing individuals from contributing to a retirement annuity, an issue the Treasury tried to alleviate with the introduction of tax-free savings accounts.

The 10X report highlights the retirement preparedness crisis in SA and the need to resolve key challenges, including improving the preservation of existing retirement savings. The proposed two-pot system may not tick all the boxes, but it does tick some key ones, and is a critical step forward in improving retirement outcomes.

Pottier is product development specialist at 10X Investments.