LULAMILE MAKASI: Need for striking a balance with new laws on accessing pensions

Rising interest rates coupled with the worsening inflation environment have hit SA’s working class the hardest, putting them in financial distress and struggling to make loan repayments. In certain instances, households are using credit to buy basic needs such as food. This is untenable.

According to the Credit Stress Report by consumer analytics and research company Eighty20, for the first quarter of 2023 working-class households spent 70% of their monthly income to cover debt instalments due to rising debt and lower incomes.

To this end, the draft Revenue Laws Amendment Bill, the Draft Revenue Administration and Pension Laws Amendment Bill released by the National Treasury recently, that provide for early access to a portion of retirement funds, are a welcome relief for millions of workers undergoing financial constraints.

In a nutshell, the draft legislations pave way for a new two-pot retirement system, effective 1 March 2024, that will allow members of pension funds to access a portion (one third) of their retirement funds for emergencies while preserving the majority (two thirds) for retirement.

Withdrawal caps should be increased

The Treasury is proposing 10% to the maximum of R25,000 of the accrued value as seed capital for the savings pot, whereas labour through Cosatu is proposing an adjustment of the cap to 30% or a maximum of R50,000. As Novare, we are leaning more towards the latter proposal.

An amount of R50, 000 is more substantial than R25,000 and can do a lot more for members with lower accrued values. If we look at an example of a member with accrued values of R200 000 or less, their seed capital will be a value of R20,000 or lower based on a proposal by the Treasury. In my view, these are members who desperately need access to their accrued savings portion. Labour’s proposal allows a member with an accrued value of R200 000 or less immediate access to R50,000 or less. Importantly, this might discourage members from resigning to access their fund accrued value.

The proposed R50,000 accrued value will assist millions of members in financial distress, such as paying tuition fees for their children and emergency medical bills for their loved ones. Or even putting a down-payment for a property, renovating homes for rental purposes to create an additional income stream, especially during these trying times.

An administrative nightmare

The implementation of the two-pot retirement system will be an administrative nightmare for fund administrators, and is likely to have an effect on the investment strategy of retirement funds. The separate pots for savings and retirement will require funds to allocate and manage investments differently for each pot and consider factors such as risk tolerance, liquidity needs, and long-term growth objectives closely. The importance of retirement fund(s) having active investment consultants will be important. Funds should employ the services of active investment consultants to manage and monitor their investment strategy(s) closely.

Boards of trustees should consider adopting diversified investment approaches that maximise the return potential and dynamic enough to ride different market conditions at minimal investment and liquidity risks. It is crucial that the funds’ investment strategies maintain a good balance for members who will make withdrawals without disadvantaging members who want to preserve their contribution towards the savings pot.

We also urge members to manage the savings pot sensibly as depletion of savings in this pot will result in members not having a lump sum payout at retirement as the retirement pot will only allow members to purchase an annuity income.

Liquidity risks

The withdrawal of funds by many members from their retirement accounts can indeed pose liquidity risks for the retirement funds. Retirement funds should carefully assess and manage these risks by maintaining appropriate liquidity reserves, diversifying investments, and implementing effective risk management strategies to ensure the fund's liquidity remains stable even during periods of increased withdrawals.

The effect of liquidity risks on investment returns can be significant. When retirement funds experience a high volume of withdrawals, it may require the asset managers to sell off investments to generate cash, potentially at unfavourable prices or during market downturns. It may also necessitate holding a higher proportion of assets in liquid and low-risk instruments, such as cash or short-term bonds, which typically offer lower returns compared to higher-risk asset classes. Investing in near cash instrument can result in lower investment returns and may limit the fund's ability to capture long-term growth opportunities.

Striking a good balance between the short-term interests of members wanting an early access to their retirement funds to deal with emergencies and capital preservation in the long term is what all stakeholders should be working towards at all times for the long-term sustainability of the retirement system in our country.

In conclusion, working with all relevant stakeholders, we recommend that, as the next phase of these draft regulations, the Treasury investigates very closely the challenges and implications on the nation’s retirement system of members who withdraw all their accrued values in the savings pot before their retirement.

• Makasi is MD of Novare Investment Solutions