National Treasury’s ongoing pension reforms target better savings outcomes and simpler retirement funds. The latest proposal – the two-pot system – delivers on the first objective, but is a step backwards on the second, more so for provident funds.
The plan is to give employees access to a portion of their savings (possibly one-third) but compel preservation of the balance until retirement, thereby addressing the competing needs of immediate relief in a financial emergency and higher pensions down the line. It’s a simple promising solution but, layered on top of existing rules adds complexity.
The two-pot system will apply to contributions made after the effective date of 1 March 2023 (as proposed by Treasury), but, given administrative challenges, perhaps only from 1 March 2024. As is the norm, Treasury will protect current (“vested”) rights, which means previous savings (plus subsequent returns) remain under the old law. Employees can thus still access those funds in full on leaving their employer.
Inevitably, it will take time to build an adequate emergency pot, to dissuade members from raiding their vested benefit when they change jobs. One way to foster more prudent behaviour before then is to seed the emergency fund, that is give members immediate access to some of their savings, at the effective date (rather than wait for the balance to build up through contributions).
However, Asisa (the Association of Savings and Investment SA) opposes this. It believes that making “old money” subject to “new rules” will create confusion and uncertainty, require the industry to administer a one-off event and incentivise members to take the money, whether they really need it or not.
This position seeks to curtail a (potential) minor abuse, but risks prolonging the actual major abuse: cashing out in full when the opportunity arises. The focus on short-term implementation issues ignores the long-term complexities, which are considerable.
Most provident fund members already have a vested benefit. Like pension and RA members, they must now annuitise two-thirds of their savings at retirement. However, their balance on 28 February 2021, plus subsequent returns, is exempt. Which means that when the new system comes in, they will have four pots, not two.
Pot A holds their first vested benefit on 28 February 2021. They can cash this out on leaving their employer, and at retirement, but not in an emergency.
Pot B holds their second vested benefit on, say, 28 February 2024, built up since 1 March 2021, plus subsequent returns. They can cash out B1 (one-third of Pot B) on leaving their employer and at retirement, and B2 (the remaining two-thirds) on leaving their employer, but not at retirement. Administrators can merge B1 with Pot A as they are subject to the same rules.
Pot C holds contributions made after 1 March 2024. One-third goes into C1 (which may come to be seen as an emergency fund), which members can access at any time (subject to still-to-be-determined constraints), whereas the balance in C2 is off limits until retirement and must then be annuitised.
The compulsory annuitisation provisions for pots B2 and C2 apply only if their combined total exceeds R165,000 within the same fund.
Pension funds will have pots B and C, but not A (but still four pots in total). RA funds have their unique Pot D, which is out of reach until retirement, with two-thirds subject to annuitisation.
Far from harmonising the access rules of the different fund types, the latest provisions drive them further apart. Nor will the amounts in pots A and B become immaterial; quite the opposite, in fact, if they remain invested and returns keep compounding.
The fund industry will have to contend with this potty system for decades to come. To assist with financial planning, administrators will have to quantify the different pots. This may have implications for the underlying investment strategies, as each pot may be assigned a different time horizon. It is the kind of complexity that Treasury wants to avoid.
The obvious remedy is fewer pots. For older provident fund members, Pot A represents the bulk of their savings, so for them, this vested right is non-negotiable. But provident fund Pot B can go.
One way is for compulsory annuitisation to become effective only from the date the two-pot system comes in. This would do away with the second vested benefit accumulated since 1 March 2021.
The other is to introduce the two-pot system retroactively, from 1 March 2021, for both pension and provident funds. That would make money available immediately (which is desirable, given the political and economic urgency to do so) and back-date compulsory preservation to that date (also a plus, as it boosts the long-term savings outcome).
This may inconvenience some employees, eyeing their full resignation benefit from 1 March 2021 but weighed against the long-term complexity of the four-pot system, it is a small price to pay.
Eliminating provident fund Pot B will lessen confusion and administrative headaches and re-establish the consistency between provident and pension funds that Treasury seeks. Doing so may seem like the harder option now, but it is surely preferable to have a complex end to this scheme than to deal with its complexity endlessly thereafter.
Ishani Khoosal-Kala is Head of EB Corporate Distribution at 10X Investments
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
