Michael Avery: With everything seemingly in crisis in South Africa, from Eskom to the failing infrastructure and potholes and rising crime levels, it's easy to forget that there is a far more insidious and slow-burning crisis that affects each and every one of us personally bubbling underneath the surface. But sadly, it's largely out of sight. It's the retirement crisis. It's an emergency, actually.
I think sometimes numbers are hard to grasp, but I often talk about the fact that only 6% of us will be able to retire and maintain our current lifestyles. That means if you were out last night with a group of 20 mates, only one of you, or just over would be able to retire with your current lifestyle.
It's crazy that we don't talk about this more, but here we are. At least National Treasury is grasping the urgency of the emergency to some extent with its long-run plan of retirement reform. Here to talk about the latest step in that long and winding road emanating from the recent Budget is Kelin Pottier, Product Development Specialist at 10X Investments. Kelin, great to chat to you again. To start, could you just explain to the listeners what this Two Pot System is and how it really differs from the current system with this aim to balance the urgent imperative to save for that nebulous, hard to grasp distant future with our immediate needs to respond to emergencies.
Kelin Pottier: Thanks for having me on the show. So, if we think about our current retirement landscape, we have many different retirement products, whether it's a corporate pension fund, a preservation fund, or a retirement annuity. We have all these different retirement products and each has their distinctly different treatments regarding access to funds. For example, someone who's in a corporate pension fund can't access any of their funds until retirement unless they resign from their job, in which case they can access their savings. Whereas someone in a retirement annuity, for example, has no access to their savings at all except for incredibly dire situations such as death or disability. Otherwise, only at age 55 can they access a portion of their retirement savings.
The Two Pot system, which is the proposed legislation that's come out from Treasury, aims to balance exactly as you said, access to retirement savings whilst enforcing preservation.
Under the new system, all contributions made to retirement funds from the effective date will be split into two pots. One is a savings pot, where one third of your contributions will be allocated, and the other is a retirement pot, where two thirds will be allocated. Members will now be able to access funds from their savings pot before retirement without needing to resign from the employment. And so it gives access on the one hand, whilst on the other hand your retirement pot must be preserved until retirement and can only be used to purchase an annuity at retirement, thereby encouraging and enforcing preservation.
Michael Avery: It's such an important distinction because we often hear the stories. The reality on the ground is that many South Africans are in a bind financially and they might have to leave a decent paying or secure job so that they can access their retirement savings either to send a child to school or university, or pay off some debts and keep the wolves at bay.
This is now a system that recognises that life happens and so Treasury is saying, well, at least some of those retirement savings can be accessed in the case of an emergency. Initially, my knee jerk reaction was, this is not a good idea because what we want to do is incentivise people to save. You want to say, right, this is your retirement money. You mustn't touch it until the day you retire. But I think reality and real life is often very different to what even the legislators' best intentions are.
How do you see this new system impacting retirement outcomes? Clearly, Treasury thinks it's going to improve outcomes. Do you see it improving those outcomes and shifting that needle from the 6% number?
Kelin Pottier: Yes, we at 10X, are massively encouraged by the new regulation. We think it will be an absolute game changer for the industry. Not only will it encourage preservation, which we know is a key obstacle in our retirement crisis. From 2018 to 2020, almost one third of those people who were contributing to a retirement fund cashed out some or all of their retirement savings. And, of course, that derails your financial plan. Therefore, most people can't afford to retire comfortably.
But if you're now in a in a position where you are enforcing preservation, we will see people getting to retirement with at least some money to sustain them from day to day. Beyond that, the fact that this now harmonises the treatment of all retirement products, be it a pension fund, a preservation fund or a retirement annuity, by providing access to some portion of funds and, importantly, not all at any point in time, we think is a massive win, particularly for retirement annuities.
We think that this increased flexibility and access to funds actually encourages saving in retirement funds and will bring more people into the fold. We have seen in the past that lack of access to funds until retirement has been a key obstacle to individuals who fear that there may be an instance where they will need some funds and so, therefore, just can't risk having this money tied up. So we think it's going to be a massive win and particularly for self-directed individuals who are looking for retirement annuities.
Michael Avery: And there is still some, I guess, punitive disincentive from dipping into that accessible pot because you are still going to be taxed at the marginal rate. You're not going to enjoy the tax benefits that come with the other pot, which will last you until you retire and have got to cash in and purchase an annuity. So I think the balance is a good one that's been struck here.
There's detail here on seed capital that is going to be used to have that first little bit in the pot. Can you share with us some more details on what is referred to as seed capital, and how that will allow individual savers to have a starting balance in their savings pot, which would be accessible at any time.
Kelin Pottier: Sure. So when the draft regulations came out, one of the immediate push-backs from labour and unions and also from some in the industry was that the system makes sense, we think it's incredibly intuitive, we think it will be beneficial for retirement outcomes, but what about my current retirement savings? This still won't solve the fact that I can't access any of the savings I have accumulated until now. So there's still, until the system comes into place, an incentive for me to resign from my secure, well-paying job in order to settle my debts, pay off my loans.
National Treasury, after going through consultation, was sympathetic to these views and said, okay, we will make some provision for an immediate amount to be allocated from your current retirement savings to the savings pot, which then on implementation will become accessible at any point before retirement.
There are still four areas outstanding with regard to the Two Pot System, on which Treasury needs to still provide further clarity to the industry. One of them is the exact details around the amount of existing savings that can be allocated to the savings pot. We still await that detail as well as on three other key areas.
We do urge National Treasury to provide that detail, and in consultation with the industry, as soon as possible to give us the best possible chance of reaching the 1 March 2024 implementation date, which is quite aggressive. Looking at where we are.
Michael Avery: That's the one thing I did pick up from this and having chatted to various role players within the industry. I mean, if you look at the pension funds, the trustees, the administrators, the asset consultants, all of them have to start changing systems and really implementing a new process and way of doing things. If you want to do that by a deadline of March next year, that is just around the corner, and we can't really move until we get that detail. So I certainly hope that Treasury does move with the requisite speed here.
We're having this conversation in the context, as I said in the introduction, of this retirement crisis. I'm living with the retirement crisis right now through decisions that my parents made. My father sadly passed away and didn't leave my mother with a huge amount of money. I've had to step in and help put some money towards her next home, which is in a retirement village.
But there's this talk of the sandwich generation. This adds real pressure on individuals who can't rely on the State. And, quite frankly, you shouldn't be pinning your hopes on the State; you should be planning. But, again, you know, Kelin, I think we're very poor planning out 20, 30, 40 years in the future.
We look at the average contribution rate here and it's going to come back to numbers that might make people's eyes glaze over, but the average contribution rate to saving for retirement is 12.9%. Yet we want to achieve an ideal 75% income replacement rate. What we're trying to do is replace three quarters of what we're earning today because when we retire our expenses will probably be a little bit less. The children will be out the home and you won't have bond repayments. Your medical costs will go up but if you look at how much we are putting away, is that setting us up for that kind of 75% replacement ratio?
Kelin Pottier: I do think that the statistic on the average contribution rate is a bit misleading. The most important thing when it comes to achieving a 75% replacement ratio is how much time you have to reach that. For an individual who is aged, let's say, 21 to 25, that individual would require an annual contribution of between 12.5 to 15% of their current salary in order to reach a 75% replacement ratio.
The issue we have, though, is that individuals wait far too long to take control of their retirement savings and either don't contribute at all during their earlier working years, or contribute too little. When we see that average contribution rate of 12.5%, that also incorporates individuals who've only just taken out an RA [Michael Avery: in their 40s!] or those who've reached age 50 and said, geez, you know, retirement is just 10 years away and I've got nothing, I need to try to catch up.
At that point, you would need more than half your salary to go towards retirement savings just to come close to a modest replacement ratio. We think individuals should not fall into the trap of saying retirement is 30, 40 years in the future, it's a problem for later. Every rand you contribute earlier on in in your lifetime has a disproportionate impact on your ability to retire comfortably and retire with dignity.
Michael Avery: And you're not squeezing your future self because it's a lot easier to take 12.5-15% of your income, as an average, throughout the course of your life, rather than hit 40 or 50 and start having to contribute 30 or 40% of your income. And most people can't do that. That's where you end up in this bind and maybe taking on unnecessary risk and that kind of thing. I just hope we have this conversation more frequently. And really it's a global conversation. If you look all around the world, there are various forms of this retirement/pensions crisis emerging.
I really think it's incumbent upon all of us — yourselves at 10X, us in the financial media and individuals — to take ownership and to understand what this really means. The last thing you want to be leaving to anyone you love is some kind of financial burden that potentially could sour a memory, or weaken a relationship. I mean, this really is about taking ownership of your own individual journey on this mortal coil. Kelin, thank you very much for your very insightful thoughts on the Budget retirement reforms and the Two Pot System. I really appreciate you taking the time to shine a spotlight on this national emergency here on Not The Daily News.
This transcript has been edited for clarity.
Listen to the full interview: Not the Daily news – One national retirement crisis, two pots:
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