Most people who skim their pension pot early will suffer the consequences in retirement, as the immediate loss in savings is hugely magnified by the loss of compound returns over time.
Yet for those facing a financial crisis, such spreadsheet arguments hold little weight. One imagines that anyone left without an income and an emergency fund during the pandemic would gladly have traded their long-term return for some short-term relief.
Our regulators and politicians have long struggled with this dilemma of competing needs. The ideal would be a system that facilitates both: immediate relief in emergencies and better retirement outcomes down the line.
That is the motivation behind National Treasury’s recent proposal, to give workers early access to a portion of their savings provided the balance is preserved to retirement.
Counter-intuitively, this trade-off could improve retirement outcomes for South Africans.
Fund members are already permitted to access one-third of their balance as a cash lump at retirement; this proposal could merely accelerate access to those savings. This approach not only helps the fund member in a time of need, but also lessens the potential burden on the state to provide social relief during crises.
At the same time, enforcing preservation of the remainder would mend the legislative flaw that allows fund members to cash in their pension or provident fund every time they change jobs. The evidence indicates that between 60% and 80% of workers who are leaving an employer do just that, causing irreparable harm to their retirement prospects. Compulsory preservation unburdens the state down the line as far fewer retirees would depend on the old age grant.
For their part, workers would not have to resign to access their fund savings early, or be faced with managing and investing a large lump sum pay-out on their own.
On the downside, these changes will probably apply only to contributions made after this proposal comes into law, so immediate and meaningful access may still be some way off. It would also mean that employees could still cash in their pension or provident funds balance as at the implementation date according to the existing rules, that is on leaving their employer. It would thus take some time before these proposals had a profound impact.
Treasury’s proposal is also likely to add complexity to an already confusing matter, for regulators, fund members and administrators alike.
This may be one reason why the proposed changes will apply only to funds governed by the Pension Funds Act (PFA). Public servants, whose savings are administered by the Government Employees Pension Fund (GEPF), will be excluded from the early withdrawal process. The GEPF is governed by the Government Employees Pension Law (1996) and is not subject to the Pension Funds Act.
Unlike most private retirement funds governed by the PFA, the GEPF is a defined benefit fund, with benefits not dependent on contributions and investment returns, but on the member’s years of pensionable service, final salary and retirement age.
Early withdrawals (permitted in the case of divorce) reflect as a reduction in the member spouse’s years of pensionable service. Practically, processing frequent withdrawal requests on this method, in a fund with 1,2 million members, would place an unrealistic burden on the administrator.
Even if it were feasible, the idea would be a non-starter politically. Our labour unions are heavily opposed to compulsory preservation, as National Treasury was reminded during the retirement reform process some years ago (although this was not even on the table at the time). It took an extra five years just to legislate the compulsory annuitisation of provident funds.
It is thus deeply ironic that Cosatu, the country’s largest labour federation, vowed to push back against the exclusion of public servants from these proposals, seemingly unaware that they also entail compulsory preservation pre-retirement.
Alternatively, it may want to secure early access without mandatory preservation.
Barring such a goal-defeating compromise, the impact of these proposals could well be positive for the formation of household savings, leading to better retirement outcomes. It seems unlikely, though, that the political and administrative hurdles can be overcome, and the legislative changes passed, within the one-year time frame mooted by National Treasury. As far as this pandemic is concerned, these changes come far too late.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice.
