The recent announcement by the Minister of Finance, Mr Tito Mboweni, might have been missed by most. Partly because it took place at midday and partly, I suspect it was not part of the so-called family meeting. Or is it that the issue of early access to long term regulated savings (retirement funding) has been a bone of contention and is old news.

Treasury Proposal: “Two-pot system”

Treasury has proposed a system that at its core will allow pension fund participants to have access to one third of their pension funds and use the other two-third to participate in a preservation fund for retirement. Put simply, at any point in the work journey an employee will have access to one third of the pension fund value, and the remaining two-thirds, will have to be used to participate in a preservation fund. Currently, the only way employees could and can access their pension funds was at retirement or resignation (termination of employment).

A further consideration is that all employed people will have to contribute to retirement savings.

We are not sure if this is an admission that the economy will not perform at any meaningful level in the next 24 months and that those who have either lost jobs or generally need assistance outside the social relief net must be assisted to ensure stability in the country.

The previous relief that was offered outside of the social net was where pensioners drawing income from private sector managed funds could increase their drawings from the regulated maximum of 7.5% to 20%. This relief was however, for a limited period and essentially was for the middle income and affluent pensioners.

What is now envisaged is much wider and more impactful. The impact on funds and long-term savings will be huge in different ways. I am presupposing that the recent alignment made between long-term savings products (pension, provident funds, and retirement annuities), implies that they all will be in the scope of this announcement and ensuing legislative change.

Impact on Unemployed and Pensioners

Those who have recently succumbed to the mass job losses experienced and may continue well into 2022, will be presented with a few interesting choices. Do I withdraw my full savings within the context of the law, or do I simply take my full one-third and use it mainly to settle long-term debt and use a preservation fund to provide for my retirement? 

How then are you to manage your pension annuity pay-outs? There will be a temptation to go for broke, in that the option may well exist for you to make maximum drawdowns. If this is to be done, then the future consequence thereof will be a shorter period in years of annuity pay-outs.

Active pensioners face similar options in so far as the opportunity to make larger drawdowns may be repeated. Depending on the personal circumstance pensioners may find themselves making these decisions based on the economic plight of their children and relatives. 

No matter how we cut this up the impact and decisions that would need to be calmly considered should be done with professional assistance. It cannot be the view of Treasury to defer the problem of a growing need for higher social grants by way of a basic living grant to all adults who are unemployed.

Impact on the Long-term savings Industry

It has been long lamented by independent intermediaries who operate in the retirement market that there exists a toxic mix of poor returns for clients. The long-term savings industry will have to find ways to manage these untimely withdrawals and accept that unless the ability to generate inflation beating returns with some level of guarantee, then its ability and role will be challenged. 

One way of playing a social role with these funds that might create some sustainable value is to increasingly find ways to deploy the funds entrusted to them towards the economic reconstruction of the country and creating an environment for growth and job creation. This could if implemented and legally allowed, create opportunities for those affected by the above to re-enter the economy not only as employees but hopefully as job creators themselves through their use of their skills and ability to enter with support the SME market.

If you are concerned about the situation and decisions, you are encouraged to consult your financial intermediary or Phoenix Employee Benefits. 

Author: Reynold Patrick King

Managing Director

Phoenix Employee Benefits (Pty) Ltd.

DISCLAIMER

This blog does not constitute financial advice. The content is intended to provide information for educational purposes. We recommend that interested parties contact Phoenix at the contact details listed or their financial advisors for a comprehensive review and needs analysis followed by the required record of advice.”

References:

www.businesslive.co.za/bd/national/2021-07-30-treasury-partial-access-to-pension-savings-in-two-pot system/   Carol Paton ( Editor at large)