On 14 December 2021, the National Treasury released two papers on proposed further retirement reforms for public comment which detail how it plans to transform the retirement savings industry and improve savings outcomes for all South African workers.
These changes will see a fundamental shake-up of pensions and retirement in the country, say analysts at South Africa’s oldest insurance company Old Mutual. Old Mutual was established in Cape Town in 1845 as South Africa’s first mutual life assurance society.
Andrew Davison, head of Advisory at Old Mutual Corporate Consultants, says the most significant among the reforms is the introduction of the two-pot system in which a member’s retirement savings will in future be split into two pots:
- An Accessible Pot into which one-third of their contributions will be invested;
- A Retirement Pot, where the other two thirds will be invested but cannot be accessed.
“This measure will dramatically improve retirement outcomes while providing flexibility to deal with unforeseen events before retirement. Most importantly, it prevents workers from cashing out their pensions savings leaving nothing for retirement,” said Davison.
“This reform could ensure that every employee who belongs to a fund will have enough money to see them comfortably through retirement.”
Davison said the Accessible Pot will be accessible but will still face some restrictions – and will not be the same as a transactional bank account. The proposal is that access will be limited to once, or maybe twice per year and subject to a minimum of say R2,000, he said.
“To ensure that people make sensible financial decisions, it may be a requirement to get retirement benefit counselling prior to making any withdrawal. Unlike the current rules, the Retirement Pot will not be accessible when changing jobs – you will have to leave that pot invested until retirement, as the name suggests.”
Auto-enrolment
One of the objectives of the new system is to widen retirement coverage in South Africa to include temporary, contract and seasonal workers and the self-employed including those in the gig economy.
The proposal is to introduce auto-enrolment whereby all employers need to enrol all employees into a retirement fund, Davison said.
“There are various challenges that will require careful thought and planning including infrequent and variable contributions, lack of a clear ‘salary’ on which to base contributions and benefits, especially for self-employed and gig workers, whether to allow opt-out at an individual level, affordability of contributions with the potential need for a wage subsidy and many others.”
Vested rights
Changes, even positive changes like these, do give rise to concerns about losing out on the benefits or features of the current system. There is no cause for concern on this as vested rights will be protected, said Davison.
“This means that any savings you have at the date of implementation (plus growth on these savings) will be subject to the same rules as before, including the ability to access the savings when changing jobs.”
Tax treatment
Another critical challenge will be the tax treatment of these two pots.
Currently, the tax treatment of retirement savings is based on contributions being tax-exempt, growth within the retirement vehicle being tax-exempt and then the benefits being taxed, Davison said.
“The paper deals quite extensively with the shortcomings of this existing tax treatment in relation to the two-pot system and suggests four alternative proposals.
“In short, it is possible that the tax treatment for the two pots may be different. There are also questions in relation to the retirement funding limits and how these might need to change, including how these might intersect with the limits applicable to Tax-free Savings Accounts.”
- BusinessTech
