South Africa's new retirement system raises concerns

According to financial services firm Alexforbes, South Africans are failing to efficiently save for retirement, particularly when changing professions, and the new planned ‘two-pot’ retirement scheme does not account for all potential savings increases.

According to the organisation, just 9% of its members save their retirement funds when they change employment.

According to Alexforbes, the minister of finance said during his budget statement on 22 February that the two-pot system will be implemented on 1 March 2024, despite worries about the systems’ capability to handle the new structure.

The new method will allow for restricted short-term access to retirement fund funds for crises while ensuring long-term retirement savings preservation. The Income Tax Act will be changed to incorporate definitions for “savings pot,” “retirement pot,” and “vested pot” in order to implement these changes.

According to the proposed Income Tax Act amendments, retirement funds will be divided into three parts: the vested pot, which includes amounts accumulated before the new system takes effect, a savings pot, which allows one-third of the funds to be accessed for emergencies, and a retirement pot, which must be preserved in full until retirement.

Donations made after March 1, 2023, must be kept until retirement.

The new laws will also have no retroactive impact, so existing retirement savings and contributions made previous to the implementation date will be unaffected.

“While the two-pot proposals go some way to address the issue of preservation, at least in respect of contributions made after 1 March 2023, there are other factors that need to be considered to improve retirement savings.”

According to Alexforbes, more improvements might be done in the following areas:

Increasing contributions

At present, the average contribution rate of 12.9% (after costs and risk benefits) by members of retirement funds is generally insufficient to achieve the ideal 75% income replacement at retirement, said the group.

Levels of debt

More emphasis needs to be put on programmes that assist in ensuring healthy financial habits and for people to live within their means.

Alexforbes said that there is a direct link between the amount of debt an individual is in and what they can afford in terms of contributions.

Alexforbes Member Insights showed that the debt-to-income ratio of the members was 69%, with 6% of members at high risk of financial stress.

“Millennials”, in particular, had higher financial stress. The higher the levels of debt and financial stress, the lower the amounts saved towards retirement, Alexforbes said.

Coverage

There are still people that are not covered by any form of retirement savings despite most formally employed workers belonging to a retirement arrangement.

The following changes could be made in regard to coverage:

• Auto-enrolment for formally employed and contractual workers.
• Scrapping the means test for the State Old Age Pension at retirement. This acts as a disincentive to save at present, said the financial services company.
• Separate interventions should be thoroughly explored for the informal sector, taking the specific dynamics of this sector into account to ensure a sustainable and workable solution rather than destabilising the integrity of the existing retirement funding system. Many other countries have also grappled with coverage in relation to the informal sector – with limited success in practice.

Although the group proposes some changes, it is overall in support of government plans over the long term.

“In the short-term, however, there will be pressure on administrators to process significant amounts of small claims given that a portion of accumulated savings to 1 March 2024 will be immediately accessible.”

It is imperative that retirement funds ensure that they can accommodate the changes, including:

• Significant changes to systems making use of the latest technology in engaging members;
• Investment strategies to cater for the various pots;
• Member communication and support to members to ensure members understand their options under the new system;

Another effect is that free-standing funds may contemplate switching to umbrella funds to accommodate the changes.