South Africa’s new retirement system – big questions hang in the air

Sanlam says South Africans are feeling mixed over the introduction of the new ‘two-pot’ retirement system planned for the country.

The new retirement system will allow people to access a small portion of their retirement funds whilst preserving a large quantity for retirement.

A savings pot will allow for one-third of contributions, which members can access before retirement. The aim of the savings pot is to help people who need access to emergency funding – which was the case during the Covid-19 pandemic.

A second retirement pot will require a minimum allocation of two-thirds, only accessible at retirement.

In addition to the two pots, a ‘vested pot’ will also be present, which will hold the accumulated retirement savings before the two-pot system is introduced and will be subject to the current rules of a respective fund.

Sanlam said that the retirement industry had gained traction in implementing compulsory preservation until the normal retirement age before the planned changes were introduced.

National Treasury anticipates that the necessary legislation for the new changes will come into effect on 1 March 2024. However, many industry bodies are concerned that there won’t be enough time for funds to change their systems before then.

Sanlam said that it does not expect a further postponement in the legislation, considering 2024 is an election year. Although the group said that it was ready for the changes, it has expressed some concerns over the new legislation.

For instance, Sanlam said that benefit funds, retirement annuities, divorce, retrenchment and various other tax implications have still not been defined. In addition, withdrawals from the savings pot can occur once a year, but there has been no indication of how the year is calculated.

The biggest question, however, is whether a portion of members’ current retirement savings will be transferred to the savings pot on 1 March 2024 as a form of ‘seeding’.

Although seeding in the savings pot was not included in the draft regulations, Sanlam believes that the exclusion could see members resign before its implementation to access their full retirement savings.

It added that should seeding become applicable, the amount needs to be big enough to matter to policyholders but not so large that it diminishes current retirement savings.

Consumer reaction 

According to findings from Sanlam’s 42nd Benchmark Report, 57% of respondents were sceptical about the new Two-Pot system, with many wary of the long-term impact on their retirement savings.

21% of respondents said that they would consider withdrawing emergency funds in an emergency, with 13% saying that they were will willing to access a portion of their benefits outside of this.

Only 8% of respondents said they would use the new system.

Sanlam said that it was interesting that only 23% of respondents said that they wouldn’t touch their savings at all.

Retirement warning 

However, Sanlam expressed concerns about the general saving culture in the country, warning that, by 2040, South Africa faces the reality of having a large population that can simply not retire.

According to Benchmark research, 75% of respondents contribute to retirement funds, whilst 25% do not.

“These statistics are not entirely surprising, considering that 46% of respondents admitted to struggling to meet basic monthly needs like food and rent,” said Kanyisa Mkhize, CEO of Sanlam Corporate.

The company said that more education and awareness campaigns are needed to bridge the gap, noting 30% of individuals did not know how to save, 47% were unsure which pension product they should invest in, and 48% failed to include medical aid contributions in their financial planning.

40% of respondents said that if they opted out of their retirement fund, it would be because their current financial needs are too big, and they need money now.

However, Sanlam said that the Two-Pot system should address this concern by striking a balance between needing long-term retirement savings goals and providing access for emergencies.

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