SA’s retirement fund conundrum – and how financial advisors can navigate it

In the weeks prior to the Medium-Term Budget Policy Statement (MTBPS), South Africans await more clarity from National Treasury on their proposal for limited pre-retirement withdrawals and the logistics required to make this happen.

Now is the ideal time to take a closer look at why this proposal arose and which key questions still need to be answered. 

There are some things in life that are “easier said than done” – and for many, saving adequately for retirement falls into that category.

We know that to retire successfully, we should simply start saving as early on as our first payday, get inflation beating returns and never touch our savings until we reach retirement age – however, this is easy to say, but evidently not so easy to do given that over 90% of South Africans reach retirement with too little accumulated savings to support the same lifestyle they maintained while working.   

A nudge in the ‘right’ direction

In most aspects of our lives, the likelihood of success dramatically increases if our immediate environment encourages and enables us to make good choices.

This is the very premise of what National Treasury is attempting to achieve with their proposal for limited pre-retirement withdrawals.

This proposal encapsulates a system of “two buckets” – the first bucket being preservation until retirement, the second being accessibility of funds in extraordinary circumstances. 

The proposal speaks directly to the notion of “libertarian paternalism” where rules have been established to “nudge” people towards making decisions that are in their best interest while still giving them alternatives.

For example, the default preservation and portability rules that were enacted in 2017 will make provision for us to automatically preserve our retirement funds if we change jobs, but also give us the option to take the cash immediately.

Furthermore, all types of retirement funds must have a default annuity strategy (after retirement an annuity or living annuity must be purchased to convert retirement savings into income) and provide members with retirement benefits counselling.      

In theory, these rules create an environment that is in our best interest, however, if the past year has taught us anything, it’s that retirement savings seem futile when we cannot put food on the table.

This is one of the reasons that has led to the current discussion around allowing us to dip into our retirement savings in “particular unexpected circumstances, extraordinary circumstances or emergencies”. 

Clear next steps required

For early retirement withdrawal to become a reality, both our laws and our retirement fund rules and systems will need to change.

However, the Government Employees Pension Fund (GEPF) is not covered by the Pension Funds Act and GEPF members are understandably upset that they may be ineligible for such withdrawals. 

National Treasury is considering allowing withdrawals from retirement annuities and legislation would have to be “harmonised” to enable retirement annuity fund members to access their retirement savings. 

National Treasury indicated last month that Government is consulting with unions, retirement funds and regulators “to work out how to increase savings, improve preservation and allow limited withdrawals without creating liquidity and investment risks.”

Changes are unlikely to come into effect before 2022. 

The fact that the financial sector is posing relevant queries to National Treasury regarding the proposal is advantageous to all South Africans as policy makers will be viewing the proposal in respect of the current reality.

Some of the queries that should be answered in the near future include: 

• How the split between the “two buckets” will be determined.
• How much will be accessible to members granted access to their retirement savings. 
• Aside from a global pandemic, what will constitute “particular unexpected circumstances, emergencies or extraordinary circumstances” to justify early withdrawals. 
• How the mandatory preservation, upon resignation from a job, will work.  

South Africans can expect to get clarity on the proposal before or at the upcoming MTBPS in November 2021.

– Leonard is an advisory partner at Citadel.