Two-pot retirement system: Will administrators laugh all the way to the bank?

Pension fund members who already started withdrawing funds from their savings pots after the implementation of the two-pot retirement system last week are not the only ones whose pockets are a bit fuller – it seems administrators will also laugh all the way to the bank.

Many people who are withdrawing money from their savings pots are now seeing what pension fund administrators have been warning about: you will not get the full amount you claimed. After tax and any extra amounts that you still owe the South African Revenue Service (Sars) were deducted, you also have to pay administration fees.

Keystone Actuarial Solutions, which offers specialist actuarial and consulting services to retirement funds and their sponsors, had a closer look at the administration charges that apply to the two-pot retirement system withdrawals and surveyed the different administrators to see how much they charge and make.

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How much administrators will make from two-pot retirement system fees

How much do the administrators then make from two-pot retirement system withdrawals? Keystone says based on an average assumed withdrawal of say, R20 000, the fee will then be an average of 1.6% of the amount withdrawn.

“A number of estimates of the total expected initial withdrawals have been published, mostly in the range of R50 billion to R100 billion. Based on these estimates and excluding an estimate of withdrawals in respect of GEPF members, the withdrawal fees that could be paid to administrators in the tax year from 1 September 2024 to 29 February 2025 could be in the range of R640 million to R1.25 billion. These amounts exclude any fees as a result of the increase in the base administration fee.”

In the future, Keystone says, assuming that most members who take a withdrawal shortly after 1 September 2024 take a further withdrawal in each subsequent tax year, the direct withdrawal fees could result in a fee to the administrators of some R500 million to R1.0 billion every year. This will represent a material windfall to the administrators and a consequent reduction to member benefits, Keystone warns.

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We could only find one administrator not charging a fee

The Citizen could only find one administrator, Allan Gray, who does not charge any administration fees for two-pot retirement system withdrawals. Jonathan Turner, head of retail operations at Allan Gray, says investors who withdraw will receive their requested amount, minus tax at their marginal rate and any other outstanding amounts owed to Sars.

The number and number of withdrawals is unknown at this stage, but is expected to be significant, Keystone says in the report. “Various commentators focussed on the tax that will be paid to Sars on these withdrawals and the effect this will have on the economy, but the other ‘leakage’ from the system will be the fees paid to administrators.”

Keystone also points out that withdrawals under the two-pot retirement system are a significant change for administrators who historically only paid benefits when members left funds, except in the case of divorce and maintenance orders.

Under the two-pot retirement system, the administrators will pay benefits while the member remains a member of the fund, which means there will be a large increase in the number of claim payments, possibly as high as four or five times the normal number of annual payments. This will reoccur if members request a withdrawal each year.

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Administrators had to make many system changes for two-pot retirement system

In addition, Keystone points out that administrators had to change their administration systems to administer member benefits in the various components, verify the identity of the member requesting a withdrawal, process the requests and effect the payments.

Therefore, most of the administrators decided to charge an additional fee for withdrawals from the savings pot and the additional administration costs of the two-pot retirement system, such as maintaining separate records of each component and changes to communication, such as benefits statements, by charging either a fee against each withdrawal, an increase in the basic administration fee or a combination of the two.

Keystone conducted a survey of medium and large commercial retirement fund administrators to determine the fees they will charge (including VAT where applicable) and particularly the fee for savings component withdrawals.

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What the numbers show

These are the responses Keystone received:

The fees are reflected, for illustrative purposes, on two sample withdrawal amounts but in the future withdrawal amounts could be higher than R30 000. Where administrators manage both stand-alone and umbrella arrangements, they appear to be charging the same fee under both arrangements.

Keystone specifically did not survey the fees charged for retirement annuity and preservation funds. Discovery will deduct the fee from the member’s remaining components after the withdrawal and not from the withdrawal itself. All the other administrators confirmed that the fee will be deducted from the withdrawal itself.

GQM and Momentum will charge an additional R115 and R100, respectively, if the withdrawal requires manual intervention by the administrator.

These fees exclude other fees incurred due to the two-pot retirement system, such as communication and member information costs, drafting of rule amendments and any increase in fidelity cover premiums.

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Minimum and maximum fees under two-pot retirement system

These are the minimum and maximum two-pot retirement system withdrawal fees that each administrator will charge:

Keystone says most administrators are charging a flat fee, irrespective of the value of the withdrawal, while two administrators are charging a scaled fee depending on the value of the withdrawal. Their average fee will depend on the profile of the actual withdrawals of their respective administration books but is likely to be in the same range as the flat fee for the other administrators.

The structure of the fee will obviously affect members differently depending on the value of their withdrawals.

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Increases in other fees

Administrators are also planning to increase their other fees, Keystone says. Three administrators explicitly confirmed they would increase their base administration fee by between 2.80% and 4.00% on 1 September due to the implementation of the two-pot retirement system.

The other administrators confirmed that their administration fees would not increase on 1 September as a consequence of the implementation of the two-pot retirement system, but several noted that they may increase their administration fee on the next fee review date once the actual profile and number of withdrawals is known.

The profile of withdrawals by amount and administrator is not known at this stage, but based on reasonable assumptions may average out at a fee of about R320 per withdrawal, Keystone says.