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Treasury proposes partial access to pension savings

Carol Paton Editor at Large

The National Treasury has proposed a “two-pot system” for withdrawals from pension funds, with one-third being accessible before retirement and two-thirds being locked into compulsory preservation for retirement.

The debate over access to retirement savings by those in distress grew new wings this week, with finance minister Tito Mboweni’s comments on Wednesday that the matter had been “stuck in the system for too long”. He had instructed officials to act on it with haste.

For more than a year, business, labour and the government have been in discussions in the National Economic Development and Labour Council on a proposal to allow withdrawals due to hardship brought about by Covid-19. But no draft amendment bill has emerged.

Parliament has begun debating the issue in the form of a private member’s bill from DA MP Dion George, which is being discussed in the standing committee on finance.

Treasury deputy directorgeneral Ismail Momoniat said in an interview on Thursday: “The approach is for a limited system of withdrawals together with mandatory preservation. It will allow some form of withdrawal but then you will not be able to take out the rest of it before retirement. There has to be greater preservation.”

Momoniat said the Treasury also wanted to make it compulsory for everyone who works to contribute to retirement savings “including people such as Uber drivers and contract workers”.

Under existing rules, pension fund members can cash out their entire pension when they resign, but with a penalty. Tax that has been withheld becomes due on two-thirds of the lump sum. The proposal would allow only a third to be withdrawn, with the remainder accessible only through an annuity.

The Treasury has long resisted a total withdrawal option in a bid to increase the low levels of savings in SA and increase preservation. Only 6% of South Africans retire with adequate savings, the Treasury estimates, and 49% of people have no retirement savings at all, says a 2020 industry survey.

The Treasury recently won a hard-fought reform to enforce a two-thirds preservation of provident funds, which previously could be fully withdrawn.

However, the change will introduce challenges for the retirement savings industry, reducing assets under management and requiring that more assets be held in cash. There is also the risk of a “liquidity event” if large numbers of people withdraw savings at a similar time.

Rosemary Lightbody, senior policy adviser to the Association for Savings & Investment SA, said on Thursday it was not yet possible to estimate the full effect of the proposal.

“We have to accept that in SA, very often retirement savings are the only savings a person might have, so they do look to [them] when in dire straits.

“We don’t like it because in an ideal world people should not access their funds before they retire. But if there has to be some form of access, this does seem to be a reasonable proposal, so we are working on it,” she said.

Funds would have to hold more cash as the access pool would have to be liquid, but they could gain from compulsory preservation.

“The access pool would have to be liquid, depending on how often access is permitted. But on the other hand, if there is a twothirds pool that has to be preserved, then you have a pot of money that is capable of longterm commitment,” she said.

Rowan Burger, head of strat

egy at Momentum Investments, said the difficulty with allowing people access to long-term savings for short-term crises reinforced bad saving behaviour, as most South Africans do not save for an emergency.

“But it is possible to use an approach which says that if you want access to your money now then you need to tie up your future money,” he said.

A liquidity event remains a risk even if the withdrawals of individuals are staggered.

“If one-third of the 6-million people with savings withdraw R25,000, that is R150bn.”

Malusi Ndlovu, director of large enterprises at Old Mutual, said that given the widespread economic devastation, the company supported the call for access to funds.

“However, whatever access provisions are made, we need to focus on improving the savings culture and retirement outcomes in the long term as well.

“Therefore, we support National Treasury’s approach of a package of reforms, addressing various aspects in one go — early access, preservation, increased coverage — as it will alleviate the short-term financial pressure and increase long-term retirement outcomes.”

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2021-07-30T07:00:00.0000000Z

2021-07-30T07:00:00.0000000Z

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