Balancing act required for SA’s pre-retirement withdrawals
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CHANGES in the pension fund rules to allow workers to dip into their savings could improve long-term retirement outcomes, but it should be a careful balancing act to not torpedo the country’s asset base.
This was a warning by some of the country’s largest asset managers this week following the announcement of a mooted legislation for early, limited withdrawal of pensions.
The National Treasury this week confirmed it was looking at proposals to allow for greater preservation with limited pre-retirement withdrawals from retirement funds without creating liquidity and investment risks.
Treasury said that any consideration for early access will require legislative and fund-rule amendments, but implementing any new system will take time.
The current law and policy prohibits any pre-retirement access to retirement savings unless an employee resigns or is retrenched.
“It is expected that any changes to the law would only become effective next year at the earliest, and some of the medium-term provisions may take even longer to take effect,” it said. “The government remains committed to encouraging South Africans to save more, both for their retirement and for shorter periods before retirement.”
In addition to prior consultation, legislative and fund rule amendments have to be done and fund administrators will also have to change their systems.
Head of investments at 10X Investments Chris Eddy said while many would consider the proposal as a negative for the formation of household
savings, the impact could well be the opposite. Eddy said retirement savers can already access a third of their savings as a lump sum at retirement – this could bring that forward in specific contexts of distress.
He said the proposal could avoid the trend where financial distress pushed workers to cash in on 100% of their savings as is currently allowed when a worker changes jobs.
“The Treasury statement makes it clear that the change to allow early access to a portion is proposed “provided that this is accompanied by mandatory preservation upon resignation from a job”, which effectively brings in compulsory preservation of retirement savings,” Eddy said.
“Given South Africa’s current low rate of preservation, this could be a net positive in relation to improving retirement outcomes for South Africans.”
Treasury said the design work and consultation were ongoing, with proposed measures for public comment to be made shortly, before or at the 2021 medium-term budget.
It is envisaged the necessary legislative amendments will be introduced in Parliament thereafter.
Treasury’s measures for early access, preservation, increased coverage look to alleviate the short-term financial pressure for Covid-19 impacted workers, and increase long-term retirement outcomes.
Director of large enterprises at Old Mutual Corporate, Malusi Ndlovu, said early access was only limited for people saving through retirement annuities or for members in employment-based pension and provident funds while remaining employed.
Ndlovu, however, said the immediate challenges would include, firstly, the liquidity issue facing retirement funds.
“Should early access be allowed, there would be a large amount of money disinvested in a short period, potentially significantly impacting asset prices and causing members and other investors to realise poor value in the short term,” Ndlovu said.
“The other challenge is the practical implications, starting with the clear access rules – how often, who decides if the member qualifies, the tax impact, and so on.”