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OPINION: Is early access to retirement savings an option?

By Tiaan Kotze Time of article published May 27, 2020

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RANDS AND SENSE: 

Many employees are in financial distress as they have either lost their jobs or are receiving reduced or no salaries as a result of the Covid-19 national lockdown. To alleviate some of the financial distress the government has implemented several relief programmes and the Financial Sector Conduct Authority (FSCA) has said retirement funds can apply to have their rules changed to allow the reduction or suspension of contributions to provide some relief to employers and members.

South Africa’s retirement fund legislation currently stipulates that active members cannot access their retirement savings whilst employed and that benefits can only be paid when members leave their employers.

In an effort to assist members affected by Covid-19, retirement fund regulators in other countries have amended their retirement fund legislation to grant members temporary early access to their retirement savings. They are using the following eligibility criteria, where members must be either:

  • unemployed;
  • made redundant;
  • subject to reduced working hours; or
  • sole traders whose business has been suspended, or whose turnover has fallen

The Australian government has allowed members to access up to AU$10 000 (about R120 000) of their retirement savings before 1 July 2020. These members will have another opportunity to access an additional payment of up to AU$10 000 between 1 July 2020 and 24 September 2020. These payments will be tax free.

The Employees' Provident Fund Organisation in India has changed its rules to allow for an advance non-refundable withdrawal of retirement savings. Employees will be allowed to withdraw the lower of 75% of their retirement savings or three months' salary as an advance from the fund whilst remaining an active fund member. 

Members participating in the Malaysian Employees Provident Fund will be able to, over the next 12 months, withdraw up to 500 ringgits (around R2 175) per month from their retirement savings. This will only apply to members below 55 years old.

The US has implemented the Coronavirus Aid, Relief and Economic Security Act (CARES), which allows the following:

  • Members can withdraw money from their Individual Retirement Accounts (IRA) and employer sponsored retirement plans without incurring the 10% tax penalty for early access.
  • Members will have three years to repay this amount and when repaid within the three years, no income taxes will be due.
  • The maximum loan amount from an employer sponsored retirement plan is now US$100 000 (about R1 906 000) and a member can now borrow up to 100% of vested assets.

The Global Pension Asset Study report of 2020 shows the size of these markets relative to that of South Africa. The figures in brackets in the first column indicate the ranking by size of assets, out of 22.


 

Total Estimated Pension Assets 2019

(USD billion)

Pension assets/GDP ratio (%)

(1)

United States

29 196

136.2%

(4)

Australia

  2 077

150.9%

(11)

Malaysia

254

69.5%

(14)

South Africa

231

64.3%

(19)

India

185

6.3%

 

Although National Treasury and the FSCA have not announced plans to amend the current retirement industry legislation to follow the global trend, a number of suggestions have come up over the past few weeks about how members could receive relief using their retirement fund savings. The ideas range from pension backed lockdown loans in partnership with banks, to accessing savings under a Special Relief Benefit.

The Lockdown Loan would allow members to access competitively priced loans without withdrawing from their retirement savings. In the longer term, the repayment of the loan instalments may become a financial burden to members. Should the members leave their funds, their retirement savings’ balance will be reduced by the amount owed.

These measures could be an opportunity to alleviate members' financial hardships by leveraging their retirement funds. Implementation would, however, require amendments to the legislation. National Treasury would also need to say whether these proposals are in line with their policy on retirement reform.

Year to date major equity markets are severely down from their peaks, so withdrawal of retirement savings during such market conditions could see members locking in any losses incurred. Early withdrawal can be likened to members borrowing from their financial futures, as every rand taken from retirement savings today means less will be available in retirement.

With millions of members possibly experiencing financial distress due to the pandemic, the introduction of early access to retirement savings may result in a substantial outflow of funds within a short period of time, leading to a negative impact on the retirement industry and investment markets. This needs to be balanced with the potential relief such a measure could provide to employees facing financial hardship.

Tiaan Kotze is chief executive, Liberty Corporate

Also see “Call for government to unlock retirement funds”


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