Other countries granting access to retirement savings
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. Members must be 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 (R114 949) of their retirement savings before July 1. These members will have another opportunity to access an additional payment of up to AU$10 000 between July 1 and September 24. 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, while remaining an active fund member.
Members participating in the Malaysian Employees Provident Fund will be able, over the next 12 months to withdraw up to 500 ringgits (R2004) a month from their retirement savings. This will apply only to members below 55 years old.
The US has implemented the Coronavirus Aid, Relief and Economic Security Act, which allows the following:
* Members can withdraw money from their individual retirement accounts 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 $100000 (R1.7million) and a member can now borrow up to 100% of vested assets.
Although the National Treasury and the Financial Sector Conduct Authority have not announced plans to amend the 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. If 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 hardship by leveraging their retirement funds. Implementation would, however, require amendments to the legislation. The 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 the chief executive of Liberty Corporate.