The legislation goes live on 1 September, but funds may not be able to pay out on that date as ‘several steps need to be implemented first’.
South Africa is eight weeks away from the most significant retirement reform in the country’s history when the two-pot retirement system takes effect.
Under the two-pot retirement system, a member’s contributions to a fund are split into a savings component that is accessible once in a tax year, and a retirement component.
For existing retirement fund members, there is also a third component – the vested component – containing the fund member’s contributions up to 31 August 2024.
The savings component will be initially seeded with the lower of 10% of the value of the retirement fund or R30 000 as at 31 August. From there on, two thirds of any new retirement savings will be preserved in the retirement component, which can only be accessed once a member reaches retirement age.
Many South Africans have been eagerly awaiting the beginning of September to gain access to a portion of their retirement money in the savings pot. But fund administrators point out that there are crucial things to bear in mind.
No immediate payouts
“One of the most important points to communicate is when their money will be accessible,” says Michelle Acton, retirement reform executive at Old Mutual.
Acton heads up Old Mutual’s two-pot reform across all its retail and employee retirement funds and has been involved in the planning and implementation from the word go.
“Even though the legislation goes live on 1 September, it doesn’t mean funds may be able to pay out on that date as there are several steps that need to be implemented first. Fund administrators can only start doing the seeding calculations (for the savings pot) from 1 September onward.”
The seeding calculation determines the initial amounts assigned to different components based on existing retirement savings. The amounts that will be allocated depend on the current amount of savings in each member’s retirement account and their market value.
“This process could take several working days to weeks, depending on the rules set by each retirement fund.”
Acton points out that the legislation does not stipulate a timeline for when the seeding calculations need to be finalised.
“Some administrators might only know what the fund value is on 5 September, or in mid-October. That does not mean they don’t comply with the legislation.”
The claims process
Only once the seeding calculation is done and the available amount in the savings pot is confirmed can retirement fund members start submitting claims.
This process involves several steps; the fund administrator needs to validate claimants’ identities.
These verification processes are necessary to prevent fraud, says Acton.
Prospective claimants then need to provide details of their annual salary and a tax number.
A member who doesn’t have a tax number cannot claim until the South African Revenue Service (Sars) furnishes them with one, says Acton.
After these verifications, the fund administrator needs to submit a request to Sars for a tax directive, which could take up to 48 hours.
Acton emphasises that all withdrawals from the savings pot will be taxed at a fund member’s marginal tax rate. However, Sars could stipulate that additional money be deducted in cases where members have outstanding tax bills.
“People don’t realise that they may want to claim the R30 000 available in their savings account, and then they are told there’s an outstanding tax bill of R20 000. On top of that, they get taxed at the marginal rate and may come out with very little after that.”
Once all these hurdles have been cleared, payment may take place, but not before a claimant’s bank account details have been verified – another fraud check.
“Old Mutual’s system is integrated with those of banks. The ID number of the claimant should match with the ID number of the bank account holder,” says Acton.
Not enough to withdraw
The minimum withdrawal amount from the savings pot is R2 000.
The Actuarial Society of South Africa (Assa) has warned that many retirement fund members will not have enough in their savings pot to make a withdrawal on 1 September.
Its Retirement Matters Committee surveyed some of the country’s biggest retirement fund administrators.
It found that the average benefit of 20% of retirement fund members with retirement savings below R20 000 is projected to be around R9 000 on 1 September. Of this, 10% (R900) will go into the new savings pot.
Starting 1 September, one third of the monthly retirement fund contributions (R314) will go into their savings pot, where R900 is already waiting, and the rest will be allocated to the retirement pot that cannot be accessed until retirement.
It will therefore take around four months for these members to have a savings pot fund value above R2 000 (R900 + R314 x 4 = R2 156).
New systems, new procedures
The switch to the two-pot system has required more than two years of planning, including building new systems, establishing new procedures, and training staff.
“On 31 August, we’re still in the old regime, and on 1 September, which happens to be a weekend, you need to run a system update to magically move into the new system, with all the underlying pension fund administration systems,” says Acton.
“We have had to digitise and automate everything. And then there’s the end-to-end testing [of the systems] that will need to take place way before 1 September.”
Old Mutual has launched a dedicated call centre with more than 200 staff to deal with client queries and claims.
Fund administrators also rely on Sars to have its systems up and running before payment occurs.
Acton says it is critical that Sars’s systems “are capable and ready, as no savings pot payments can be made without a smooth tax deduction directive process”.
When the floodgates open
Old Mutual expects that between 60% and 70% of its close to 1.3 million members could opt to withdraw money from their savings pot when the legislation comes into effect.
“But nobody really knows how many people will come forward,” says Acton. She cites Australia, Chile and Brazil as examples of countries that enabled retirement fund members to access a portion of their savings during Covid-19.
“There was the expectation that only lower-income earners would come forward and claim. And then over 90% of people came forward – so it was access requests over all income levels.”
Retirement fund administrators will only have an idea of the volume of requests once the date has taken effect. “We need to plan for the worst case,” says Acton.
Old Mutual expects claims to spike during the first six months of the current tax year and then again in March when the new tax year takes effect.
“So, we expect a second cycle of claimants [from 1 March 2025] before things settle down to what the new normal will look like,” she adds.
‘The best thing for the retirement industry’
Notwithstanding the short-term pains and possible chaos associated with implementing the two-pot system, Acton believes it is “the best thing to have hit SA’s retirement landscape”.
From a governance perspective, South Africa’s retirement industry has been world-class, but not when it comes to compulsory preservation, she says.
Before the two-pot system, South African employees who were members of retirement funds could cash out the entire sum (subject to tax) when they left their employer.
From 1 September onward, they will be forced to preserve two thirds when they switch jobs.
“South Africans currently retire with only two times or three times their annual salary, which is nothing. Studies show only 6% of people can retire comfortably,” says Acton.
“With the two-pot system with two-thirds of pension fund contributions locked in, this could go up to nine times [one’s annual salary].”
An improvement in these statistics will have a significantly positive impact, she adds.
“Fewer people will be dependent on the state when they retire, and we will start seeing a world where pensioners have better income levels. It will have a massive knock-on effect for dependency ratios too.”