Reforms will lead to ‘greater savings’
• Tough economic landscape makes it hard for South Africans to prepare for retirement, writes Lynette Dicey
Research conducted across the retirement industry shows that the majority of South Africans are not saving enough for retirement to maintain their pre-retirement lifestyle or retire comfortably.
The reasons behind the low savings rate of South Africans, says Darshana Kooverjee, head of Umbrella Fund Solutions at Liberty, are vast and include the fact that low salary increases are limiting how much individuals can reasonably contribute towards their retirement savings as well as that many people cash out of their retirement funds when they change jobs.
“For the majority of South Africans, it’s becoming harder to save for retirement, particularly when both employer and employee contributions to a retirement fund are based on a percentage of an employee’s salary,” she says. “The economic landscape has been tough on South Africans. Salary increases have been limited as a result of constrained economic growth, and many individuals are facing financial difficulties. When short-term finances are under pressure, longer term finances are often the first to be sacrificed.”
Even in cases where members make compulsory contributions to their retirement funds, the drive for more disposable income leads to people sacrificing on their retirement savings, explains Kooverjee, adding that in an environment where job losses are not uncommon, many individuals access their retirement savings before retirement to help reduce their financial strain.
She believes the new twopot retirement system is a more flexible one that will ultimately lead to greater savings. The implications of the new system on the industry, however, shouldn’t be looked at in isolation, but rather as part of the journey of retirement reform that was started more than a decade ago.
Kooverjee explains that the overall objective of all the retirement reforms is to improve the financial position members find themselves in when they reach retirement.
“The default regulations introduced in 2018 placed an onus on retirement funds to allow members who leave employers to still be able to safeguard their funds by preserving them within the fund. The 2021 T-Day changes went further by aligning the options members of different retirement fund types have at retirement in terms of accessing their retirement savings.
“Members of provident funds now have to annuitise at least two-thirds of their non-vested retirement savings at retirement
— aligning to the rules of pension funds and retirement annuity funds.”
What the new system adds, she says, is a further level of protection for the member’s retirement income by making members preserve a portion of their benefit — the retirement component — until retirement, while also allowing access to the other portion — the savings component — to meet any emergencies that could arise between now and retirement.
“In effect, it allows preretirement access to part of their benefit without having to resign from their employer, in exchange for preserving a portion of their benefit to provide for retirement.”
The introduction of the twopot retirement system presents a unique opportunity to review the existing suite of products and how we think about retirements savings, she says.
PLATFORM CHANGES
“Retirement fund administrators and investment product providers have likely reviewed the design of their offerings with the member in mind. This includes rethinking platform changes to allow ease of access, speed of claim payments, as well as education around the changes and the implications of these changes on retirement fund members.”
She says for occupational funds such as pension and provident funds, a large part of the engagement has previously been via the employer, with the direct engagement usually occurring at points of exit.
“The shift to the two-pot retirement system introduces the opportunity for more frequent engagements between the fund and the member. This presents opportunities to rethink how we engage with members, enabling us to help increase education and help shape better outcomes for members at retirement.”