GETTING TO GRIPS WITH A ‘TWO POT’ SYSTEM

A proposed change is meant to help people obtain some of their savings before retirement more easily

There is still a prolific amount of jargon to wade through, which only makes things less transparent

In the 1980s The Pointer Sisters had a hit with the song We’ve Got the Power. The sisters might have made some questionable fashion choices, but they did have a point (excuse the pun), and we as retirement fund members should have the power as well.

This brings me to the subject of agency — the ability to make choices appropriate to our circumstances.

The reality is that asymmetric information — where one party has an information advantage over the other — detracts from our ability to make the right choices, and thus diminishes our agency.

Take the example of fees. One of the longstanding gripes with the retirement industry is the lack of transparency about fees and costs, processes and accountability.

Now, it is true that the industry has made some headway on this score — fund members have more ready access to information than has been the case previously.

But there is still a prolific amount of jargon to wade through, which only makes things more opaque and less transparent. Ongoing retirement reforms, even if they were made with benign intentions, have only added to the noise.

One of the recent developments in the retirement reform process is the proposed implementation of the “two pot” system. As the saying “Knowledge is power” suggests, we ought to empower retirement fund members to understand what this new system will mean for them.

Without covering all the details, here is the core of this specific proposed reform.

The two pots are the following:

A pot with a lid: the preservation pot, which is intended to improve ultimate retirement outcomes; and

An open pot: members are allowed partial access to retirement funds to see them through a time of financial distress.

So what does this all mean? First, why do we even need such a thing as a “preservation pot”?

In a nutshell, the preservation pot aims to create a safety net for retirees and restore some sense of agency to their retirement outcomes.

At the moment members of SA pension or provident funds can withdraw the full value of their fund when they are retrenched or if they resign from their post. Between 2018 and 2021, The SA Revenue Service reports that more than 700,000 people cashed out most, if not all, of their pension fund savings before their retirement date.

However, withdrawals before retirement are taxed heavily, and the bigger the withdrawal, the higher the tax rate. For example, any withdrawals above R990,000 attract a whopping 36% tax.

So the reality is that people who cash out early usually face a double whammy once they eventually retire: they haven’t saved as much as they initially envisaged, and they paid a substantial cut to the tax authority. Effectively they’re left without sufficient money to sustain themselves.

Financial security and financial independence are important aspects of agency. The proposed legislation means that at least a portion of savings will be preserved, simmering under the lid of the first pot.

So why a second, more flexible, pot?

Here, the government is recognising that in times of financial distress people have to be able to access at least a portion of their pension fund savings. At the moment the only way they can do this is by resigning from their jobs or by withdrawing 100% of their pensions.

As a result they’re left with little to no safety net to see them through retirement.

The two-pot system will allow members to preserve a large part of their retirement savings, but also get access to a portion of their accumulated pension savings (the second pot) in a responsible way.

So how will it work practically?

The proposal is that the first pot should consist of two-thirds of a person’s pension contributions and be accessible only on retirement. The remaining third should remain in the second pot and be kept in an accessible retirement fund account, which can be used at any time. It is likely that withdrawals from the second pot will be allowed only once a year, though there is no finality on this yet.

However, the fact that pension fund members know that at least a portion of their funds will be readily accessible is likely to empower them to make better choices. If members are also able to have access to simple, understandable advice about how to secure the best possible outcomes given their specific constraints, all the better. Arguably, this type of education should either be offered for free or be covered by the pension fund provider.

Importantly, the government has called for public consultation about this proposed two-pot system. The initial request was for any submissions relating to this proposal to be made by the end of January 2022. However, this was made public only on December 14, so role-players lobbied for, and secured, an extension of the deadline.

The public perception is that only an exclusive group of individuals typically weigh in on these types of discussions. In truth, our collective input — as retirement fund members and citizens — is what is being called for.

Our knowledge allows us to contribute to the discussion: what are our concerns? And how might this proposal serve society better?

The Pointer Sisters hit the nail on the head. We do have the power.