By Dumo Mbethe, CEO at Momentum Corporate
Covid-19 has highlighted a need for a greater savings culture to protect against financial stresses brought about in a challenging economic landscape – which has only further widened the retirement savings gap. Now, early access to retirement savings is being touted as a saving grace and is one of the most anticipated topics at this year’s National Budget Speech.
The Momentum/Unisa Consumer Financial Vulnerability Index (CFVI) research already highlights the desperate need for financial discipline and literacy in South Africa. The average South African employee does not have the know-how to navigate the complexities of the financial landscape in attaining financial success.
Yet, National Treasury, in December 2021, published an entire discussion paper on the proposed ‘two-bucket retirement system’ – acknowledging that giving struggling South Africans access to their retirement savings could reduce immediate hardships and perhaps encourage a greater willingness to utilise retirement funds.
If we are going to start implementing early access, retirement funds will need to play a pivotal role in empowering employees to improve their financial outcomes through the provision of professional retirement benefit counselling and financial coaching. Intense and effective member engagement and education are going to be critical to empower informed decisions and drive prudent behaviour to minimise long-term pain.
These services will be instrumental in helping South Africans understand what is possible within the boundaries of the proposed legislative changes and how an early withdrawal will impact their financial situation and retirement prospects. So, Funds will now have this dual challenge. On the one hand, we need to help people save a lot more for retirement and on the other, provide some level of early access for the really cash-strapped.
While we should be cautiously optimistic about how retirement funds can help members who are facing challenging times financially, we applaud the National Treasury for its prudent, carefully-considered and consultative approach because this concession needs to be implemented with great care. If it drives the wrong behaviour, it can have dire long-term consequences for fund members who are already saving far too little for retirement as it is.
It starts with understanding the reality of our current savings position.
The real plight of South African retirement savings
We have to acknowledge that early access to retirement savings has significant implications because, for most South African income-earners, their employer’s retirement savings and insurance benefits are often the only savings and insurance they have.
The reality is that most income-earners are already saving far too little for retirement. This is largely due to a widespread tendency to withdraw retirement savings when changing jobs to fulfil short-term financial needs and wants. With the pandemic, we saw an increase in members getting retrenched or switching jobs and promptly withdrawing their retirement savings as cash.
The introduction of early access to retirement savings could increase long-term pressure on the national social security infrastructure and reduce the pool of investments available for the development of the economy. It’s key to have the right guardrails in place to avoid a situation of short-term gain, long-term pain.
As retirement fund and product providers, we are acutely aware of the lived realities many employees face in the current environment, which includes reduced salaries and retirement fund contributions that have been put on hold for a period of time due to companies’ cash flow pressures. Many households also face the additional burden of supporting family members who have lost jobs.
If we look at the retirement savings status of members on our FundsAtWork Umbrella Funds, with over 340 000 members across 4 700 employers spanning 21 broad industries, we see that the average amount they have saved for retirement as of 31 January 2022 is almost R190 000. Around 49% have saved more than R30 000, which means approximately 51% have less than R30 000 in accumulated funds. The latest proposal is that 1/3 of the funds will be made available annually, with a minimum of R2,000 being withdrawn, up to 10% of the total, not exceeding R25,000. A second withdrawal can occur but only if it doesn’t exceed the limit stated above.
Gaining access to a portion of their savings will deplete already low levels of retirement savings and will increase dependency on state-provided income when they do actually retire. So, it is important that we manage expectations.
There is a silver lining at the end of the day (career)
While several risks need to be carefully considered, prudent and careful implementation of early access to retirement savings, with the necessary checks, balances and guardrails, offer potentially positive outcomes.
The introduction of some mandatory preservation, such as the proposed two-pot system, could contribute to countering the impact of early withdrawal by ensuring longer savings periods beyond just current employment and could take some of the burden off the state.
However, when it comes to the two-pot system, people think there will be this large pot of money available, but in reality, the numbers will likely be smaller than expected. There are going to be many variables when it comes to this system, especially considering it will be applied prospectively rather than retrospectively.
Even though they may be justified in today’s circumstances, we have to remember that changes to a long-term system such as saving for retirement are always ill-advised – unless all angles are considered. The long-term stability and objectives need to be clear to all stakeholders. But, we welcome the opportunity to engage on these matters to ensure an optimal outcome – which is exactly what we are doing.
As Momentum Corporate, we will endeavour to guide our clients and their employees towards greater financial resilience. Early access to retirement and the two-pot system are simply be another opportunity for us to help educate South Africans and guide them to make sensible and rational financial decisions in challenging times.