By Malusi Ndlovu, Director of Large Enterprise at Old Mutual Corporate.
Last week, the Minister of Finance released details around relief measures, which are being provided to support the recovery of the economy and offer relief to the poor in response to Covid-19 restrictions and recent civil unrest.
As part of this announcement, it was confirmed that National Treasury is currently in discussions with business and labour around proposals for limited withdrawals from retirement funds. It is important to note that the proposals for access to retirement funds are considered a package in conjunction with increased preservation and improved coverage.
Currently, employed South Africans experience very poor retirement outcomes. One of the main reasons behind this is that members already have access to retirement benefits when changing employers before retirement. Many members tend to cash out their retirement savings when moving from one employer to another, so early access is nothing new.
Early access is only limited for people saving through retirement annuities or for members in employment-based pension and provident funds while remaining employed.
It is therefore essential, given the widespread economic devastation caused by Covid-19 and the impact on incomes and dependency ratios, we support calls to extend access for these groups. However, whatever access provisions are made, we need to focus on improving the savings culture and retirement outcomes in the long term as well.
Therefore, we support National Treasury’s approach of a package of reforms, addressing various aspects in one go – early access, preservation, increased coverage, as it will alleviate the short-term financial pressure and increase long-term retirement outcomes.
The immediate challenges would include, firstly, the liquidity issue facing retirement funds. Should early access be allowed, there would be a large amount of money disinvested in a short period, potentially significantly impacting asset prices and causing members and other investors to realise poor value in the short term.
The other challenge is the practical implications, starting with the clear access rules – how often, who decides if the member qualifies, the tax impact, and so on.
Currently, retirement funds are not designed to allow for ad-hoc withdrawals of savings for a large proportion of the membership. In the event of these changes, administrators, retirement funds, employers and other stakeholders would need time to prepare for this change in regulation.
Members of retirement funds should note that these are merely proposals, so no early access is possible at this stage. The requisite amendments to the relevant regulatory regime would need to be enacted, and retirement funds would need to amend their fund rules before they may be actioned.