Treasury proposes a ‘two-pot’ retirement scheme to aid struggling South Africans

Cash-strapped South Africans with retirement savings may be given a chance to access a portion of their monies through National Treasury’s two-pot proposal.

Treasury has published two papers on proposed further retirement reforms for public comment.

The first of these papers, Encouraging South African households to save more for retirement, will allow people to access a portion of their monies on a short-term basis.

“Government is sympathetic towards the difficulty many South Africans are currently facing due to the Covid-19 pandemic and has engaged with the regulators and other key stakeholders to work out relief measures for consumers,” said the department in a statement.

Finance Minister Enoch Godongwana first proposed partial access to the retirement funds in his November 2021 Medium-Term Budget Policy Statement.

The idea is to boost household savings by increasing preservation before retirement and increasing flexibility through partial access to retirement funds through a “two-pot” system.

In an ideal world, retirement savings would be only be accessed upon retirement. But many South African’s don’t have short-term savings or had to dig into their short-term savings to survive the devastating economic impact of Covid-19.

How it would work:

• Pot one: contains two-thirds of the savings and is to be preserved until retirement.
• Pot two: contains one-third of the savings for pre-retirement access.

Pre‐retirement withdrawals come with the condition of mandatory preservation.

“The proposal currently being considered through the paper released for public consultation (i.e. Encouraging South African households to save more for retirement‘), is the introduction of a two-pot system, which will enable the restructuring of retirement contributions into two pots,” said the department.

While government wants to assist people to survive difficult present circumstances, it also wants to avoid old-age poverty and reliance on the state.

“Such restructuring will entail the protection of vested rights on accumulated retirement savings prior to the new two-pot 2 structure taking effect,” said the department.

Mandatory enrolment into the retirement system

The government is also considering introducing automatic enrolment (leading to mandatory enrolment) into the retirement system.

“Not all employers provide a retirement benefit for their employees. Unless these employees self-enrol in a retirement annuity fund, they are left with no provision for retirement,” said the department.

The annexure to the paper introduces a brief overview of what can be done to ultimately have every working person in South Africa covered in some scheme for retirement or similar benefits.

The second paper, titled Governance of umbrella funds, seeks to improve governance in retirement funds in general, but particularly for commercial umbrella funds.

Key among these is the deviation from the norm of having 50% employee representation in a commercial umbrella fund.

Comments to these papers are requested by 31 January 2022 and may be sent to retirement.reform@treasury.gov.za.

Compiled by Narissa Subramoney

NOW READ: Covid creating a generation that will never be able to afford retirement