Two-pot pension system disburses billions, but concerns linger

Many concerns over the two-pot retirement payouts have not yet been addressed, even as the system forges ahead with almost R60 billion disbursed to claimants since September last year.

Prof Lucien van der Walt, director of Neil Aggett Labour Studies Unit at Rhodes University, said the system is a positive development, but it allows a small amount to be accessed annually.

“Given the situation that many working-class people face, it’s better than being trapped in a downward spiral of financial instability and losses,” he said.

Small annual access seen as both a benefit and limitation

“Previously, many people quit their jobs so that they could access their retirement funds, often leaving them broke later, and on the small government old age pension system.”

Van der Walt also highlighted as one of the negatives of the system the fact that the money would be taxed on withdrawal at the usual tax rate.

“You will lose some of the money, even though it is your money. This is not the same as withdrawing cash from an ATM,” he said.

However, trade union federation Cosatu described the pension fund reform as “among the most transformational since the democratic breakthrough of 1994”.

More than R57 billion has been paid to more than 3.5 million workers since the roll-out of the two-pot pension system.

“Fund operators reported unprecedented numbers of calls and applications from workers. While some funds’ systems were initially overwhelmed, most coped well, with Cosatu and its affiliates intervening where workers experienced challenges,” said Cosatu’s parliamentary coordinator Matthew Parks.

Cosatu praises system rollout but slams employer defaults

While the ANC-aligned federation praised the “excellent progress” made in the system payouts, it objected to some employers and municipalities that had failed to pay over workers’ pension contributions.

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Parks said some 7 700 employers had been fingered as culprits, with the largest numbers of such cases reported in the municipal, security and cleaning sector.

He said Cosatu was “deeply angered by over 7 700 employers who, through this process of providing relief to workers, have been exposed for having failed to pay over workers’ pension contributions”.

He said this is fraud and theft and must be dealt with by law enforcement agencies.

“Cosatu, with National Treasury and the Financial Sector Conduct Authority, continues to intervene with such delinquent employers to ensure this criminality is dealt with,” said Parks.

Saftu raises alarm over lack of access before retirement

But the South African Federation of Trade Unions (Saftu), while welcoming the system, rejected the rules surrounding the second pot – the retirement component.

“The two-pot pension reform could have been progressive if it were not for the rules for the second pot, which require workers to access it only at the retirement age,” said Saftu in a statement.

“This means a worker who is dismissed, retrenched or who resigns, will not access their pension fund in a lump sum until after they reach retirement age.”

How the two-pot system works

The two-pot system has two components – one for savings and the other for retirement.

This meant 33% of the contributions would go into a savings pot and be accessible for withdrawal once a year, while 66% would go into the retirement pot, where it would be kept in the fund until the employee reached retirement age.

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This is designed to ensure employees will be able to access their retirement savings to provide some financial relief, according to the fund operators.

‘Reduced standard of living’

Some regard this as a great idea in light of the ongoing economic crisis and financial strain that is burdening workers.

The African Christian Democratic Party had cautioned workers that withdrawals from the savings pot should only be made for emergencies.

“It should also be noted that this withdrawal will be subject to tax and other administrative costs, resulting in one receiving less than what was applied for,” said the party.

“Additionally, a withdrawal from the savings pot will reduce the final total amount available at retirement and may result in a reduced standard of living.”

Fund operators and watchdogs urge caution

Last year, retirement fund operator Allan Grey told its clients that the idea behind the new two-pot retirement savings system is to promote the preservation of retirement fund investments until members retire.

While Old Mutual, in one of its myth-busting explanations, said the system would be automatic for all retirement fund members.

But Corruption Watch cautioned about the potential for fraud and corruption related to the two-pot retirement system, particularly regarding cybersecurity vulnerabilities and the risk of scams.

The corruption buster encourages vigilance, reporting suspicious activities, and verifying communications from retirement funds.

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