WeeklySA_AdminRETHINK: Proposed pension access by workers will happen only early as next year
By Isaac Moledi
National Treasury has now capitulated on its earlier stance to Parliament Standing Committee on Finance earlier this year, rejecting the proposed amendment in the Pension Funds Act that seeks to grant loans to fund members as a guarantee for bank loans.
It now proposes partial access to pension savings in what it calls a two bucket system, the move expected to be welcomed by some trade union federations such as Cosatu but which will not go down well with other stakeholders such as pension fund managers and administrators.
The Treasury’s proposed withdrawal, which could be implemented as early as next year, will be in the form of a two bucket system, with up to one-third being accessible before retirement and two-thirds being locked into compulsory preservation funds.
Currently, the Pension Fund Act does not allow early access to the fund by members except when the loan is intended as a guarantee to a home loan or home renovations.
The Treasury’s proposals also want to make it compulsory for everyone who works to contribute to retirement savings, the move which is not accessible to all South Africans who are working.
This move, according to Treasury, does not include the public servants who fall under the Government Employees’ Pension Fund (GEPF) and is not regulated under the Pension Fund Act.
The GEPF is the largest pension fund under the government-controlled asset management company, the Public Investment Corporation.
The government current proposal is expected to be welcomed by trade union federations such as Cosatu which has recommended hat members’ withdrawal should be limited to the use of 30% or R30 000 of one’s pension fund. The union federation also recommended that the withdrawal should not be taxed.
However, other stakeholders in the pension fund industry have cautioned about the proposed early withdrawal, repeatedly raising the issue of poor culture of savings in the country. Worsening the situation is the culture of consumerism, conspicuous consumption and instant gratification arguing that there is no way of guaranteeing that retirement fund cash withdrawals will be used responsibly.
Mica Townsend, business development manager at 10X Investments, was quoted earlier in the Weekly South African Mirror as saying that while the proposal might be well meaning it was not necessarily well considered. “The danger is that this amendment would give retirement savers another way to prioritize today’s needs at the expense of their much older (and likely more vulnerable) selves. This is highly undesirable from a public policy perspective,” said Townsend, who added “it risks exacerbating an already dire situation where the vast majority of South Africans had almost no way of supporting themselves in retirement, with many thousands spending their final years struggling to make ends meet.”
According to him, findings in 10X Investments’ Annual Retirement Reality Report and various other studies show that members’ understanding of the existing benefits of their retirement funds is poor and confirm that alarmingly few people are on track for a decent retirement.
Old Mutual and other fund administrators warned against the early withdrawals quoting the current savings situation in the country which they say may worsen. Speaking at the launch of the 2021 Old Mutual Savings and Investment Monitor last week, head of financial education John Manyike pleaded for a lot of precaution if people are allowed to withdraw from their retirement funds.
The Treasury’s new stance on early withdrawals follows the department’s earlier rejection of the proposed amendment suggested in March this year by the opposition Democratic Alliance (DA) to amend Section 19 of the current Pension Fund Act to enable fund members to access up to 70% of the value of their pension fund before retirement as a guarantee for a loan to alleviate financial pressure members are facing due to Covid- 19 pandemic and other emergencies.
“Individuals should be free to choose, in unison with the trustees of their pension funds, how their financial assets are utilised when it comes to providing collateral for responsible loans” the DA said in a statement. A week before he was relieved off his duties as Finance Minister, Tito Mboweni, expressed a desire to allow South Africans to make a withdrawal from their pension funds to provide relief for those whose finances are under pressure during these trying times.
Mboweni’s announcement followed President Cyril Ramaphosa’s speech earlier this year for government to support the recovery of the economy and provide relief to the poor in the wake of the spate of violent unrest and the ongoing Covid-19 pandemic.
In his speech on retirement reform, the outgoing Mboweni said: “National Treasury is in discussions with NEDLAC on a proposal for limited withdrawals from retirement funds, for those losing part of their income during the Covid-19 pandemic. This is proving to be a complex problem to solve, if we are to ensure preservation of savings. “
Mbowenis was quoted as saying that the government continued to engage with trade unions, regulators and other stakeholders to discuss how to allow limited withdrawals linked to tightening preservation by closing current loopholes, and also to expand coverage so that all those employed or earning an income are required to put aside a small proportion for saving for their future.
It is not yet known if the current incumbent Enoch Godongwane will have a different view on the issue but experts are quoted as saying that it is unlikely that he will follow a different view.
Finance deputy director-general Ismail Momonait reiterated at the same briefing that the government’s intention was to ensure preservation of savings to avoid liquidity problems.
He explained that there needs to be a “very limited window of access” under very “specific” circumstances. He said South Africans already have a preservation issues as some, soon after resignation and cashing out their pensions, only leave small amounts in their reserves.
“The deal therefore would require “limited” withdrawal and a tightening of preservation,” he said, adding that this would mean that funds would not be withdrawn beyond what is not allowed.
According to Momonait, Treasury was also investigating ways to ensure that everyone who works and earns an income will be compelled to be a member of a pension fund. Once a framework on the matter is developed with different stakeholders or partners, it will be tabled in Parliament, he said.
