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Big Business Insights: Everything you need to know about Two-Pot
The proposed Two-Pot Retirement System could be implemented as soon as March 2024. Yet a lot of questions remain about how exactly the new system will work, how to prepare for it, and what it will mean for funds and their members.
In this episode of our Big Business Insights podcast series, host and Managing Executive at Old Mutual Corporate Consultants Blessing Utete asks our Retirement Reform Executive Michelle Acton – who’s been closely involved with Treasury in the consultation process around the new system – all the important questions you need to know:
- What’s changing, what isn’t and what’s still unclear?
- How will it change the retirement and employee benefits landscape?
- What do employers and brokers need to explain to their employees or clients?
- How exactly will the Savings Pot work?
- And more.
Listen as Blessing and Michelle unpack the who, what, when and how of, arguably, the most impactful change to the South African retirement industry in recent history.
Blessing Utete 00:03
Welcome to the second season of Big Business Insights, the Old Mutual Corporate podcast where we discuss issues that concern senior decision makers, particularly human capital managers in large enterprises. Each episode focuses on one topic that is top of mind for today’s business leaders, aiming to provide you with key insights to improve your employees work experience, and financial wellness and make your business fit for the future as you navigate towards it. I’m Blessing Utete and today I want to talk about the changes that are happening in South Africa with regards to retirement funds that will now be allowing members to withdraw some of their savings from these funds.
There are a number of questions that are being asked by clients aside from what will happen, or when will this happen. How actually is this going to happen? And what is this Two Pot system all about?
So, for HR directors and financial directors, as well as financial advisors, who may be unsure of what their role is going to be into this early withdrawal system, we’ve got someone here that’s going to help us unpack this topic in quite some detail. Today, I’ve invited Michelle Acton, who’s our Group Executive for Retirement Reform in Old Mutual, who’s going to give us some insights into this discussion around this so-called Two-Pot System.
Welcome, Michelle.
Michelle Acton 01:19
Thanks, Blessing. It’s great to be here with you.
Blessing Utete 01:23
I think maybe let’s just start off with the first question. Now, what is this Two-Pot System all about?
Michelle Acton 01:29
That’s a good question. I think there’s been a lot of noise in the media and a lot of different areas of information coming around. But essentially, let’s take a step back. So what is Two-Pot is the name being given to the latest changes to retirement funds. And it really is looking at enhancing how retirement funds currently work in a number of different ways.
So if we go back to COVID, and we all remember COVID so vividly, it was a time where if there’s one thing we realized it was that people didn’t have any other savings other than what they’d save for their retirement, because most times, it’s because they’ve been forced by their employer.
But there was no short-term savings, there was no emergency savings vehicles, nothing like that was in place. So the idea of the Two-Pot system is to actually try and restructure retirement funds into two parts. And the idea is every member will continue contributing to their retirement fund. But when that money goes in, there will actually be a split of allocation of that contribution.
So one third will go into your what we’re calling a Savings Pot for now. And the other two thirds will go into a Retirement Pot. Now really, what that is, is it’s giving you an advance of when you get to retirement, because normally when you get to retirement, you can take a third in cash and two thirds you can use to buy a pension. But actually now when the money goes in, it’ll be split one third into savings and two thirds into your Retirement Pot. That Savings Pot, that one third, Is your cash at lump sum at retirement. And the two thirds is your income at retirement. So you’re going to be building these two separate pots until you get to retirement. And when you get to retirement, whatever is in your Savings Pot is your lump sum, whatever’s in your Retirement Pot is what you use to secure an income.
So very similar to what we’ve got. Now, the only main difference with the New World, though, is that you can access your Savings Pot before retirement, and not linked to changing jobs. Because currently, if I change my employer, I can access my money. And we know people do that, they do it often.
And it actually doesn’t do anything for retirement savings, because you end up cashing out and having to save again. So the idea is now you’ll be able to access your money without saving. So that one third. But whatever you access out of your Savings Pot beforehand, of course, is going to be less money you have at retirement on your lump sum.
So that is the one element. And then of course on the Retirement Pot side, that money now you will no longer be able to access. So we’re actually changing the whole structure in terms of the fact that the amount you can now access will be your Savings Pot component before retirement. And the other two thirds is going to be locked in until retirement which should hopefully increase retirement members’ outcomes at retirement. So that’s really what it’s about. But it’s a massive change. It’s probably the biggest change ever to hit our retirement fund industry. So we can’t underplay it. And it’s also confusing. So people don’t quite understand how it all fits together.
Blessing Utete 04:20
We’ll go into some of that detail just now. But maybe just take a step back and tell us you know, where are we in this? I mean, if I’m being asked by some of my employees as an HR exec or a senior person in my organization that we’ve heard this issue coming up, when is it actually happening?
When can I access this money?
Michelle Acton 04:39
We’re getting a lot of that because people hear they can access their retirement funds, and they want to be able to access it now. But where we are essentially we’ve received proposed legislation, this is still proposed, it’s not finalized.
At this stage that legislation has been closed for commentary. And we’re going to be getting feedback hopefully in the next two or three months from National Treasury around all the feedback and what final legislation will actually look like. And the effective date at this stage is proposed at 1 March 2024, which is next year, March, a few months away. But that date will only be finalized when the legislation is finalized. So I think that’s a really important thing.
If somebody asks you the question around, when can I access my money? And when will this happen? All the communication and the information out there is 1 March 2024, because that’s the proposed date. But that date is not finalized until the legislation is finalized. And that’s the date in it. So it could change.
Blessing Utete 05:33
So I really hear from my administration team that they do a lot of admin to support. You know, these withdrawals, when people resign from the job when they retire, or in the event of unfortunately, death.
How much admin should I expect to be doing for this to two-Pot system that’s coming? What should I be preparing for as in my administration of the retirement fund?
Michelle Acton 05:55
So I think, first of all, currently retirement fund admin is actually quite simple, believe it or not. Contributions go in, and when somebody leaves, they withdraw. But they don’t do that every week, or every month or every year.
So you end up from that aspect, your volume of claims is usually linked to your resignations from employers or death. Now, if you think about it, we’re going into a world where members will be unable to access some of their savings money every single year. They may, they shouldn’t, I mean, that’s the thing. It’s an enabling clause.
So it enables you to access it. It’s designed to be emergency, rainy day fund. And so the idea was members shouldn’t be touching it, they should leave it there in case they have an emergency. But we also know, based on current economic climate, our people are struggling, that a lot of members will be coming forward to claim as often as they can.
Now what also kickstarts us is with the start of the new regs, if the effective date is 1 March next year. What they’re also saying is there’s going to be a one sort of allocation from all your existing savings into new savings of 10%, capped at R25 000.
Now, what that means is that every member who has a retirement fund on the first of March, will have money in their fund in their Savings Pot, they’ll be able to access. So just administratively if you’re an employer and you’ve got 1 000 members or employees.
That means 1 000 employees will want to have their money on the first day, there is no way an employer can process that. So I think there’s no doubt that this new claims type is brand new. But I think it’s something where members are going to have to approach the administrators separately, not through the employer in order to process those claims.
So, because otherwise an employer is going to need to hire a whole new admin team just to cope with pension fund claims.
So, each administrator I think is going to be different. And this is still very new. It’s not clear who’s doing what and how they’re managing it. But I think just based on the sheer volumes we’re expecting, I think there’ll definitely be a process where members will need to initiate the claim with the administrator or the retirement fund directly. Because if the employer gets involved in that process, it’s going to add a lot more work there. So I think that at this stage, I would say moving forward, it’s a new world, and it’s going to be quite different. It shouldn’t result in more work for an employer. I think it should be something where employers are there as a source of information, there’s no doubt that if members have questions on their retirement fund, especially the Employee Retirement Fund, or the employee retirement fund, they’re going to go to the employer for the quick answers.
So, it’s going to be really important that your HR and payroll staff are well versed with what the process is. But in terms of initiating the process, I think that’s going to be something that a member will have to do directly with the retirement funds.
Blessing Utete 08:44
That should be a relief for employers. Maybe just if you can just talk a little bit more around why industry is supporting this in the first place. You know, as a retirement fund has been set up for certain conditions and for people to retire comfortably.
Why are we then allowing this access to happen in the first place? What’s the benefit?
Michelle Acton 09:07
Yeah, so there’s a lot of focus on this access component, right, the fact that people are going to be able to access some of their savings. But in our retirement fund industry, where we are now members have full access, all they’ve got to do is resign.
And so, actually, what we’re doing is we’re tightening up access and making it more fit for purpose. So with that, with the projections that we’ve done, it’s clearly showing that actually members’ retirement outcomes in the long term are going to improve because it means every South African who’s working for an employer who has retirement funding, whatever they’re saving, two thirds of it is going to be there for retirement you won’t be able to access it.
So in the long term, and pension systems are long term, we’re not going to see any immediate straightaway change in someone’s financial position, but the structures are being adjusted so that the medium and long term impacts will be so much better. So we will see members retiring better. I mean, at the moment, the popular statistic that’s thrown around is that 6 to 7% of members can retire comfortably.
I mean, that’s a shocking statistic. And the idea is with this new system with compulsory preservation being brought into it, in 2030 years’ time, we’ll be in a position to increase that number to 30 and 40% of people who should be able to retire comfortably. Now, that would be a major improvement from where we are now. So I think as an industry, that is one of the big reasons we’re supporting, it’s part of a much bigger retirement reform. But I think bringing in compulsory preservation is going to be life changing for a lot of South Africans.
Blessing Utete 10:36
That’s good. That’s good. An important point. And I liked your comment earlier. That this is cash at retirement. I mean, so it should be used for that purpose, ultimately. So if I have now got several funds that I run, in my organization, I’ve got some members on a bargaining council fund. I’ve got people in a negotiated fund, I’ve got people in a provident and a pension fund. What does all this mean, across the structures?
Michelle Acton 11:04
Sure, I think what’s going to be really important for employers is to make sure that you’re starting the conversations now with your administrators of the various funds, well, at least the funds to make sure that they’re getting ready, because as much as I mentioned earlier, the date could change. It also could be where it is now. And there’s only a few months between now and then.
So I think the first thing is just to make sure what are they doing to prepare? And make sure for each of those funds, there’s an understanding of how those members will be able to access that money, because that’s going to be a big question. Members are asking questions about Two-Pot, but the bigger question that’s being asked is, How do I access my money?
So I think as an employee, if you have multiple funds, it’s going to be really important to make sure you understand which of each of those funds are doing to get ready. And also understand how each of the processes are going to work in order to submit those claims, because you don’t want to be the one that’s going to field those calls, as we get closer to 1 March, because it’s also going to be important.
And as an employer, you’ve got a duty, but it’s also, its members’ trust in what information comes from the employer. So you can actually help the process to by sharing that information as well. So driving the comms process, driving the communication down to the employees to make sure they are aware of what actually needs to be done in terms of comms.
But the only other point I wanted to raise around that as an employer when it comes to lots of funds. I mean, for most funds, one of the biggest changes now, because we’re moving into this new world where members are going to initiate claims is before, the employers always owned that data or that member information and whatever information was given to the administrators was what the administrator or the retirement fund has. And so I think what’s really important, especially if you’ve got a lot of different funds is to make sure the quality of information and data you’re giving those retirement funds is accurate. So I would say just, there’s probably three boxes in terms of their question.
The one is make sure you know what each of you administrators and retirement funds are doing. So you can help share that message. B is keep members informed. So be part of the conduit to push the communication down to the members on the ground to make sure that they’re well-aware of what it is and also make sure people don’t panic. There’s no need to start trying to resign before the effective date because your money is going to be lost or locked in. None of that’s happening.
Blessing Utete 13:17
Yeah, very important nuggets in that. Do you just want to also cover the tax implications of Two-Pot? What is going to be the tax dispensation when people get this access?
Michelle Acton 13:28
So let’s say R25 000 is allocated, that member can come forward on day one and claim that R25 000. Now the first thing that’s important is that R25 000 when claimed will actually be added to the person’s marginal taxable income. So in the definition of taxable income, it’s not including any withdrawal from the Savings Pot. So it means if a member has a low income, individual or low income, they could pay a marginal rate as low as 18%. But of course, for your higher income, I think the rates go all the way up to 45%. So they will pay a marginal tax rate.
So from that amount, there’s probably going to be two amounts deducted. So if I say I want R25 000, from that will be some administration charges to process that claim. And then secondly, will be the tax charged on net, which will be your marginal tax rate. But on the other hand, if you don’t touch that money, and you leave it in your Savings Pot ‘till retirement, it’s your lump sum at retirement. And when you get to retirement, then you pay the more favourable tax rates on that money, of course, which means you get your first R500 000 to R550 000 tax free.
Blessing Utete 14:31
So, you’ve highlighted a few things through this conversation around the challenges of the landscape.
The fact that we don’t preserve enough, we don’t contribute enough. And you know, just generally our savings in South Africa are low. If I’m an employer, would it be wise for me to think about other emergency savings options? Or is this now a solution to savings, emergency savings?
Michelle Acton 14:54
I think there’s a couple of elements. I mean, I believe as an employer, the more the opportunities you give folks or staff to save, the better. I mean, in fact, some of the work we did a couple of years ago was speaking to individuals and what benefits you would want. And a lot of them, it was just the benefit of if you told me to save, and I know I can save, you saved me the hassle of even going to research what’s the best vehicle. So I think from that aspect, offering somebody, you know, looking at other savings vehicles for staff, that helps. But simplistically, though, if you’re an employer, you know, you add more additional benefits structures and additional levels or vehicles, it’s of course additional administration complexity.
So, I do think that a simple way to start is enabling members to save more in time. And so, so yes, moving into the New World, there will now be part of your contribution to retirement fund as an emergency savings component. Ultimately, it still should be doing the purpose of a retirement fund, so that all that money should be aimed for retirement, but we know South Africans, and if they get into trouble, they need somewhere to access.
So, I think it’s important to have a look at what basket of benefits you offer your staff. But I think the easiest one is just enabling members to put more money away. So have your
7.5% member contribution rate? What about adding a 10 and a 12, and a 15% contribution rate? You know, it’s that sort of thing. It’s a small change, but it can have a massive impact for staff in the long term.
Blessing Utete 16:25
Yeah. As we get to the closure of our discussion, if I am a trustee or a management committee member, I’m responsible for these funds, should I be worried about costs, because all of these changes come with a lot of additional costs that may have to be incurred?
How’s the costs going to be, you know, when someone does withdraw? What does that mean, and then ultimately, to the overall cost of running a retirement fund?
Michelle Acton 16:54
There’s two elements that I think are going to have massive potential cost drivers. The first one is there’s a whole new claims type, okay, you’ve got your savings component withdrawal benefit, which is a brand-new claims type, which hasn’t been happened before. And that’s really where you need to be able to enable a more transactional type functionality on your administration. And that’s a new process. That’s new systems.
And like I mentioned earlier, we’re expecting huge numbers of people being able to come forward and claim on day one, and so you must be able to facilitate that. So it’s going to be new systems build, it’s going to be people, call centres, you know, all of those things will need to be built to enable this functionality. Because when members are going to want to come to get their money, they’re going to want it now. And it’s not something that they’re going to be willing to wait for. So, so that on its own is going to have a significant cost.
And then the second element, which we haven’t really touched on too much, is this whole concept of preservation, because currently within retirement funds, and each fund is different, but probably about 90% of members when they resigned from an employer are cashing out their benefit. Now, that’s a cash process.
But you know, you just need to know the person’s bank details, you just need to know their tax number. And then essentially, it’s a disinvest process, the tax directive paid into the members account, and it’s all good.
Now, post March, a part of that benefit is actually going to be preserved. So now a member is going to have to decide do I leave it in the fund or do I want to move it to my new employers fund etc. And part of what that entails as well, is a huge brand new and increased administration process of preservation. You know, if I’ve got to move money from Fund A to Fund B, that, of course, takes a lot more work than paying it out in cash. We much prefer people doing it, you know, preserving, but it does enable a lot more because systems between administrators are not linked, etc.
So I do believe the other element that’s going to add cost is the additional administration burden of preservation. I think over time, it’ll get smoother. I do believe in both of those, it’s almost going to have that hockey stick effect, if you know what I’m saying where there is going to be a significant increase as we’re doing setup, new process, etc, which will almost have an investment cost if I can use that word or once-off cost to get ready. And then there’ll be an ongoing running cost. But the other benefit, or the other side at the moment is members have got quite low on-average retirement fund values because they keep cashing out when they change jobs. And I’m talking very generally, but that’s what we’re seeing.
If you’re now going to have people where when they change jobs, they’ve preserved what they’ve had previously, and they’re bringing it along with them, the average fund value for a member will get bigger. And what we see over the long term is it means that actually your cost proportionately should start reducing. So I do think in the short to medium term, yes, there’ll be an increased cost. You ask the question from the perspective of a board of trustees or management committee, how those fees are going to be recovered. That will depend on the fund. I mean, I’ve seen conversations where funds say we’re going to charge an administration fee for that Savings Pot benefit, which will enable that to be reduced. Others might say, actually, it’s just going to be all included in the same fee, which just needs to be increased. So that again, as I said, everybody’s still in that building and figuring all of this stuff out at stage. And so we don’t have all the answers. But I think one would be naive to say that this isn’t in the short-term going to have a resultant increase in cost. But members are going to be getting a lot more flexibility. And as you know, with flexibility comes increased costs.
Blessing Utete 20:30
And generally, would that mean what you’ve just explained? Does that bode well for standalone or umbrella funds? What do you think, as I think umbrella funds will be able to absorb this better than standalone funds?
Michelle Acton 20:43
You know, I think it’s definitely the case where you administered it depends basically, on your administration capability, whether you are standalone or umbrella, I think definitely on the umbrella side, it’s easier, right?
Because it’s about economies of scale. And it’s about the volumes being, you know, being able to build that capability, because whether I’m building capability for 5 000 members, or whether I’m building capability for 100 000 members, a lot of that initial fixed cost, from a system build, etc, will be the same. So from that aspect, I think the argument of bigger is better does come through with the sort of builds.
The other challenge is, the bigger you are, the more generic the process needs to be. So yeah, I mean, I definitely think this is driving more and more. But with this industry, we’ve seen it anyway. I mean, I think there’s generally a trend to be moving towards umbrella. Because also as an employer, if you’ve got a standalone fund, this two-Pot legislation is a lot to be focused on as trustees on top of running your business. So at least when you move into an umbrella fund, you don’t have to worry about that. It’s almost the responsibility of that fund, to make sure that the fund is ready and make sure where you are an employer, that you are properly and adequately communicating and empowered to support your employees. Where if you’re part of a standalone fund, then basically you’re the, you know, the employers involved through the trustees as well and actually building what that solution might be.
Blessing Utete 22:10
Thank you, Michelle. I mean, just in closing, maybe your last two or three thoughts that you’d leave with someone in in the position of an HR or Finance in an organization that’s got a retirement fund.
Michelle Acton 22:26
I’ve been knee-deep in Two-Pot for the last year or so. And there are a couple of areas, I think that’s very, very important as an employer is communication and education for the employees. There’s a lot of misinformation out there. There’s no need to resign beforehand, because you’re worried something’s going to happen to your money. First of March, people shouldn’t even notice that there’s been a change. So that’s the first thing to remember – no panic, existing benefits, existing rules, no change.
The second element is around the fact that there is going to be this one off initial seading. And that number is 10%, capped at R25 000, which is not a massive amount if you think about it in the bigger picture of things. But there’s a lot of confusion that people think they’re going to be able to come and access a full third or even I’ve heard extremes of full retirement values you’ll be able to access on day one.
No, that is not the case at all, you’re only going to be able to access a small amount. The third thing is these changes for future monies, this whole concept of a Savings and Retirement Pot. It’s your money. And it’s your savings point of view. If you’re going to be looking at accessing it, it’s your lump sum at retirement. So whatever you take out of it beforehand, you’re basically borrowing from your future self. So if you have nothing left in your Savings Pot when you reach retirement, you’re going to have no lump sum at retirement. You’ll have the security of the income at retirement, which is part of what the Retirement Pot does. So it’s really important for each and every individual to just not think about this as because I can access it I should. Ultimately, the purposes of a retirement fund is for retirement.
And I suppose the fourth thing is a bit of comfort, because this whole ability for compulsory preservation is not new in the world. Okay, around the world, if you look at most retirement fund systems that all enforce preservation, because we know if you don’t force people to save, they don’t do it. So all it will mean is in 20 or 30 years from now, when you do retire, you’re going to have a much more comfortable retirement than you would if you’d been able to access that money earlier.
Blessing Utete 24:36
Thank you very much, Michelle. That brings us to the end of this episode. Thank you to our audience for listening today. Appreciate it. Thank you for listening to this episode of Big Business Insights. I hope this helps you do big business better. Follow the Old Mutual Big Business Insights podcast and toggle notifications to get the alert when a new episode is live. To find out more about old mutual corporate, visit Oldmutual.co.za/corporate
Old Mutual 25:05
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