Retirement industry ‘needs to get working’ on two-pot system

Published Feb 21, 2023


Staff Reporter

The pension fund industry could miss the proposed March 1 2024 deadline to be ready to implement the new two-pot pension fund system should the reforms not be finalised in the first half of 2023, according to commentators at Old Mutual.

Retirement Reform Executive at Old Mutual, Michelle Acton, said the industry is hopeful that updated draft regulations would be released with the National Budget Speech on February 22.

The 2022 Draft Revenue Laws Amendment Bill, which was released for public comment in July last year, proposed the two-pot system, which would allow pension and provident fund members, as well as retirement annuity policyholders, to access a portion of their retirement savings before retirement age.

“We at Old Mutual wholeheartedly support the reforms as the most important regulations to move us towards ending old age poverty at retirement. In this context, the industry is doing all it can to prepare for implementation, but we cannot undertake any work on system development until the reforms are passed into law,” said Acton.

She noted that the amount of work needed to ensure readiness is far-reaching, as entire new and sophisticated automated systems will have to be developed to enable fund members to efficiently access the allowed portion of their savings. Old Mutual estimates that the new level of accessibility will lead to a 300-400% increase in claims to be processed by administrators.

This new system would have to allow for member-initiated claim functionality as, for the first time, members will have to register claims without going through their employer. This would require member engagement through an automated digital platform, the establishment of entire new call centres, and implementation of fraud and risk prevention measures.

“The administrative changes will be the biggest ever seen in the retirement industry in South Africa and means the need for an entirely new processing and service model. We will have to build a new system overlayed on the existing system. This will take a massive amount of budget and resources and will require at least 12 to 18 months to build,” said Acton.

Acton said the two-pot savings regime meant that even the contribution mechanism had to be redesigned to ensure separation of payments into the two separate pots. In addition, member education and change management processes would have to be implemented to ensure that members understand the new system including qualifying criteria for applications and the claims process.

Acton said retirement funds will also need time to prepare and to plan around the liquidity and cashflow implications of a sudden exponential increase in applications. Without finalised regulations, the industry cannot be ready by March 1 next year, as it would be almost impossible to address the multitude of changes required to be compliant in less than a year.

Other outstanding issues

Blessing Utete, Managing Executive of Old Mutual Corporate Consultants, said the company was also expecting Minister Godongwana to provide updates on several critical issues related to the pension fund reforms.

Seeding. This seeding aspect related to a portion of current savings being used to seed the accessible savings pot up to a regulated capped amount. The Minister would have to provide specific details on how this would work to ensure the stability of funds and protection of members’ retirement fund outcomes.

Implications for over-55s. Updated provisions in September noted that provident fund members over 55 years old would have the option to continue contributing to their current provident regime or move into the new two-pot regime.

Members who opted for the new regime would lose the ability to access 100% of their future accumulated funds in cash when they retired but would continue to enjoy full access to their current savings accumulated before the new regime took effect. This option would be a once-only decision and irreversible once the change had been made.

Utete noted that the option would amount to a complex decision for members to make and industry needed more detail on how this would work to properly advise its members.

Alternative funds. He said clarification was needed on how National Treasury would deal with the aspects of defined benefit, public sector, and legacy funds. Defined benefit funds and public sector funds were under consideration and Treasury had indicated that a consultative process would be undertaken with defined-benefit funds and stakeholders to consider the options available. He said the announced protective mechanisms needed to be explored, including increasing future contributions when a member withdrew funds before retirement. Further clarification was also anticipated around the possibility that members could be allowed to access their savings in the event of retrenchment.

Related Topics: