You, the pandemic, and your retirement fund
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Words on Wealth:
Alongside employers, particularly in the hard-hit hospitality industry, retirement funds have been pummelled by the pandemic. Many funds had to offer contribution holidays while others had to shut down permanently when the employers they served went out of business.
In a media briefing this week on the state of the retirement fund industry, the Financial Sector Conduct Authority (FSCA) produced sobering statistics on the extent to which the pandemic had negatively impacted funds and their members.
Anton van Graan, a retirement fund analyst at the FSCA, reported on a survey of almost 800 retirement funds. Of these, almost half (47.5%) had been asked by employers and members to grant relief by allowing the temporary suspension of contributions.
“We noted that larger employers managed to weather the effects of Covid-19 and continued with the payment of salaries and honouring commitments to preserve fund benefits,” Van Graan said. “However, the effect on small businesses appeared to be where the most hardship was evident and was particularly observed in umbrella funds (large commercial funds housing a number of employers) indicating requests for contribution relief by employers. The greatest number of requests for relief were noted in the manufacturing and services industries.”
On a positive note, Van Graan said it was encouraging that the payment of premiums for group life and disability cover had largely continued uninterrupted, either from adjusted pensionable salaries, risk reserves or by the employers.
Wilma Mokupo, the FSCA’s head of prudential supervision of retirement funds, reported on liquidations. She said 526 funds, with 42 103 members among them, had been liquidated in 2020. This was up 21%, from 433 funds (with 27 454 members) in 2019. Funds serving the hospitality industry had been worst affected.
The FSCA also provided interesting insights and statistics on unclaimed benefits, which I will cover next week.
EMERGENCY ACCESS TO SAVINGS
Although retirement funds were able to provide relief by allowing the temporary suspension of contributions temporarily, they were not able to grant access to savings.
The government has always encouraged saving for retirement by, among other things, generous tax deductions on contributions. But National Treasury has come to the realisation that, in dire situations, people need money sooner rather than later.
Treasury recently announced that it was exploring a “two-bucket” savings system, with a large bucket untouchable until retirement age (unlike currently, where you can access all your savings, minus tax, when you change jobs) and a smaller one accessible in an emergency. However, if a solution is agreed on, it will take some time to implement, not least because all sorts of laws, including tax laws, will need to be amended. So there’s zero hope of this form of relief during the current crisis.
The industry is cautiously supportive of the proposals. The Association for Savings and Investment South Africa (Asisa) says the association and its members “support meaningful changes to the current retirement system that are aimed at strengthening preservation of savings, while at the same time providing a manageable solution to emergency access to savings”.
Rosemary Lightbody, senior policy adviser at Asisa, says it is important to point out that this will not be an overnight process. “We are sympathetic to the hardships endured by South Africans because of the Covid-19 pandemic and the lockdowns, but regrettably there is no possible ‘quick fix’ within the current legislative framework.”
Chris Eddy, head of investments at 10X Investments, says there may even be an overall improvement in savings. “Enforcing preservation of the [inaccessible bucket] would mend the legislative flaw that allows fund members to cash in their pension or provident fund every time they change jobs. The evidence indicates that between 60% and 80% of workers who leave an employer do just that, causing irreparable harm to their retirement prospects,” he says.
Importantly, we will avoid the situation in which people resign their jobs just to get their hands on their retirement savings, as has happened during the pandemic.
David Kop, a Certified Financial Planner and head of policy and engagement at the Financial Planning Institute (FPI), says if you are in the position to access your retirement savings, either through resigning or through losing your job, there are a few things to consider.
For example, if you are heavily in debt, debt counselling may be an option to renegotiate this debt.
Have you looked at your budget and your spending behaviour? “There may be items that you are able to cut to help you manage your way back to a better financial position.”
You also need to consider tax on your withdrawal, as well as the longer-term implications for your retirement.
“Choosing to access your retirement funds is a decision that should not be taken lightly. If you are considering making a withdrawal, I would strongly recommend contacting an FPI professional member to help you navigate the decision,” Kop says.