CEO editorial – Retirement savings

Gary Mockler
Group Chief Executive Officer

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Robbing Peter to pay Paul – a GTC perspective on the Two-pot retirement system

With the advent of the Two-pot retirement system, GTC is being asked for an opinion on this mechanism. 

Before I put forward this opinion, some context on the retirement savings regime in South Africa is called for.  For as long now as I can remember, various pundits and authors (they are not always the same thing) have been quoting the very poor records of South Africans, as retirement savers.  A commonly used statistic is that some 6% of South Africans retire with sufficient financial means to continue life as before without having to adjust their lifestyle or continue earning.  A quick Google trawl as I write this confirms that this statistic (or thereabout) prevails today, and it is my recollection that this same statistic prevailed when I began my career in financial services a long time ago.

One does not need to be a financial advisor to understand the precariousness of saving (say) 10%-15% of one’s earnings over a career of (say) 40 years, and then expecting this same investment to provide 100% of a similar standard of living over (say) a further 30 years…

Long before GTC opines on using retirement investments for short-term savings, let us all take cognisance that the thumb-sucked percentage of salary that I mentioned in the previous paragraph as being allocated to retirement savings is often less than this number. 

Many retirement funds will deduct insurance costs as well as the necessary fund and administration charges from this gross amount.  Indeed, as South Africa’s sixth-largest provider of retirement fund administration, we can attest to the national average – as presented in various industry surveys – being some 12% of earnings allocated to retirement savings.  

So, when considering the use of retirement savings for short-term shortfalls, let’s remember the origin of the motivation for a savings element of a retirement fund (and the subsequent reference to a ‘Two-pot system’).  Covid-19 and lockdown were the original motivations for members having a necessity to access retirement funds long before retirement. As Governments Two-pot thinking has evolved, (and Covid lockdown has become a thing of the past) this short-termism then broadened into a more generic ‘emergency’ definition.  Current intentions are almost certainly for universal availability with no emergency criteria being applied. 

Insisting that a retirement fund member waits until their retirement date for funds when they are facing some immediate financial catastrophe (defaulting on a bond payment – having a child refused school entry because of fees or facing a hungry family unable to eat) is unrealistic and defies any form of sensible financial planning. 

In general, South Africans – who were never great savers – are becoming poorer, quicker.  Enforcing any form of compulsory retirement savings whilst ignoring the significant money shortfalls that many families face, too defies conventional financial planning. Criticising the early withdrawal of retirement monies for immediate use is a little like kicking the dog.  We are not directing our criticism at the offending cause. 

The question asked of GTC shouldn’t really be about whether a portion of one’s retirement savings should be accessible whilst one is working.  The question should rather be whether South Africans – in any form or manner – are able to meet their financial objectives, now, later in their working lives, and also in their retirement.  By implementing Two-pot, is Government actually addressing the root cause of the average South African’s money shortfall, or are they bashing away at a square peg, trying to fit it into a round hole?  

Each retirement fund member will benchmark their living standards and wealth accumulation according to their own benchmarks.  Trying to assess the South African retirement fund market generally, we would use the conventional Living Standards Measure (LSM 1-10) to categorise retirement fund members.  

Those closer to level 10 could well elect to measure themselves internationally.  They could choose to work and reside elsewhere in the world.  On the other hand, those on the lower end of the LSM scale (and in this exercise, we should include the 33% of the South African population who are unemployed) will have far more modest benchmark aspirations, and for many, it is sadly a more realistic socio-economic benchmark such as the Upper Bound Poverty Line (UBPL), as defined and measured by Stats SA.

As we approach mid-2023, it is unlikely that many South Africans, irrespective of their LSM categorisation, find themselves in the financial positions they aspired to, just a few years ago.  

At the same time that Government considers dividing compulsory monies into various pots (and subsequently robbing from Peter to pay Paul), they must prioritise economic growth initiatives, contain expenditure, ensure fair revenue collection from citizens, and account honestly for monies received and spent.  Only then can the Regulator consider the allocation of a finite amount of savings away from an individual’s long-term savings into short-term drawings, as being sustainable. 

Until South Africans can create real wealth (and for many this is too grandiose an objective), we must acknowledge that desperate times call for desperate measures and that short-term financial desperation takes priority over retirement savings.  

Read the press release here.