A look at the MTBPS’s proposed two-pot retirement system

SIMON BROWN: I’m chatting now with Blessing Utete, head of corporate consultants at Old Mutual Corporate. Blessing, I appreciate the time today. In our Medium Term Budget Policy Statement last week, the minister endorsed a two-pot retirement system. He didn’t give us a heck lot of details, but he gave us some insight. I think the two important points are that pension funds/provident funds will no longer give you full access when changing jobs or being retrenched. And perhaps the bigger one is that you will have access to some of your Regulation 28 funds ahead of retirement. This is a big story for, for South African savers, investors and ultimate retirees.

BLESSING UTETE: Hi, Simon. Thank you very much for having me. Yes, you’re right. I think from a South African retirement industry perspective this is quite a significant change in the dynamics. If you think about someone who has worked in the industry for some time, I believe that the proposed forms will improve retirement outcomes ultimately, because we’re going to have a lot more preservation in the long term than we do now. We certainly need retirement fund members to be less dependent on the state or the family when they retire.

While there’s been a lot said about this early access and the possible relief it can have for financial emergencies, I think the big positive out of this is really the idea of some preservation taking place.

SIMON BROWN: In the past you could leave a job [and] there was a tax implication, but a lot of folks shrugged off the tax implication. Truthfully, if you were in your twenties or even in your thirties, it might’ve been a small amount of money. But, get to retirement age and that money would have been vast.

BLESSING UTETE: Absolutely. I think if you look at the stats – and this is really the big issue with our industry – over 80% of members who changed jobs take their retirement savings and cash and spend that on other things not for retirement. And so this massive leak in the system generally means that people don’t have decent retirement benefits when they get to retirement. We’ve got dismal stats of about only 6% of the people in retirement being able to get to a decent retirement outcome. So this ability to actually make sure that people preserve, even when they change jobs, is a significant turn in our industry.

SIMON BROWN: Yes. With respect, I was one of those 80%, but my defence is I was young. I was in my twenties at the time and I was ignorant. The flip side – the minister is kind of taking with one hand and giving with the other. He is saying, look, I appreciate sometimes things happen – Covid is a perfect example – so you will have some access ahead of retirement to those Reg 28 products.

BLESSING UTETE: That’s right. We expect that what will happen is the note we are expecting from the minister, as he said in the budget, is that there will be an accessible part of your retirement and a non-accessible part. That’s why we calling it the two-pot system. That non-accessible pot will be protected until retirement, and you’ll be able to access your accessible pot in the short term – when there’s a financial emergency or you need some relief. But there’s obviously not much detail around that at the moment.

SIMON BROWN: The one concern certainly I’d thought about is, if he had said, look, you can take your Reg 28 early [with] maybe some tax implications or something, it would have put some liquidity issues on the industry. This makes it a much more manageable process, albeit we need to see the numbers.

BLESSING UTETE: Absolutely, Simon. We need to see the numbers. But I still think we need to understand the liquidity issues properly. There are eight million members in the retirement savings net and you can imagine, even if we get partial access – let’s say a third is accessible – that’s still a significant chunk of assets. We don’t necessarily want a run on those assets; we definitely want to make sure that there are some measures to control how that money is paid out or accessed when it’s available.

SIMON BROWN: I imagine there probably will still be some consultation, but we’ll hear the sort of hard details in the February budget, I imagine.

BLESSING UTETE: That’s what we are expecting. But we’re actually expecting a paper with more detail shortly from National Treasury. That’s what was mentioned – that there will be some details issued soon. So we are hoping that any time now we’ll get more detail.

SIMON BROWN: Okay, because among the questions, one that sprung up to me is what about Sars because, at this point in time, when I hit 55 and can access the money, there are tax implications. I suppose another is going to be that frequency.

BLESSING UTETE: Absolutely. I think there are a couple of things in terms of what we are expecting. We certainly want to know how it’s going to work, how much will be allowed, what the timelines around this are, and what rules are available. You mentioned, quite rightly, typically one would – on resignation or retrenchment or being dismissed – be able to access your money now. There are certain tax implications of that which are more stringent than when you get to retirement. Are those tax implications going to continue in terms of are they going to get more stringent or less stringent, based on the accessibility that comes with it? So there’s a bit of a grey around those areas.

SIMON BROWN: There are some greys, as you said. We’ll get a document, we’ll get some insight to it. But my sense is that broadly – lacking some of the hard details, I appreciate – this is actually a really elegant solution and actually a good move for our retirement industry. Do you concur with that?

BLESSING UTETE: I agree. I think it’s definitely a pragmatic solution that manages both ends. We know the Covid pandemic has [brought] a big realisation around emergency savings for individuals. Unfortunately in South Africa we realise that most people have only one form of savings, which is compulsory – the pension savings. So you’re balancing that with how we make that short-term access available, but make sure that the long term is also taken care of. That’s why we certainly are in support of this two-pot arrangement.

SIMON BROWN: I’ve spoken with your colleagues and peers in the industry about the other two sort of debating points around infrastructure assets within Reg 28. And then also the limitations, particularly on offshore. Have we had any indication of that, or is it seemingly that Treasury is kind of saying this perhaps is the biggie right now?

BLESSING UTETE: Yes, I think this is the biggie, and I think there’s been pressure on this one for some time. It came out and we had various other political parties putting papers into parliament [on this]. So I think there’s a bit more pressure at the moment to get more news on that. But I think certainly there’s more that’s going to come on the infrastructure front around Reg 28.

SIMON BROWN: You made the point earlier that for too many South Africans their only real savings – what’s the number you said there? – only 6% of people are really ready, which puts them as a liability on the state, on friends, on family. A bit of regulation around that to almost force us to do some good things is not a bad thing.

BLESSING UTETE: Absolutely, Simon. I certainly agree with that.

SIMON BROWN: We’ll leave that there. That’s Blessing Utete. He’s head of corporate consultants at Old Mutual Corporate. We’ll see more details around this coming up of course in the February budget. Broadly I think it’s a great idea. We’ll see exactly how it all plays out.

Blessing, I really appreciate the time today.