Sunday, January 16

‘Two Canister’ System Expected to Double Retirement Results for New Members


The National Treasury has released a document titled ‘Encouraging South African Households to Save More for Retirement’ for public comment.

The document provides proposals aimed at allowing limited access to retirement fund savings prior to retirement, improving longer-term retirement outcomes by enhancing preservation and inclusively enhancing retirement outcomes through the mechanism. automatic enrollment.

The proposal envisions a “two-bucket” system whereby members could access up to one-third of their net contributions to the retirement fund and accumulate investment returns on an annual basis to provide short-term financial relief.

This will be accompanied by a requirement that the remaining two-thirds be retained in the long term, which will improve retirement outcomes for most fund members relative to the status quo.

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‘Practical and responsible solution’

Alexander Forbes supports the two-container system as it will have a positive impact on people’s lives by providing a viable and responsible solution to the real needs faced by members.

Lack of preservation is the critical factor in poor financial performance at retirement.

According to Alexander Forbes Member Insights ™ for 2021, only 9% of members keep their retirement savings when they change jobs.

This, in turn, leads to very poor retirement outcomes, as the average replacement rate is only 31%.

This means that for every R1,000 earned by a member before retirement, they will only replace R310 of income in retirement.

For this reason, the proposed reforms are necessary to balance members’ long-term retirement savings goals while meeting their short-term financial needs.

Impact

Our model has shown that the two-bin system will result in a new member accumulating more than double their fund value upon retirement compared to the current system, while providing access to a portion of their savings annually.

Source: Alexander Forbes

We anticipate that the proposed two-recipient system will further emphasize the need for retirement funds to better connect with members in order to provide information, education and advice at critical stages of their lives to optimize their financial results both in the short and long term. long-term.

The additional complexities of managing the system, including providing modernized member engagement services to allow such connections, require substantial scale on the part of retirement fund managers to ensure that members receive value for money.

Ultimately, the two-bin system provides the opportunity for employers and funds to reinvent their benefits and investment strategies to impact people’s lives by striking a meaningful balance between short-term and long-term needs.

Looking ahead, there are still a number of issues to consider in order to implement the two-vessel system effectively. Alexander Forbes will participate fully in the call for public comments to share his ideas with the National Treasury.

Listen to this MoneywebNOW podcast with Simon Brown (or read the transcript here):

Vickie Lange is Head of Research, Best Practice and Academy, and John Anderson is Executive – Investments, Products and Enablement at Alexander Forbes.


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