IN A NUTSHELL: By adopting a goal-based framework, defined-contribution retirement funds can give members a clear idea of the impact of early withdrawals on their pots and projected retirement income.
In traditional defined-contribution retirement funds, members typically focus on their account balance. However, this focus doesn’t give a complete picture of what really matters — the monthly retirement income they will eventually receive.
Currently, by law, all fund members receive regular fund statements. On these statements, members can see their account balance and how this has changed over a period. But does presenting their fund balance in this way give members a realistic understanding of their retirement situation?
A goals-based framework shifts the focus from simply tracking the account balance to considering how well these savings are aligned with the member’s retirement income goals. Instead of seeing “R1 million”, members see “R5 000 per month at retirement”. Most people do not understand the actual worth of R1 million, but they understand the buying power of R5 000 per month.
South Africa has a low preservation rate. According to SARS data, from 2016 to 2018, around R78 billion was taken out of the retirement system through early withdrawals each year. This, in part, led to the creation of the Two-pot system, which gives members access to some funds.
From 1 September 2024 member statements reflect three amounts:
- A vested pot, which shows a member’s accumulated savings up to 31 August 2024 less the seed capital* that funded his or her initial “savings pot”, plus investment growth thereon.
- A savings pot, which is the member’s seed capital plus a third of contributions from 1 September 2024, plus investment growth thereon.
- A retirement pot, which is two thirds of contributions from 1 September 2024, plus investment growth thereon.
*Seed capital is the lesser of 10% of a member’s accumulated savings up to 31 August 2024 and R30 000.
Members are allowed to withdraw money from their savings pot before retirement (one withdrawal per fund per tax year, subject to a R2 000 minimum); however, these amounts will be subject to tax.
The new system aims to strike a balance between giving members access to some of their money but ensuring not all of the money can be cashed out.
By November 18th 2024, SARS reported R35 billion in withdrawals, which is scary, but it’s important to remember that now at least there is an underpin for all members having some savings that will have to be used for retirement.
Would fund members rethink their withdrawals if they could see how it would affect their future income? In other words, if they could see how R5 000 per month at retirement changes to R4 000 or less?
That’s what a goal-based approach advocates: that members are provided with information focusing on real income. Member statements could be adapted as follows:
Vested pot
Although the rules of this pot remain unchanged, members are shown in rand terms the level of their retirement income from this pot, and the impact a withdrawal may have.
Savings pot
Members are shown how withdrawing from their savings pot affects their overall retirement readiness – and what it means for the income they can expect to receive when they retire.
Retirement pot
Members are shown how much money is in the retirement pot, and what kind of retirement income that pot is likely to generate.
Example of a regular fund statement
Proposed goal-based statement
Members are then armed with information on what pension they can expect, under various scenarios. They could set personal goals, such as a desired monthly retirement income, and regularly assess whether their future income is enough to meet this goal. If not, they may need to reconsider their contributions, when they expect to retire and/or investment strategy.
In a cash-strapped society like South Africa, the temptation to withdraw funds every year will be strong. However, within a goal-based framework, members can clearly understand the trade-offs between early withdrawals and the impact on their future retirement income.
Sources
Colourfield: Change retirement fund statements to change members’ thinking;
Defined-contribution retirement fund investment strategies: An appropriate default?
SARS: The latest Two-Pot withdrawals
