Old Mutual warns of potential delay in implementing two-pot system

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Retirement reform executive at Old Mutual, Michelle Acton said the industry is hopeful that updated draft regulations would be released with the National Budget Speech on 22 February 2023.

The 2022 Draft Revenue Laws Amendment Bill, which was released for public comment in July 2022, proposed the two-pot system, which would allow pension and provident fund members, as well as retirement annuity policyholders, to access a portion of their retirement savings before retirement age, without having to resign.

“We at Old Mutual wholeheartedly support the reforms as the most important regulations to move us towards ending old-age poverty at retirement. In this context, the industry is doing all it can to prepare for implementation, but we cannot undertake any work on system development until the reforms are passed into law,” said Acton.

She noted that the amount of work needed to ensure readiness is far-reaching, as entire new and sophisticated automated systems will have to be developed to enable fund members to efficiently access the allowed accessible portion of their savings.

Old Mutual estimates that the new level of accessibility will lead to a 300 to 400% increase in claims to be processed by administrators.

Engagement through an automated digital platform

This new system would have to allow for member-initiated claim functionality as, for the first-time, members will have to register their claims without going through their employer. It would require member engagement through an automated digital platform; the retraining and capacitating of entire new call centres; and fraud and risk prevention measures.

“The administrative changes will be the biggest ever seen in the retirement industry in South Africa and means the need for an entirely new processing and service model. We will have to build a brand-new system overlayed on the existing system. This will take a massive amount of budget and resources which requires at least 12 to 18 months to build,” said Acton.

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Acton added that the two-pot savings regime meant that even the contribution mechanism had to be redesigned to ensure separation of payments into the two separate pots. In addition, member education and change management processes would also have to be undertaken to ensure that they understand the new system including qualifying criteria for applications and the claims process.

Acton also emphasised that retirement funds will need time to prepare for the system and plan around the liquidity and cash flow implications of a sudden exponential increase in applications. Without finalised regulations, the industry cannot be ready by 1 March, 2024, as it would be near impossible to address the multitude of changes required to be compliant in less than one year.

Other outstanding issues

Blessing Utete, managing executive of Old Mutual Corporate Consultants, said the company was also expecting Minister Godongwana to provide updates on several critical issues related to the pension-fund reforms.

Seeding

This seeding aspect related to a portion of current savings is being used to seed the accessible savings pot up to a regulated capped amount. The Minister would have to provide specific details on how this would work to ensure the stability of funds and protection of member retirement funds and protection of member retirement-fund outcomes.

Implications for those over 55 years old

Updated provisions in September noted that provident-fund members over 55 years old would have the option to stay and continue contributing to their current provident regime or move into the new two-pot regime.

Members who opted for the new regime would lose the ability to access 100% of their future accumulated funds in cash when they retired but would continue to enjoy full access to their current savings accumulated before the new regime took effect. This option would be a once-only decision and irreversible once the change had been made.

Utete noted that the option would amount to a complex decision for members to make and industry needed more detail on how this would work to properly advise its members.

Alternative funds

He said clarification was needed on how National Treasury would deal with the aspects of defined benefit-, public sector-, and legacy funds. Defined benefit funds and public-sector funds were under consideration and Treasury had indicated that a consultative process would be undertaken with defined-benefit funds and stakeholders to consider the options available.

He said the announced protective mechanisms needed to be explored, including increasing future contributions when a member withdrew funds before retirement.

Further clarification was also anticipated around the possibility that members could be allowed to access their savings in the event of retrenchment.