As people the world over live longer, healthier lives the debate around the design and funding of retirement fund schemes show no sign of subsiding.
In 2014, then-UK Pensions Minister, Steve Webb, (in)famously advised pensioners to buy Lamborghinis. Despite the uproar at the time, his intention was not for a sports car-driving, middle-aged hoard (after all, 60 is the new 40) to descend on British roads, nor was it to encourage reckless or frivolous spending.
Instead, his comments conveyed the increasingly prevalent view that individuals should be able to make their own decisions on how to spend their pension pots, with little interference from the government. Webb was essentially referring to the move from Defined Benefit (DB) to Defined Contribution (DC) pension plans – a transition made by South Africa ahead of its many developed and developing peers.
The question regarding choices and discretion as to our pension savings has resurfaced, albeit in a slightly different format. This is due to proposed amendments to the legislation governing pension savings in South Africa.
At present, as pension fund members, we can withdraw a full lump sum from our retirement funds at any time during our lives. We can do this when we are retrenched, or when we resign, or (flippantly) when we want to buy a fast car. The legislation, which is available for public comment until the end of January 2022, proposes that members can only withdraw one-third of their pension savings to use at their discretion. The remaining two-thirds will remain invested in the designated pension vehicle.
The legislation aims to encourage prudent savings decisions amongst pension fund members. Instead of emptying their entire pension pots to buy a fast car, they would only have access to a third. Instead of opting for a “fast, flashy car”, pension fund members will need to carefully assess how they use the discretionary one-third of their pensions. This does not mean that, in times of extreme need (being stranded on the side of the road), this discretionary fund is inaccessible. It just needs more forethought. . Importantly, they will have a safety net. A portion of their pension savings will be preserved for their eventual retirement. They will effectively be wearing a seatbelt, to ensure their safety on our post-retirement journey.
There has been much debate on whether the government should have the power to prescribe how retirement fund members allocate their pension savings.
What is of greater importance here, is that retaining a portion of pension savings is likely to ensure that fewer pensioners face destitution upon retirement. The social safety net, or seatbelt, helps them to reach their destination relatively unscathed. Ultimately, whether we do so in a Lamborghini, or a Toyota, the result is a more secure retirement, a vehicle with seatbelts.
Choices – too many choices or too little freedom?
Let’s start by looking at some of the choices members face when they start their working life and extend the transport analogy used above. At various times in the working journey, employees venture onto the showroom-floor of the car-dealership to select suitable options for saving for and getting to retirement. Members make these choices when joining a firm, starting to save for retirement, selecting contribution rates and plans within the employer’s scheme, ) and deciding to retire. It is tempting, of course, to choose the Lamborghini, all bright and shiny. But the budget, in this case, is the size of a third of a pension pot that can be accessed at any time. So, we utter a rather resigned sigh, and look at other options.
If at the outset, retirement fund members were educated about their options, and understood that this particular Lamborghini came without a seatbelt, would they still be so disparaged by the limitations to their choices? I suspect not.
It is also important to note that, even with a more limited choice, members still have a fair degree of discretion. There is room for flexibility. They can choose the make, model and colour, and still effectively get to drive themselves on their retirement journey. They can also choose to put more money aside, in a retirement annuity. But, to emphasise a point, they get to do so safely.
Education around a safe journey
The debate around prescribed retention of a portion of the pension pot continues, and the invitation for comment has been extended beyond the January deadline as various roleplayers in the industry add their voices. Public comment may be made until the 10th of February. It is highly likely, however, that the seatbelt rule will come into effect.
It is therefore the role of trustees, pension plan providers, consultants and their ilk to ensure that members are comfortable wearing their seatbelts. Members need to be educated as to the rationale for retaining two-thirds of their pension pot and educated about the choices that are still available in undertaking their retirement journey.
If they understand the importance of wearing a seatbelt, they are far less likely to lament the perceived curtailment of their freedom.