Retirement savings face depletion

New NBFIRA Act to lead to an increase in encashment options Members’ net worth replacement ratio to decline New Law to cushion members and give them flexibility to spend from pensions Since the introduction of pension benefits in Botswana, the main purpose of this benefit was to provide the working class with a retirement plan to assist workers in their life after formal employment. This was to safeguard the government against high numbers of people who became destitute once they were no longer employed. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] With that in mind, strict regulations were enacted to protect retirement benefits from being accessed for anything outside of the main intention of the pension savings plan. However, over the years, there has been increasing pressure from members of pension funds to be allowed to access their pension savings in circumstances where it would benefit them now rather than later. For instance, members would cite mortgage repayments as the perfect example where they should be allowed to access their pension savings with the reason that losing their homes now would put them in a far worse position than trying to preserve their pension savings for retirement. Although debatable, Alexforbes says the new Retirement Fund Act clearly shows that these pressures from members did not fall to deaf ears. The Retirement Funds Act 2022, which commenced on October 14, repeals and replaces the previous Retirement Funds Act 2014. It allows deferred members to access 100 percent of savings clear loans or 50 percent to foot medical expenses mortgages. The previous bill allowed members to access only a third of the savings. A key requirement under the Act is that pension fund members who wish to encash their pension benefits will be required to prove that the amount requested will be enough to clear their outstanding loans or medical bills. Speaking during an engagement session to unpack changes in the Retirement Act, Head – Client Servicing at Alexforbes (formerly Alexander Forbes), Nina Sephuma, explained the improvement in the new Retirement Act of 2022 is that this dispensation now extends to retiring members. While members are allowed to use their benefits to pay off medical expenses, the condition, however, is that the illness has to be a chronic condition. “In this case, the condition to pay is confirmation from a doctor that this is indeed a terminal illness,” said Sephuma. The Act also stipulates a waiting period of a minimum of six months for deferred members. For loans, a key requirement is that the benefits must be enough to cover the loan. Addressing the media this week on the changes in the Retirement Funds Act, Acting Director - Retirement Funds at NBFIRA, Phineas Sesinyi explained that a deferred member who wishes to clear their loan with pension benefits will have to approach their respective fund’s board of trustees and present their case. “They will need proof and will conduct their own investigations,” he said. “You may be assisted if your benefits are enough to cover such loan. “But as a deferred member, you will have to have stayed at least six months without working and the board of trustees will have to be satisfied that accessing your pension benefits is the last resort.” According to Sesinyi, the money requested by a member should not exceed the amount available in savings. “We can’t take all your pension savings because we emphasise that people should have a pension,” he noted. Implications of the new Act The changes brought by the Act are expected to have an impact on the sector. With the increased number of provisions that allow members to encash from their pension savings, the implications will simply mean that members will possibility erode their pension savings before they actually retire. Allowing members to settle repayments of any nature with their pension savings can only decrease their savings. Research has shown that in order for a member to retire comfortably, their annuity should be at least 75 percent of their last salary received. However, more often than not, members’ pension savings are inadequate due to various reasons that include finding employment late. The general consensus is that the encashment will only add on to the erosion of their pension before retirement. Lesego Mzwinila, Head of Employee Benefits, Alexforbes estimates that members currently get around 40 percent of their salaries. Factoring in encashment, Mzwinila warns that “we are going to have an even bigger problem when we retire when we now look at those issues”. “There will definitely be a depletion of retirement savings due to an increase in encashment options and also due to a rise in deductible allowances,” Sephuma added. “This will affect the members’ net worth replacement ratio; not just one member, but the national replacement ratio. The replacement ratio helps pensioners figure out how much income they will need to maintain their pre-retirement lifestyle. The ratio most commonly cited is 70 to 85 percent of pre-retirement income. On the positive, however, she noted that the changes will give members the flexibility to use a bit more of their retirement savings. “Also, it will cushion members because instead of losing a house, you can now use your benefits to try and secure that home.” Most importantly, she said, it will come in handy when a member has a chronic illness. “It is a good development from our point of view, looking at the difficulties that people face,” Sephuma noted. SA introduces two-pot system Review of legislation is common practice in a lot of markets. It is usually prompted by a need to improve members’ overall welfare. In South Africa, for instance, legislation is also in the process of being changed. The Draft Revenue Laws Amendment Bill has been tabled to allow for a “two-pot system”. This enables South Africans to also save for non-retirement purposes, such as emergencies, via their retirement funds whilst preserving more of their savings for retirement. It is assumed that this law will come into play in January 2023. Prior to implementation of a change to legislation, the industry is usually engaged and then a motion passed in parliament for review and adoption. Kenya began allowing members to actually cash 40 percent of benefits while Nigeria allows members to take 25 percent for mortgage loans. [/ihc-hide-content][ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ][/ihc-hide-content]

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