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Col 2: Low-income members

The two-pot system is great, but it is debatable whether many lower-income individuals should even be members of retirement funds.

Bruce Cameron 22July2023 low income members

By Bruce Cameron
Co-author of The Ultimate Guide to Retirement in South Africa


Another system of group life assurance and savings should exist that would suit them far better.

The problem lies with a legislative decision of March 2021 that forced provident fund members to be effectively retirement fund members.  From that date they will have to use two thirds of their savings for retirement.

The proposed two-pot system partially gives members some relief from the March 2021 legislation that forces retiring members to invest two thirds of their retirement capital to purchase an inadequate pension for life.

Simply put, the majority of lower-paid workers lack the resources to save for retirement. They have to deal with historically high transport expenses, growing inflation, the increasing costs of education, feeding, sub-par electricity and housing, deal with the cost and failure of electricity supply, poor housing and a public health service that is completely incompetent.

Public institutions have failed, as a result of the ANC’s total abuse of the economy with widespread corruption and the appointment of inexperienced cadres. The result is the lack of delivery of essential services to the poor, while at the same time reducing job opportunities.

Here is a list of reasons why the current structure must be rethought:

Facts from the Benchmark Survey

According to the recent Sanlam Benchmark survey of retirement funds:

  • 40 percent retirement fund participants said that they would leave their retirement fund if they could because their immediate financial requirements were too great.

  • Only 2 percent of those polled said they felt financially ‘well-prepared’ for retirement. A further 14.7 percent felt ‘somewhat prepared’.

  • 77 percent of members are ‘already feeling quite anxious about their current position in life’; and, 92 percent are feeling ‘some stress right now’.

  • Of those with lower-income, 44 percent are aware of the two-pot regime; 51 percent think it is a good idea because members need access to money; and, 64 percent will utilise it.

These are massive numbers when you consider there are about 15 million retirement fund members in South Africa.


Replacement Ratios

The proportion of your first annual pension to your last yearly salary is known as your ‘net replacement ratio’. No allowances are considered while determining this sum, so your replacement ratio may fall below what is considered acceptable.

After 40 years of employment, the majority of retirement funds strive to replace 75 to 80 percent of your salary. Your replacement ratio will fall if you withdraw money along the way and do not make payments for any period.

Lower-income members after 40 years could be closer to 25 percent or even less if retirement funds are not preserved.

There are three parts to retirement funds savings:

  • Retirement savings. Your pension will be paid from this part.

  • Group life assurance costs. Less money will go to retirement savings for most lower-income funds as they will pay more than higher-income funds for group life cover, because they tend to die younger as a result of poor health and high-risk jobs, such as miners and security guards.

The assurance premiums for members with a higher income bracket contributing, of - say R5 000 a month - will be Rx, while those lower-income members will pay Rx-Plus. As a result, lower-income members contributions for buying a pension will decline to unacceptable levels.

  • Costs: Both higher and lower income funds have much the same costs. So, once more, the replacement ratio for lower-income funds will reduce at a greater pace.


A brief history of retirement funds

The majority of retirement funds up until the 1990s were defined benefit pension funds. This changed when unions, with a majority of black members, adopted the provident fund structure.

Provident funds assisted in over-coming low job security where members could be unemployed for weeks, if not years.

More crucially, provident members were never compelled to purchase a pension upon retirement. They could receive their money in cash.

Members, who, due to low replacement ratios, withdrew the accumulated capital at retirement, spent it (likely primarily on repaying debt); and, then claimed an Older Person’s Grant funded by the state.

Life assurance benefits are probably the biggest drawcard of lower-income funds, with retirement savings simply being a secondary consideration.

There is one contradiction however in the Sanlam Benchmark survey: Only 20 percent of lower-income earners are aware of staff benefits, such as group life assurance. The percentage however might be higher, as those surveyed tended not to be union and industrial funds.


Partially due to high administrative and investment costs, the then Finance Minister Trevor Manuel, announced a significant revamp of the retirement system in South Africa in the late 1990’s. Since then, there have been numerous changes in a long and difficult battle.

One of the early areas of concern was the non-preservation of accumulated savings by members (both pension and provident funds). Many people, when they quit their jobs, took retirement savings as a lump sum (it does not seem to matter to members that lump sum was harshly taxed).

National Treasury decided in March 2021 that all provident fund members should be treated like pension fund members using two-thirds of their retirement savings to buy a pension for life - unless the benefit was worth R247 500 or less; or they were 55 years or older on March 1, 2021

There is also a grandfather clause which exempts contributions before March 2021.


Then along came Covid-19. Many people, in particular low-wage workers lost their jobs or income reduction. For many members accessing their retirement funds were their only source of income. If they lost their jobs they could get access, but if they had a reduced or little income they either had to resign from being employed; or, get divorced with all the retirement savings being passed on to the former partner.

Alexforbes already had a voluntary savings scheme in place for retirement fund members and it was a part of what led to the two-pot system.

There are several components to the two-pot regime:

  • the amount you have saved up until February 28, 2024. You can withdraw an amount which is the lesser of 10 percent of the benefit or R25 000. The trade unions want more but without thinking what will happen to investment markets;

  • Starting on March 1, 2024 one rand out of every three rand contributed to your retirement scheme will be invested in a savings account. The balance will be invested in a retirement fund which will remain there until the day you retire and must be withdraw as a pension for your life (and possibly a partner); and,

  • There is no compulsion on you to withdraw the savings portion and at retirement it will be added to your retirement capital and used to buy a pension for life. It is better leave it there until you retire.

So why is everyone simply pushing ahead with both the forced savings and the two-pot system. The reasons are:

  • It saves the government from paying future state-paid Older Person’s Grants;

  • The financial services industry supports the changes as it adds R-billions to the assets they manage;

  • The trade union and the industrial funds (mainly controlled by the unions) do not seem to understand what was happening.

But now think of the lower-income person. There needs to be a lot more research into who should or should not be a member taking into account such things as their net living wage.

Accounting company PwC says a minimum income for a single person could vary from R5 582 to R9 648 a month. A minimum income for a family of six between R17 232 and R32 271 a month.

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