General update before I dive into the topic:
The South African retirement fund landscape has been undergoing significant shifts since the introduction of the Retirement Reform. The said reform started with discussions back in 2007 with the discussion paper “Social Security and Retirement Reform” with many of the issues mentioned in that paper, still being issues today, being:
- low preservation rates,
- high costs for low-income earners,
- governance and transparency in some of the funds.
In October 2024, the Pension Funds Adjudicator, Ms Muvhango Lukhaimane, called for greater accountability from retirement fund trustees in addressing the non-payment of contributions by participating employers. In reflecting on the PFA 2023/24 report, she stated, in summary that the introduction of the two-pot system has exposed significant non-compliance, with employers, especially in sectors like security and municipalities, failing to hand over contributions to funds. This has led to numerous complaints, with 84% related to withdrawal benefits and non-payment of contributions.
But back to the topic:
As mentioned, the retirement reform introduced changes like the 2013 T-Day reforms, the 2016 introduction to default regulations and the latest being the two-component (pot) system.
Financial planners and advisors must stay ahead of these changes to offer sound, compliant advice to clients.
One question that I asked quite a few role players in the industry is if a transfer from the Savings Pot into the Retirement Pot, is a section 14 transfer or a replacement? The short answer is that it is neither. But let’s unpack it a bit further with the view of a conduct / risk-based approach rather than a pure rules-based approach.
With the implementation of the two-pot retirement system in South Africa and the complexities of section 14 transfers and replacements, it has become increasingly critical for financial planners and advisors to adopt a risk-based approach. Financial planners and advisors must not only comply with regulatory frameworks but also ensure that clients are positioned to make informed decisions. By integrating the Financial Planning Institute’s (FPI) Code of Ethics and the six steps of financial planning, advisors can effectively mitigate risks and uphold their duty to act in the client’s best interest.
Understanding the two-pot system and transfers between the pots
The two-pot system, which came into effect on 1 September 2024, allows retirement fund members to split their contributions between two components: a retirement pot and a savings pot. While the retirement pot is locked until retirement, the savings pot allows for limited pre-retirement withdrawals. The introduction of this system has opened new considerations and potential risks for clients who may be tempted to access their savings pot prematurely, thus undermining their long-term financial security.
In the context of section 14 transfers, which involve moving a client’s retirement savings between funds, financial planners and advisors face the challenge of ensuring that such transfers are not only compliant with regulations but also in the client’s best interest. The risk of replacing or transferring a retirement product without thoroughly evaluating the implications can have severe financial consequences for the client.
Why financial planners and advisors must take a risk-based approach
A risk-based approach focuses on identifying, assessing and mitigating the risks that could negatively impact the client’s financial wellbeing. In the case of the two-pot system and section 14 transfers, there are several risks that financial planners and advisors must be aware of:
- Premature withdrawals: clients may not fully understand the long-term implications of accessing their savings pot early, potentially risking their retirement plans.
- Incorrect transfers: moving funds between providers or products without a proper risk analysis may lead to higher fees, tax penalties, or reduced benefits.
- Compliance risks: the Financial Sector Conduct Authority (FSCA) tightly regulates section 14 transfers. Financial advisors must ensure that all compliance requirements are met to avoid penalties for the client and themselves.
- Moving funds from the savings pot to the retirement pot is not technically a replacement or partial replacement, as it does not involve two different financial products. However, the effect is like a replacement. Following the guidance of the General Code of Conduct for replacements is a good practice and will help place the client in a position to make an informed decision.
By taking a risk-based approach, financial planners and advisors ensure that all these potential threats are evaluated before making recommendations. This approach is particularly important given the increasing regulatory scrutiny in the financial services industry and the obligation of advisors to adhere to specifically FAIS regulations.
The role of informed decision-making
Financial planners and advisors have a duty to put clients in a position to make informed decisions as mentioned above. This responsibility is central to the FPI’s Code of Ethics, which requires professional members of FPI (CFP®, FSA® and RFP®) to prioritise client interests and ensure transparency throughout the advisory process. An informed client is more
likely to understand the risks associated with accessing their savings pot or moving retirement funds from one provider to another.
Financial planners and advisors can achieve this by clearly explaining:
To provide clients with comprehensive and risk-based advice, financial planners and advisors should follow the six steps of financial planning, as outlined by the FPI’s practice standards. These steps provide a structured approach to managing client risks and ensuring their financial goals are met.
The introduction of the two-pot system and the ongoing complexities of section 14 transfers or any other transfer between any “pot” make it essential for financial planners and advisors to adopt a risk-based approach. By adhering to the FPI’s Code of Ethics and integrating the six steps of financial planning, financial planners and advisors can help clients make informed decisions that safeguard their financial futures. In this way, financial planners and advisors not only manage risks effectively but also reinforce trust and confidence in the financial planning profession.