South Africa’s GEPF prepares the ground for a two pot system

South Africa’s Government Employee Pension Fund, GEPF, the R2.2 trillion ($116 billion) defined benefit fund for the country’s public sector employees, is in the process of readying its investment processes for a new law that will allow people to draw down some of their retirement income early.

The Revenue Laws Amendment Bill and the Pensions Fund Amendment Bill still need to be signed into law by South Africa’s President, but GEPF is busy preparing for a September 2024 kick-off.

Beneficiaries’ pots will be split into two components comprising a savings element (one third of their pensionable service) from which people can tap a capped amount annually, alongside a larger, invested component which can’t be withdrawn until retirement – or death.

“People will only be allowed to make one withdrawal every tax year from the savings component and whatever they withdraw is treated as additional income and taxed,” says Brian Karidza, head of benefit and actuaries at GEPF.

On one hand the legislation has come under fire for using pension funds to solve societal problems. Critics argue that retirement funds should only be used for retirement, not for supporting people through COVID and its aftermath, the cost-of-living crisis or bouts of unemployment, warning the policy will foster a long-term retirement shortfall.

Others believe it could solve a pervasive trend in the country that sees cash-strapped beneficiaries resigning from their jobs to draw down their pension ahead of retirement. On average, people change jobs seven times in their working life, each time cashing in their pension before they start saving again from scratch in a new job. The problem is most prevalent in private sector pension funds rather than South Africa’s large public sector funds like GEPF, Transnet and the Post Office.

“The only way people will be able to access the retirement element of their saving is by reaching retirement age. The introduction of a savings pot allows people to access their pension without needing to exit the fund, and introduces compulsory preservation for the first time,” says Karidza. “The hope is it will result in the average member being better off because they will actually retire with a larger portion of saving than under the current system.”

Sifiso Sibiya, head of investments at GEPF is confident the changes won’t significantly change investment strategy at South Africa’s biggest pension fund. GEPF doesn’t need to adjust the amount of liquidity it holds because there is a cap on the maximum amount people can withdraw. The fund’s 1.2 million active members could all, potentially, request a drawdown but the fund’s 0- 2 per cent allocation to cash, plus monthly net contributions, would be able to absorb the liquidity calls.

“We won’t need to liquidate any investments, and in the short term it won’t have a significant impact on investment strategy,” he says.

But that doesn’t mean there aren’t other complications to navigate. Sibiya warns that if the government increases the R30,000 cap (the amount has changed several times) things could get a little more complicated. “Until it is settled and acted into law, it becomes hard to get our hands around it. We are trying to plan but there are many moving parts – it is like shooting at a moving target.”

He is also concerned that liquidity calls from other pension funds acting on withdrawal requests at the same time could drain liquidity from the capital markets and create volatility. “GEPF has 80 per cent of its assets invested in South Africa,” he says. “If pension funds sell huge bond tranches it will effect the yield curve.” He believes that smaller funds, with a high number of active members, are most at risk of having to change their asset allocation and hold more liquid assets to meet withdrawal requests.

Some industry protagonists envisage  GEPF running two investment strategies. One for the savings pot and the other for long-term retirement. But Sibiya favours maintaining the current consolidated approach – just  growing the allocation to cash.

“Running a separate strategy for each component will reduce economies of scale by introducing smaller mandates and higher fees,” he says. “It would be better to hold still and just adjust the cash allocation and have larger mandates.”

He is wary of the impact on returns from holding a larger allocation to liquid assets. But hopes that as the new system beds down, beneficiaries’ retirement buckets will ultimately grow bigger because they will be free from the damaging impact of withdrawals that plague the current system. “Our long-term view is that illiquid investments will grow which from a developmental point of view and looking at the needs of South Africa’s infrastructure investment, is positive.”

Preparing for the new system has absorbed huge amounts of time. None more so than readying GEPF’s back-office processes to meet withdrawal requests on time. “The worst-case scenario is if we get 80-90 per cent of our membership coming forward. This would would increase the number of payments that need processing by 10-fold,” says Karidza. “The timing is very tight considering we are still trying to understand the implications.”