How early access could pose a risk to individuals

Allowing early access to pension saving could expose individual savers or insured members to more risk of making the wrong decisions than less flexible systems. If insured members are allowed early access to their pension funds they could be faced with making complex choices which might negatively impact on their future levels of retirement income. For example, today Tanzania social security policy’s regulations of 2003, is stating that people will be allowed to access 25% of their pension contributions as a tax free lump sum before reaching 55 or 60 years. It seems that in many cases people prefer to withdraw their lump sums without being properly informed of the impact this would have on their final pension pot size. For sure this will put them at risk of ‘having less than they expect to live on in retirement.’

Because of this risk, early access options may need to be accompanied by a system of financial information (or possibly regulated advice) to educate the general public members or insured people with their family members about the implications of accessing pension savings early. Such an information system could be an added expense as it is not currently part of the SSRA’s considerations for the design of personal accounts, though the SSRA will be required attempting to ensure that a comprehensive system of generic information is available to all individuals. Public or private pension providers and workplace providers will be required to choose whether to make financial information and advice available to members of their pension schemes and some have started to do, but others will be required to provide only generic information in an effort to keep management charges low.

Contributions in most defined benefit schemes are pooled into one investment fund, which means it could be difficult for defined benefit schemes to offer early access. In a defined benefit scheme it could be difficult to determine the value of an individual’s accrued benefits, which are in part based on future earnings. Taking money early from a defined benefit fund could reduce the value of the whole pooled fund, and potentially have an adverse effect on other scheme members. Therefore early access could be difficult for defined benefit schemes to incorporate since does not have individual member account as it is permitted in provident funds or like the former National Provident Fund (NPF) before being transformed into a comprehensive social security fund (NSSF) which operates under social insurance principles.

There is the potential for a run on a defined benefit pension fund if people respond to rumours of trouble with the fund by wanting to access their fund early. In the public sector, most defined benefit schemes are contributory and unfunded and allowing early access in these schemes could represent a cash-flow cost to the Government. Because of the potential difficulties for early access to pension savings in defined benefit schemes, early access in other countries is often only permitted in defined contribution schemes or provident funds. In summary, introducing early access options could encourage more people to save, existing insured members to contribute in higher amounts and could appeal to women, younger people and men and women on low incomes and in particular for majority Tanzanians who have not covered with social security protection.

However, Wananchi need to access their pension savings early risk lowering the size that their pension pot will be on retirement though this risk could be mitigated by the increase in savings that providing early access options might generate. Introducing early access could lead to a greater complexity in the management of the existing public pension funds. This greater complexity could lead to higher management fees which, in their turn, could contribute to reducing the size of the pension pot that savers or insured people receive on retirement.