Two-Pot roused slumbering retirement savers

By: Siobhan Cassidy, MoneyMarketing contributor

Image: shutterstock

The introduction of the Two-Pot Retirement System on 1 September fulfilled expectations that it would set in motion an unprecedented run on what little savings South Africans have; it also precipitated a spike in engagement among retirement savers that could impact the national saving trajectory positively over the long term.

In the first couple of months after implementation, the South African Revenue Service (SARS) reported “an unprecedented and steady increase in tax directive applications”. Millions of withdrawal requests were submitted, and billions of rands were withdrawn by savers. While lamenting the savings (and future growth) lost to their clients, industry experts welcomed a new level of interest in a topic that South Africans have previously avoided like the plague.

“From an investment market perspective, the introduction of the two-pot system doesn’t seem to have had any impact whatsoever,” says Rob Southey, Head: Asset Consulting at Momentum Corporate. “There were no market liquidity issues, and none of the fund managers we engaged had held additional cash in preparation for 1 September 2024 – hence no cash drag would have been experienced on members’ investments.”

In giving members access to a third of their retirement savings, purportedly for emergencies, the two-pot system seemed to declare open season on savings. The other part of the new legislation, however, closed down (by two-thirds) an access point that has long been the downfall of retirement savers: cashing out on leaving a job. Under the old system, savers could withdraw all their savings from their corporate fund on leaving a job, denying themselves the benefit of compound growth, and sometimes exhausting their lifetime allowance of tax breaks on lump sums.

Under the two-pot system, two-thirds of all savings must stay in the system until retirement, and then be used to buy an annuity that will pay an income in retirement. It is well known that cashing out has been a key contributor to South Africa’s retirement savings crisis. The importance of stopping this gap cannot be overestimated in a time of what looks like extreme job-hopping to older generations, who could realistically hope to be employed by one business for life. In a statement released with financial results for the six months to 30 September 2024, Alexforbes says the two-pot retirement system, which

“represents the most significant change in the history of South Africa’s retirement funding landscape … was projected to improve long-term retirement outcomes by up to 2,5 times current levels, resulting from the impact of compulsory preservation”.

John Taylor, Head: Investment Products at Liberty Corporate Benefits, says “greater benefits at retirement will take some years to show, as the retirement pot will need to build up over time, especially to an amount exceeding the de minimis amount of R165 000 at retirement, but there is evidence that this is occurring”.

Alexforbes says an underappreciated impact of the two-pot system was that members would now have to make an active decision regarding the compulsory preservation of their retirement pot upon changing employers, whereas most would have previously elected to withdraw their entire fund value in cash. The implication is that members will have to be more engaged with their retirement funds and their options at exit.

This talks to an issue that is often blamed for South Africans not saving enough for retirement and dipping into those savings when given a chance: a lack of engagement with what is required to preserve one’s lifestyle in retirement and how to get there.

Unexpected benefit

As the dust settled on the introduction of the two-pot system, one of the biggest, largely unexpected wins came around engagement of fund members. Elana van den Berg, Legal and Consulting Manager at Momentum Corporate, says there has been “much more member engagement”. She says members have been “taking ownership” of their retirement savings and asking more questions. Alexforbes says they had seen more than 4-million logins to the AF Connect member portal in the two months from 1 September. This compares with 1,5 million logins to AF Connect in total for the 12 months prior to 1 September.

Jonathan Sierra, Wrapped Product Specialist at 10X Investment, agrees with this assessment, saying one of the immediate benefits noticed was that younger people were engaging with their

pension affairs for the first time. Vickie Lange, Head: Best Practice at Alexforbes, agrees, adding that member engagement will “continue to be far more prevalent under the two-pot regime relative to the old regime”. She adds that it was still “too early to establish whether members would increase contribution rates to their retirement funds because of this change that allows them some access”.

There are lingering concerns that savers will treat the accessible pot of one-thirds of their retirement savings as their emergency fund, with many people potentially drawing down that third every year. Momentum’s Van den Berg expresses concern that from next year we could see “much higher withdrawals, so much higher leakage from retirement system as members take a third of 12 months’ worth of contributions”.

10X’s Sierra says: “Ultimately, whether members choose to access their savings pots in the next tax year will depend heavily on their level of financial literacy, and the industry’s ability to effectively communicate the implications of doing so.”

A focus on educating members has already borne fruit, according to EasyRetire CEO Deresh Lawangee, who says the business observed a lower-than-expected volume of claims when the two-pot system took effect. He attributes this to “intentional and robust communication strategies around the implications of making withdrawals. Retirement funds that conducted on-site seminars and partnered with service providers to educate members on the implications of withdrawing their two-pot savings saw a noticeably lower proportion of claims,” Lawangee adds. “Members were informed about the tax implications (e.g.

income tax charges and the settlement of outstanding tax liabilities like IT88 orders) and the potential for worsened retirement outcomes, resulting in more informed decision-making.”

10X’s Sierra concurs, saying: “We found that a good portion of our clients who used the two-pot calculator developed as part of the withdrawal application journey decided not to proceed when they saw the long-term impact of withdrawing.” In an update after the first wave of withdrawals, SARS noted that 28 525 directives had been cancelled by taxpayers who had changed their minds.

Building momentum

There is consensus around the importance of building momentum on increased levels of engagement among retirement savings fund members. Liberty’s Taylor describes “a surge towards using digital platforms and increasing the ease with which customers can deal directly with providers on their benefits”.

Momentum’s Southey says education and advice is key. He describes a tool built by Momentum that shows the impact on member’s retirement benefits from withdrawing from the savings pot at different ages, the change in the replacement ratio due to withdrawals, and the difference in investment outcome for different investment strategies between the savings and retirement pots.

While there is consensus that it was too early to observe the full impact of the two-pot system, and there has been something of a run on savings, in the words of 10X’s Sierra “all models project a substantial improvement in outcomes for the average retirement saver, along with robust growth for the retirement fund industry as a whole”.

Alexforbes anticipates a marginal impact on GDP growth resulting from two-pot spending, ranging from 0.1% to 0.3% in 2024 and 0.2% to 0.7% in 2025. The company expects that the inflationary impact of such spend will be negligible but that the impact on the fiscus will be more meaningful. Better tax receipts could improve the debt-to-GDP ratio by 0.5% to 1.1% of GDP in the 2024/2025 tax year and 0.8% to 2.3% in 2025/2026 tax year.