New retirement system will benefit South Africans 

Despite warnings of potentially huge outflows from retirement funds, South Africa’s new two-pot retirement system will benefit millions and the asset management industry. 

This is feedback from FNB Wealth and Investments CEO Bheki Mkhize, who told Daily Investor in an interview that its models do not indicate a massive immediate withdrawal from retirement funds when the new system is introduced. 

The new rules applicable to retirement funds, commonly referred to as the ‘two-pot system,’ are set to be launched on 1 September 2024. 

This will require all future contributions made to retirement funds to be split into two portions –

• Two-thirds of your contribution will be allocated to a retirement component, which must be preserved until you retire.
• The remaining one-third will be allocated to a savings component, from which you can withdraw once per tax year before your retirement. 

The withdrawal amount will be limited to the value in the savings component at the date of withdrawal. 

This new system aims to promote the preservation of savings until retirement while also providing retirement fund members with some access to their savings in times of need.

Mkhize said the government managed to strike a good balance between workers’ demands, the retirement industry’s interests, and its own interests. 

He said FNB’s models indicate the new system will benefit both savers and the industry in the long run. It will give people the liquidity they need in desperate times while keeping two-thirds of their savings invested. 

FNB noted in their studies that many South Africans would cash out their pensions when they moved jobs or resigned. This means they will lose out on the benefits of compound interest and impact the industry’s assets under management. 

The new system will adequately address this issue, according to Mkhize, and thus result in more savings being invested until maturity – benefitting savers and asset managers. 

“I do not think you will have a stampede on day one or week one when this system is implemented. From what we have modelled, there won’t be a large liquidity event,” Mkhize said. 

He did note, however, that it would be crucial for asset managers, including FNB Wealth and Investments, to educate their clients about how the system works and the benefits of staying invested. 

Mkhize cautioned that implementing the new system on 1 September is not a foregone conclusion, and plenty of work will be required from the government, regulators, and the industry. 

He explained that asset managers have to work with the assumption that the deadline will be met, but it would be very difficult to meet it. 

In particular, before the industry can fully adapt to the new system and educate clients, there has to be legislative and regulatory certainty that has not yet been created. 

The country’s national election on 29 May will probably delay this even further as the required legislation is unlikely to be signed into law and regulations created before this date. 

In this regard, Mkhize’s comments echo those of product development actuary at Coronation Rael Bloom, who said rushing the implementation of this system risks undermining confidence in the industry. 

A major risk is that the system will not be properly implemented, resulting in discontent among retirees and undermining confidence in the retirement industry, Bloom said. 

This stems from the aggressive timeline the government has set for implementing the system, initially set for 1 March 2024 but now pushed back to 1 September 2024. 

The rush to implement the system increases the chances of delays, errors, and a lack of understanding from savers about the changes to the system. 

A raft of regulatory changes is required to give legal effect to this new system and clarify the changes. 

This includes changes to the Income Tax Act and Pension Fund Act. This enabling legislation must still be finalised and promulgated.