Why Two-Pot reform must shift the retirement investment question
South Africa’s two-pot retirement debate has been dominated by concern over withdrawals from the smaller savings component. That focus risks missing the bigger opportunity created by the reform.
Two-thirds of new retirement contributions are required to remain invested until retirement, giving funds more capital, for longer, to invest for growth.
But more money staying invested does not necessarily translate into better retirement outcomes.
The next test is investment design.
Funds may need to consider how this longer-term capital is invested in a way that keeps members exposed to growth, while reducing the risk that poor market conditions at the point of retirement, retrenchment, transfer or drawdown weaken their income security.
“Two-pot changes the investment challenge facing retirement funds,” says Marvin Nair, Investment Solutions Executive at Old Mutual Corporate. “If more money is going to stay invested for longer, funds may need to look beyond typical considerations. They have to ask whether the investment journey is designed well enough to protect members when timing turns against them.”
Research by Old Mutual Corporate estimates that retirement reform policies such as two-pot could improve retirement savings by up to two to three times over 30 to 40 years, potentially moving the proportion of South Africans on track for a secure retirement from about 6% closer to 20%.
Early evidence is already pointing in this direction, with Old Mutual Corporate reporting a 33% improvement in preservation since the reform took effect.
But preservation is only the first step. The real investment question is how funds use that longer time horizon.
Growth needs time
The two-pot reform creates two investment tasks inside the same fund.
The savings component must manage liquidity and short-term volatility, while the retirement component can be invested with a longer horizon, making it more able to accommodate longer-horizon assets such as alternatives, where appropriate.
“Infrastructure and private equity can be well-suited to long-term capital because they are designed to deliver value over time,” says Nair.
These assets are less tied to daily market movements than listed equities.
Their returns are often linked to projected cash flows, operational improvements and long-term asset development, which can help reduce reliance on a concentrated listed market.
The long-term return case is one reason global pension funds have increased their exposure to private markets and real assets.
According to AXA IM’s 2026 Global Pension Trends Report, citing the Thinking Ahead Institute’s 2025 Global Pension Assets Study, allocations to private markets, real assets and alternatives had risen to approximately 20% of pension fund assets by the end of 2024. *(AXA IM. Global Pension Trends Report 2026, citing the Thinking Ahead Institute, Global Pension Assets Study 2025).
Nair says Old Mutual’s Private Equity Fund Five illustrates the potential return opportunity, with an internal rate of return of more than 40%, though outcomes vary by asset, vintage and manager.
While past performance is not indicative of future performance, this example demonstrates the trade-off that these underlying returns are not smooth. “There are some really, really good assets in there, but you need to be willing to take the pain at the start,” he explained.
Timing is everything
A longer investment horizon helps funds pursue growth, but members do not experience returns as long-term averages.
Their outcomes are tested at specific moments, such as when they retire, transfer, are retrenched or start drawing an income.
“Members do not experience retirement savings as a 20-year average. They experience them on the day they need the money,” says Nair.
“The issue is not that markets move,” he says. “The issue is when a member is forced to make a disinvestment decision at the wrong point in the market cycle – in particular, when markets are down.”
Old Mutual Corporate’s modelling shows how timing risk can change a member’s outcome when they are forced to exit during a downturn.
In one illustrative scenario, smoother investment journeys produced outcomes of about R3.95 million and R3.82 million, compared with about R3.11 million for the typical balanced fund.
In practical terms, that is between about R707,000 and R840,000 more available to the member at exit, or roughly 23% to 27% higher than the typical balanced fund outcome. (¹)
This effectively adds insult to injury – at the time of being retrenched, the typical balanced fund investor also needed to accept a significantly reduced benefit due to a market downturn.
The same investor would’ve been 27% better off had they been invested in a smoothed bonus portfolio instead.
“Growth is essential, but the path of returns can determine the outcome,” says Nair. “A portfolio that can absorb more of the market shock inside the investment journey may help protect members from locking in losses when life happens.”
Risk must be carried differently
A better retirement investment journey does not remove risk. It manages how risk is carried.
“In a conventional balanced fund, the full effect of adverse market conditions is reflected directly in the member value at that point. If a member exits, withdraws or starts drawing an income during a downturn, the loss may be crystallised.”
Smoothed bonus portfolios are designed differently, says Nair. “They can help spread the effect of market movements over time, rather than passing the full impact directly to whichever member happens to exit at the wrong moment.”
Despite a challenging market environment, including a fall in equity markets in March 2026, smoothing reserves in Old Mutual’s portfolios remained positive.
This gave the portfolios room to declare a special discretionary 2% bonus in June 2026, over and above the normal bonuses declared through the usual smoothing process.
“Protection is not about removing growth or removing risk,” says Nair. “It is about designing the journey, so risk is carried more equitably over time.”
Retirement funds may need to look beyond return targets alone.
A key consideration is whether the default investment journey uses the longer horizon created by preservation, keeps members exposed to growth, manages liquidity and timing risk, and protects income security when unfavourable market conditions and member cash-flow events collide.
“Two-pot allows the industry to think differently about retirement investing,” concludes Nair. “The goal is not only returns. It is also to design a journey that helps members stay invested, participate in growth and avoid being forced to carry the full cost of bad timing.”
Find out more
Old Mutual Corporate’s Smoothed Bonus solutions are designed to target above-inflation returns over the long term while reducing the volatility associated with long-term investing.
The Absolute Growth Portfolio has an aggressive investment mandate focused on growth assets, including local and global equities, alternatives and property, with returns distributed through smoothed bonuses.
Readers can learn more about Old Mutual Corporate’s Smoothed Bonus solutions and the Absolute Growth Portfolio here: www.oldmutual.co.za/retirementinvestments
Visit www.oldmutual.co.za/employeebenefits for more information on our full range of employee benefits.
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP and Life Insurer.
¹ These figures are illustrative, based on specific assumptions, and do not represent guaranteed outcomes. This is based on someone investing R10000 per month (increasing at 4.5% p.a.) since 1 April 2007 and exit is end-March 2020. Comparison is between AGP Smooth and AF Global LMW BIV median fund return. AGP Smooth: R3,951,936. AGP Stable: R3,818,957. AF Global LMW median fund return (typical balanced fund): R3,111,922. Calculations: R3,951,936 minus R3,111,922 equals R840,014, or about 27.0% above the typical balanced fund. R3,818,957 minus R3,111,922 equals R707,035, or about 22.7% above the typical balanced fund.
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