Two-pot system threatens R3.72 trillion industry 

South Africa’s private retirement industry, which manages around R3.27 trillion in assets, faces significant risks in the implementation of the new two-pot retirement system due to its tight deadline and potential mass withdrawals from funds. 

At the end of March, Parliament passed the Pension Funds Amendment Bill that will, from 1 September, require that funds be divided into three components or “pots”, split between savings, retirement and a vested portion.

Commonly referred to as the ‘two-pot system’, the new rules applicable to retirement funds are proposed to launch 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 retirement. 

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

However, before the system can be implemented, major changes to legislation have to be made, signed into law, and then regulations outlined by the Financial Sector Conduct Authority (FSCA). 

Ninety One, South Africa’s largest asset manager, outlined the milestones that need to be met before the system can be implemented on 1 September. 

In order for the above changes to be implemented and for members to have access to funds in their Savings component:

• The final legislation must be promulgated
• The fund’s administrator has to finalise the necessary system changes 
• The FSCA will need to approve the retirement fund’s rule amendments
• SARS will have to be ready to process the tax directive applications required for withdrawals from the Savings components.

It is unlikely that this will all be done by the 1 September deadline, particularly considering the country’s national election in May, which may result in a new government coming into power. 

A major risk with this tight deadline is that the implementation of the system is rushed, increasing the chances of delays, errors, and a lack of understanding from savers about the changes to the system. 

Product development actuary at Coronation Rael Bloom said this may result in discontent among retirees and undermine confidence in the retirement industry. 

However, the most significant risk lies in the rapid flood of money out of the system once South Africans are allowed to withdraw from their “savings pot”.

To highlight the risks of creating an expectation for recurring lump sum withdrawals, Bloom outlined what happened in the Chilean retirement market during the Covid-19 pandemic. 

Prior to the pandemic, Chile’s pension system was generally well-regarded. However, the retirement system was decimated following a series of Covid-19-related withdrawals, with over $50 billion flowing out of the system.

In contrast, Australia also allowed emergency withdrawals from Superannuation funds during Covid, but only under very specific and limited means-tested conditions. 

This protected the integrity of the Australian system, allowing it to recover once the immediate needs of the pandemic had passed.

Old Mutual CEO Iain Williamson also warned of significant outflows and the potential impact on the retirement fund industry. 

Williamson said implementing this system will inevitably result in material outflows from retirement funds in the short term. 

“We expect to see material outflows from the effective date for a few months and then a gradual slow down to a steady state,” he said. 

This has the potential to significantly impact the earnings of asset managers who are heavily exposed to retirement products. 

Williamson added that he thinks the reforms will be positive for the industry in the long run as it will encourage South Africans to leave most of their savings invested for retirement. 

He also predicted that the two-pot system is unlikely to be implemented by the 1 September date given by the National Treasury as Parliament still needs to pass legislation to enable it to be created. 

This is unlikely to be done before September due to the national election at the end of May, following which a new political administration may be in place.