South Africa’s R100 billion retirement hit

South Africa’s retirement fund industry is expected to take a R100 billion hit from outflows when the country’s new two-pot retirement system comes into effect on 1 September. 

Despite this, the new system is expected to benefit savers and asset managers long-term by limiting early withdrawals. 

Earlier this year, President Ramaphosa signed the Pension Funds Amendment Bill into law that will require retirement funds, from 1 September, to be split into two components or ‘pots’. 

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. 

Individuals with an existing retirement fund will have a third pot, which will retain the value of their contributions and any growth prior to the implementation of the new system. 

The new system aims to balance preserving savings until retirement and give South Africans access to some of their savings in times of need. 

However, in the immediate term, both savers and asset managers are expected to take a significant hit, with the government potentially raising R5 billion in tax revenue from the withdrawals.  

AlexForbes estimates that the retirement fund industry will experience outflows of around 1% to 2% of all funds. FNB gave a similar estimate. 

With around R5 trillion being currently invested in retirement funds, this will translate into a total outflow of around R50 billion to R100 billion. 

This has led to some concerns from asset managers as to whether their systems will be able to handle the sheer volume of outflows and how it will impact their revenue and profitability. 

Old Mutual CEO Iain Williamson said that outflows on this scale would severely impact the financial performance of companies heavily exposed to this sector. 

“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. 

FNB Wealth and Investments CEO Bheki Mkhize does not share Williamson’s concerns as the bank’s modelling suggests the impact will be less severe than expected and drawn out over a longer period. 

Mkhize told Daily Investor at the launch of FNB’s Retirement Insights Survey that the reforms will be net-positive for South Africans and the asset management industry. 

FNB noted in its research around the two-pot system that many South Africans already cash out their pensions when moving jobs or resigning, severely impacting their outcomes in retirement. 

This also creates a headache for asset managers, as withdrawals are unpredictable and are often for the total value of the invested amount – not just a portion of the funds. 

Mkhize said the new system will not only limit the amount that will be withdrawn annually but also make it far more predictable and manageable for 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.” 

He pointed out that asset managers still have a lot of work to do in terms of educating their clients about the changes. 

Furthermore, asset managers are under immense pressure to ensure they adapt to the new system, with Mkhize saying FNB has had some challenges in this regard. 

In the long run, the system will benefit both savers and the industry, according to FNB’s modelling. More money will remain invested until maturity, and retirees will enjoy better outcomes following the end of their working careers.