South African retirement warning

A large portion of South Africans do not save enough to retire comfortably simply because they never earn sufficiently high wages. 

Other South Africans, who do earn decent salaries, do not put enough aside to retire on time or with enough money to stop working. 

This results in many having to work longer than they initially expected, rely on family for support, or turn to the state to boost their income in retirement. 

Old Mutual Wealth chief investment strategist Izak Odendaal explained that in South Africa, the burden to save for retirement is mostly placed on the individual. 

Over the last few decades, most local retirement funds have made the transition to defined contribution funds and as such the burden of adequate retirement provision falls largely on individuals. 

An exception is the Government Employee Pension Fund (GEPF), the largest in the country, which is a defined benefit fund. In other words, if it ever runs out of money, taxpayers will have to bail it out. 

Fortunately, despite a few governance wobbles at the state-owned asset manager, the PIC, the GEPF is more than fully funded with R2.3 trillion in assets.

To put it slightly differently, South Africans should worry about whether they are individually saving enough for retirement, rather than whether the country’s overall pension system is sustainable or poses a fiscal risk, Odendaal said.  

The country has a large, sophisticated and well-regulated financial system that is a key strength, though its reach is unevenly distributed. 

Most people don’t have enough retirement savings since they never earn enough, but many who do earn decent salaries don’t put enough aside.

Slight improvements have been made in recent years to improve the returns of retirement funds by enabling them to increase their exposure to foreign equities. 

Despite this, it is unlikely that membership of an occupational pension fund will provide sufficient income in retirement for most people. Therefore, other savings vehicles will remain important.

Odendaal’s advice for South Africans is simple – the best time to start saving is yesterday, and the right amount to save is more than you think.

Two-pot solution

The two-pot system promises to significantly increase the chances that many South Africans will retire comfortably in the future. 

It also promises to boost investment in South Africa by forcing a pool of savings to be held until retirement, which could bolster fixed-capital formation in the country. 

Odendaal explained that a big problem in the past was a lack of preserving retirement savings when people switched jobs. 

The two-pot system addresses this, as two-thirds of retirement savings must now be preserved, with one-third available to be withdrawn for emergency use. 

While most of the focus has been on the withdrawals, the compulsory preservation aspect of two-pot is a significant reform that should ultimately improve individuals’ retirement outcomes. 

Though unlikely in the short term, the next step is mandatory participation, where every full-time worker must contribute to a retirement fund.

Compulsory preservation also has the potential to increase the pool of capital available for investing in the local economy.

This will boost the country’s savings rate and the funds available for investment, enhancing economic growth over the long run. 

FNB senior economist Koketso Mano outlined this benefit at the bank’s launch of its 2025 Retirement Insights Survey earlier this year. 

Some economists have expressed concern about the billions of withdrawals, warning that they would undermine the country’s already-low savings rate and fixed capital formation. 

However, Mano explained that the system should translate into enhanced savings, which can be used to invest in productive areas of the economy.

While there will be billions of withdrawals every year, this should be outweighed by the increased amount locked in until maturity.

In particular, the increased retirement savings translate into more capital being available for investment in fixed-income projects, given the nature of retirement savings being locked in until maturity. 

This type of investment is crucial for faster economic growth in South Africa, which will lead to higher incomes and increased capital that can be saved or spent. 

As a result, the two-pot system has the potential to create a positive flywheel that will drive faster economic growth and better outcomes for households.