The two-pot retirement system is here – and it could pay off for South Africa in a big way

The new two-pot retirement system launches this week on Sunday, 1 September 2024, and it could significantly boost retirement outcomes in South Africa.

The new system will have a savings pot, which will hold one-third of all retirement savings from the implementation date and be accessible before retirement.

A second retirement pot will hold two-thirds of retirement savings and only be accessible upon retirement.

A third vested pot will hold all the retirement funds until 31 August 2024, except R30,000 used as seed capital in the savings pot, and will follow existing legislation.

Although many financial institutions have warned about the possible dangers of withdrawing early, Old Mutual Chief Investment Strategist Izak Odendaal said compulsory preservation will have the most critical impact over time.

“At an individual level, people should end up with substantially higher retirement benefits, all else being equal,” said Odendaal.

“Modelling by Old Mutual actuaries suggests that the average retirement benefit of pension fund members could rise from the current two to three times of final salary, to up to nine times of final salary, even with the full savings pot being accessed.”

Domestic savings areas are also a more stable source of funding for fixed investment, which is crucial for economic growth.

“If there is one thing that economists agree on, it is that countries that enjoy long periods of rapid economic growth are countries with high investment rates,” said Odendaal.

“At 15% of GDP, South African investment levels are around half of where they should ideally be. The
blame does not primarily lie with a lack of domestic savings, but rather with political and policy uncertainty, institutional bottlenecks and depressed business confidence.”

“But if investment spending was to pick up as some of these challenges are addressed, a shortfall of domestic savings means the current account will start widening again, exposing the country to sudden swings in capital flows. A growing retirement system can ease this constraint over time.”

Consumer and government boost

As the withdrawals from the two-pot system will be taxed, the government is also expected to see an influx of tax revenue.

The two-pot withdrawals resulted in an additional R5 billion in tax revenue for the February budget.

Consumers will also have more money to spend, with many expected to settle the debt.

With lower inflation (4.6% in July, a three-year low) and interest rate cuts expected in 2024 and 2025, the medium-term outlook for consumer spending has improved.

Although some investments will be sold to payout withdrawals, they will likely be staggered over a few weeks or even months as many pension fund administrators cannot simultaneously handle the expected volume of requests.

A SARS directive must also be issued each instance, potentially delaying payouts.

Pension funds also hold cash that will act as the first buffer as withdrawal requests come in.

“Most importantly, however, is simply that the JSE is a large and liquid equity market with an average daily equity turnover of around R20 billion. The average daily turnover on the local bond market is several times larger,” said Odendaal.

“As for global markets, these will not even notice if there is large selling by South Africans.”

“At any rate, market participants do not seem spooked by the prospect of two-pot withdrawals, as the FTSE/JSE All Share Index hit a new record close above 84 000 during the week.”

Investors are optimistic about a soft landing in the US. The US Fed will start cutting interest rates in September, with the South African Reserve Bank (SARB) right behind it.

There is also growing optimism that South Africa is entering a phase of faster economic growth and less political noise.

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