What the new two-pot pension system means for interest rates in South Africa
South Africa’s new two-pot retirement system has rolled out, and questions remain about what it will mean for interest rates in 2025 and 2026 – with experts anticipating withdrawals to impact inflation.
The new system will divide retirement savings into two pots: a “savings” pot and a “retirement” pot.
The savings pot will be one-third of retirement savings from Sunday, 1 September and be accessible before retirement.
The retirement pot will maintain two-thirds of retirement savings and only be accessible at retirement.
A third “vested” pot holds the retirement savings until 31 August, minus a maximum of R30,000 used as seed capital in the savings pot, and follows existing legislation.
The system is designed to ensure that South Africans can access some of their retirement savings in an emergency while allowing most funds to grow for retirement.
At a media luncheon last week, newly appointed South African Reserve Bank Deputy Governor Mampho Modise told reporters that the two-pot system could add 0.2% of GDP if the money goes into consumption rather than debt repayments.
The SARB said that the withdrawal impact will be sharp in 2025 and 2026, but it will die down as the ability to access funds will be limited to one yearly withdrawal.
Using data from the SARB, Sanisha Packirisamy, chief economist at Momentum Investments Group, broke down the likely scenarios for the two-pot retirement system.
The retirement reform is not expected to have an inflationary impact in 2024 under its moderate withdrawal (deemed more likely) and high withdrawal scenarios. As stated above, the reform is expected to have a minor inflationary effect in 2025 and 2026.
The SARB’s core model showed that this could result in higher interest rates of 20 basis points in 2025 and 40 basis points in 2026 under the moderate withdrawal scenario.
In the higher withdrawal scenario, interest rate increases of 60 basis points in 2025 and 90 basis points in 2026 are expected.
“The larger interest rate increases in the high withdrawal scenario are also influenced by the projected bigger knock on the currency,” said Packirisamy.
Citi, however, believes that the reform will not lead to interest rate hikes.
The expected improvement in the government debt ratio would, it is said, result in a lower risk premium, which is not included in the SARB’s core model but is featured in the Quarterly Projection Model (QPM), which guides monetary policy decisions.
“We caution that the actual inflationary impact will also depend on how consumers split the funds between debt reduction and consumption,” added Packirisamy.
The SARB is widely expected to cut the repo rate from its 15-year high of 8.25% in September due to an improved inflation outlook and rand strength.
The US Federal Reserve is also expected to cut interest rates in September amid lowering US inflation and weak job numbers. This will allow the SARB to cut interest rates without reducing the interest rate differential between the two nations.
Stock movements
The two-pot system is expected to have seen roughly R40 billion leave pension assets.
Although this is a prominent figure, it is less than typically lost in early access every year.
Chantal Marx, Head of Investment Research at FNB Wealth and Investments, said that the two-pot system could benefit retailers and banks.
“The introduction of the two-pot system, together with possible interest rate cuts, decent momentum in wages, and lower inflation, could boost consumer confidence and drive an increase in spending in the months ahead,” said Marx.
“This is expected to be positive for domestic retailers, particularly discretionary names (clothing and furniture mainly).”
“There could also be some benefit accruing to the banks, as savers may utilise their withdrawals to pay down debt, which could improve asset quality and free up capital to drive higher quality loan origination as well as higher transaction activity.”
She also noted that most of the larger discretionary retailers listed on the JSE are trading below their two- and five-year average PE ratings.
That said, delving into history and looking at growth rates alters the picture.
“All these retailers, bar TFG, are trading below their ten-year average forward PEs, and all these names are trading a long way off the upper end of their fair value range as expressed by the standard deviation. Growth still looks very solid over the next three years for TFG, Pep and Mr Price,” said Marx.
“With the above tailwinds in mind, including the two-pot windfall, there is still opportunity in these names, even more so in the event of any short-term weakness.”
That said, the withdrawal money must still come from somewhere, with capital expected to flow out of domestic bonds and cash. With the size of these holdings, however, the flow impact is expected to be quite small.
“The introduction of the two-pot system may result in slight short-term pressure for asset managers, money managers, and insurers, but the long-term flow impact is still expected to be net positive,” said Marx.
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