What the two-pot system means for South Africa

While largely lauded as a progressive regulatory reform that will benefit savers and the broader financial services sector in the long term, the two-pot retirement system that comes into effect in September 2024 will have far-reaching implications.

Under the system, one-third of monthly contributions to a retirement fund will go into a savings pot, which investors can withdraw at any time, with a minimum of R2000. Two-thirds will go to a retirement pot, which investors cannot access until retirement. Any contributions up to 31 August 2024 become the vested component.

To better understand the potential implications, research conducted by Investec draws on early pension withdrawal regulatory amendments implemented in Australia, Chile and Peru, offering instructive insights and potential lessons related to the macroeconomic implications of pension fund withdrawals on capital markets.

Australia allowed retirement fund withdrawals in a means-tested manner that were subject to taxes, unlike Chile and Peru. The inadequate design of pension fund withdrawals in Chile and Peru led to notable asset withdrawals and hurt the liquidity and depth of domestic capital markets.

Differing consumer responses

In Australia, 1% of private retirement savings assets, or 2% of gross domestic product (GDP) was withdrawn in 2020. Nearly half of those eligible withdrew in the first 10 days and three-quarters who had funds remaining after the first round withdrew again.

Australian households used part (50%) of pension fund withdrawals to repay loans. The spending response post the loan repayment was very sharp, with 90% spend occurring within the first four weeks.  The majority (60%) of discernible spending was on non-durable products, as blue-collar workers and those with slightly lower wages withdrew more. Early pension withdrawals in Australia generated roughly 0.8% of GDP in direct spending within four months.

After Chile approved early pension withdrawal in 2020, consumers drew on 23% of the total assets held in 2020, which equates to roughly 20% of the country's GDP that year.

Chilean households used part of the pension withdrawals to repay loans. Credit card past due loans decreased below pre-pandemic levels, while non-performing loan rates (NPLs) for banks in Chile reached historic lows. Consumers also replenished cash deposits, which increased significantly between Q1 2020 and Q3 2021.

However, Chilean pension funds were negatively impacted after they were forced to liquidate assets to meet the withdrawal demands, which reduced their domestic exposure to long-term domestic government and corporate bonds, and bank stocks.

While this increased financing cost for government and corporates, IMF data showed no clear evidence of negative performance among Chilean banking stocks relative to the local aggregate stock market index, largely due to the increased deposits.

Similar to Chile, Peru also saw significant early withdrawals from pension funds as a percentage of total pension funds assets under management given the inadequate design of pension withdrawals.

Potential SA implications

Investec believes that trends in South Africa will more closely mirror those seen in Australia. Pension entitlements among South African households expressed as a share of nominal GDP is one of the largest across emerging markets, averaging 120% between 2018 and 2022.

Research suggests South African consumers will use capital from the two-pot system to reduce debt and fund living expenses.

For instance, the Sanlam Benchmark survey found that South African retirement fund members who withdrew benefits recently used the amount to reduce short-term debt (51%) and fund living expenses (33%).

Worryingly, the survey highlighted that only half of the members surveyed indicated they were aware of the tax implications, which suggests initial withdrawals may surprise on the upside.

While impacting retirement savings, Investec research indicates potential economic benefits. If consumers access R100 billion or more in early pension withdrawals, the resultant spending and savings could boost real GDP in the country by more than 0.5% in 2025 and add R20 billion in extra tax revenue.

As awareness levels regarding the tax implications and consumers gain a better understanding of the importance of increasing their retirement contribution over time, Investec believes pension fund withdrawals may diminish in subsequent years.

Investec Bank Limited registration number 1969/004763/06, an Authorised Financial Services Provider (11750), a Registered Credit Provider (NCRCP 9), an authorised Over the Counter Derivatives Provider and a member of the JSE. Investec is committed to the Code of Banking Practice as regulated by the National Financial Ombud Scheme. Copies of the Code and the Ombudsman's details are available on request or Investec COBP.