The two-pot pension system will go live in SA on September 1. Under the new regulations, a portion of one’s pension will become accessible on an annual basis without the need for resignation or retirement.
On the implementation date, pension contributions will be split with a third going into a savings pot, which is the pot that allows annual access, and two-thirds into another pot making it inaccessible until retirement. A third pot, which is the vested pot, will be created where any accrued pension savings will be transferred — with the existing scheme rules applying even after the two-pot system goes live.
Though much of the focus has been on the accessible pot, the rationale for the change is better explained from the perspective of the inaccessible pot. Under the present system, about 700,000 withdrawal options are exercised each year, with pension benefits paid out by pension funds exceeding contributions by as much as R80bn a year — the bulk of which come from withdrawals. As a result, the average tenure for retirement funds is about eight years, with more than 60% of member funds being under R50,000 in value, limiting the beneficial effects of long-term compounding on member funds.
The regulation is meant to limit the cashing-out problem and encourage long-term savings and investment. This is done through the inaccessible pot, which members will not be able to access even if they quit their jobs. Furthermore, upon retirement, this pot will be limited to purchasing retirement annuity-related products. While making the rules tighter on the inaccessible pot, there is also a recognition of the need for emergency access to retirement funds, without triggering resignation, hence the savings pot.
With much buzz about the prospects of accessing a proportion of our pension funds, there are some economic implications. There is the prospect of reduced consumer debt to disposable income, which is expected to lift consumer spending propensities, particularly for distressed households. This is expected to have a positive effect on economic growth, as a portion of our pensions will be spent earlier than they normally would have been. Long term, however, the future negative effects of lower cash-out amounts from resignations and retirements will eventually cancel out this positive effect.
The largest positive from the new system is sustainable consumer spending in the long term from higher preserved pension funds from the inaccessible pot. This will, however, take a significantly long period of time to materialise as these accrue.
From an individual perspective, the largest single liability that most of us has remains retirement: the prospect that we will one day have to continue to fund our lifestyles without the ability to actively earn an income. Furthermore, medical advancements have meant that people are expected to live longer, implying that this lifestyle will have to be funded for a longer period of time.
From an investment strategy perspective, for most young members of pension funds, all three pots — the vested, inaccessible and savings pot — remain with a long-term investment objective of growing in real terms. We therefore advocate for sufficient allocation to growth assets such as equities and property, which will provide the bulk of above inflation returns in the long term at the cost of short-term market volatility. We separate the issues of accessibility and investment objective, which allows us to design investment strategies that will achieve the desired outcomes.
With that in mind, it is essential for individuals to avoid the temptation to unnecessarily tap into their pension funds, and when they do, they should seek the consultation of a financial adviser, wealth manager or investment professional. Though there is no option to opt in or out of the two-pot system, individuals who choose not to exercise any of their annual allowable withdrawals from their savings pot should be unaffected by the new system.
In the near term, we also look forward to the prospect of interest rate cuts as inflation, and inflation expectations have been cooling to close to the SA Reserve Bank’s monetary policy committee midpoint target of 4.5%. This should, hopefully, provide much-needed relief to SA consumers.
• Smith is chief investment officer at Absa Investments.
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