South Africa will have a new two-pot retirement system by September this year, but there are several risks facing members and the industry.

As the name suggests, the two-pot retirement system will have two pots – savings and retirement savings.

The savings pot will hold a maximum of one-third of all retirement savings and will be accessible prior to retirement.

The retirement pot will hold a minimum of two-thirds of all retirement savings and will only be accessible at retirement.

A third vested pot will also be present and hold all retirement savings from before the system is introduced whilst also following all current regulations.

The system is intended to ensure that South Africans can access short-term savings as a financial safety net, with the Covid-19 pandemic showing that there are times when immediate access to finances is more important than the need to save for retirement.

Although Rael Bloom from Coronation said that the system should result in better retirement outcomes for members in the longer term, he highlighted three potential problems in the new system.

Execution risk

Bloom said that the two-pot system is the most significant reform in the history of the South African retirement system, and the aggressive timeline could lead to severe errors and a lack of member understanding of the potential benefits of the new system.

Although the system has now been delayed to 1 September 2024 from the initial 1 March 2024, the deadline is still tight.

“In order to ensure a smooth transition to the new system, clear and effective communication with members about the upcoming changes is vital, alongside operational changes that are required for industry stakeholders to be able to deliver on their respective obligations under the new system,” Bloom said.

Seed concerns

He also warned that members may be unhappy with the initial seed capital lump sum when the new system was introduced.

There has been a push for the initial lump sum to be made to members at the system’s inception, with advocates stating that members need to access these funds amidst the country’s financial hardships.

The amount of seed capital will be set at 10% of a member’s retirement balance and be subject to a maximum of R30,000.

However, the actual amount that members will receive will be lower than this when taxes and administration costs are considered.

“There is a risk that some members may not have a full understanding of the actual amount that they will receive when their seed capital is paid out,” Bloom said.

Moreover, members may expect to receive their funds on 1 September 2024, but there are risks that it may take longer for stakeholders to have the necessary processes in place so that funds can make these payments to all their members.

“In the current system, most funds only need to make payments to a small percentage of their member base for life events such as retirement or resignation. In contrast, all members of retirement funds will be entitled to a seed capital withdrawal at inception, putting a huge administrative burden on funds, their administrators and other industry stakeholders such as SARS and the FSCA,” Bloom said.

“This risk of the seed capital payouts not meeting member expectations is compounded by the significant financial difficulties faced by many South Africans, coupled with the fact that funds have limited time to educate members about the new system.”

Sustainability

There is also a major risk to the whole point of pensions, as the initial seed capital lump sums may create expectations that endanger the long-term sustainability of funds.

“It is critical to the long-term sustainability of the retirement system that this initial seed payment is only allowed once, and that additional lump sum withdrawals from members’ retirement pots and vested pots are not allowed.”

“After the seeding has taken place, the only amounts that should be accessible to members should be the balances available in their savings pots.”

The danger created by the expectation of recurring lump sum withdrawals was highlighted in the Chilean retirement market during Covid-19, where the previously well-regarded system was decimated after $50 billion flowed out of the system.

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