Two-pot pension system ‘will boost people’s retirement savings’

Having submitted its reaction to National Treasury on the latter’s proposed two-pot pension savings proposal, the financial services industry was given little further clarity on the issue in Finance Minister Enoch Godongwana’s Budget last month save that it was under consideration.

LAST year, partly as a result of South Africans suffering financially during the economic downturn brought on by the Covid-19 pandemic, National Treasury proposed changing the current retirement savings system to a “two-pot” system, to allow people to access up to a third of their retirement funds in an emergency

The proposal, where you would be able to access contributions from one pot, with contributions to the other pot not accessible until your retirement, is part of government’s broader retirement reforms aimed at encouraging employees to adequately save for retirement.

“If the two-pot system is implemented properly, it will provide a feasible and accountable solution to address the immediate needs of many retirement fund members,” says Gontse Tsatsi, head of retail client management at Old Mutual Investment Group. However, he warns that the system should now be seen as a silver bullet for emergency savings.

“Investors must continue to invest for a rainy day which could occur in the short or medium-term, independent of their retirement savings.

They should not use their retirement savings as a form of emergency savings. Saving for emergencies is as critical to a financial plan as investing and planning for future financial goals,” says Tsatsi, adding that the key to reaching your long-term financial goals is to ensure that the occasional crisis does not derail your plans. According to the annual 2021 Old Mutual Savings and Investment Monitor, 34% of South Africans do not have enough savings to last more than a month were they to lose their income or jobs, while 37% said building up an emergency savings pot was a key priority.

'PRACTICABLE AND RESPONSIBLE’

When the two-pot system was first proposed last year, Vickie Lange, Head: Research, Best Practice and Academy, Alexander Forbes, and John Anderson, Executive: Investments, Products and Enablement, at Alexander Forbes voiced their support for it, with modelling to back it up.

“Alexander Forbes is in support of the ’two-pot’ system, as it will make a positive impact on people’s lives by providing a practicable and responsible solution to the real needs faced by members. The lack of preservation is the critical driver of poor financial outcomes at retirement,” Lange and Anderson said.

According to the Alexander Forbes Member Insights for 2021, only 9% of members preserve their retirement savings when changing jobs. This in turn leads to very poor retirement outcomes as the average replacement ratio is only 31%.

This means that for every R1,000 earned by a member before retirement they will only replace R310 of income in their retirement. “For this reason, the proposed reforms are necessary to ensure balancing members long-term retirement savings goals and to meet short-term financial needs,” Lange and Anderson said.

They said their modelling demonstrated that the two-pot system will result in a new member accumulating more than double their fund value at retirement, as compared to the current system, while providing access to a portion of their savings annually.

“We anticipate that the proposed two-pot system will place further emphasis on the need for retirement funds to better connect with members to provide information, education and advice at critical stages in their lives to optimise both their short- and long-term financial outcomes.

“The additional complexities of administering the system including the provision of modernised member engagement services to enable such connections requires substantial scale from retirement fund administrators to ensure that members receive value for money.

“Ultimately, the “system provides the opportunity for employers and funds to re-imagine their benefits and investment strategies to impact people’s lives by finding a meaningful balance between short and long-term needs,” Lange and Anderson said. | Supplied