Two-pot retirement system: impact on investors, markets and SA economy

When the two-pot retirement system is implemented from Sunday, it will have a wide-ranging impact on investors, markets and the South African economy.

Government will get more money through taxing your payout, while you will have more money to spend.

Could the selling of some investments to realise the cash payouts disrupt the local financial markets?

Izak Odendaal, chief investment strategist at Old Mutual, says the most important thing to remember is just because you can, does not mean you should.

“It cannot be stressed enough that you must avoid early withdrawals from your retirement funds unless it is absolutely necessary. The biggest friend any investor has is time, since time facilitates compound growth. Early withdrawals from a retirement fund robs that money of the time to grow.”

He points out that even at a relatively modest growth rate of 4% per year, R30 000 will more than double to R65 733 over 20 years. At a 6% annual growth rate, it will more than triple to R96 214 and at 10%, will grow to R201 825.

“Therefore, taking R30 000 out of your retirement savings today does not mean that your future self will be R30 000 poorer. It means in future you will be poorer by R65 000 or R96 000 or R200 000 two decades from now. It gets worse, since early withdrawals will be taxed at your marginal rate, whereas growth inside a retirement fund is tax-free.”

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Impact when members withdraw between R50 billion and R100 billion

Estimates from government and various financial institutions suggest that pension fund members will withdraw somewhere between R50 billion and R100 billion in the first month or two under the two-pot retirement system. Odendaal says this will largely be a one-off event, as future withdrawals will be based on one third of new contributions from September onwards and will therefore be spread out over time.

Odendaal says the two-pot retirement system will have three immediate impacts:

• Firstly, since these withdrawals will be taxed, government’s coffers will swell. In the February Budget an additional R5 billion in tax revenue was pencilled in for tax from two-pot withdrawals.
• Secondly, consumers will have more money to spend. They will probably use a portion of withdrawals to settle debt, but they will spend the rest since it is unlikely that people will withdraw savings only to save it again. Combined with lower inflation and coming rate cuts, the medium-term outlook for consumer spending has therefore improved.
• Thirdly, pension funds will have to sell some investments to realise the cash payouts. Could it have a disruptive impact on local financial markets? Odendaal says probably not. “The withdrawals will most likely be staggered over a few weeks or even months since not all pension fund administrators will be able to handle the expected volume of requests at the same pace.” A Sars directive must also be issued, which might delay payouts somewhat.

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Will pension funds have enough cash?

In addition, Odendaal says, pension funds already hold cash that will act as a first buffer as the withdrawal requests come in. According to the Alexander Forbes Large Manager Watch, cash holdings in the country’s largest balanced funds, a proxy for the broader pension industry, was 2.7% at the end of June.

“This is a relatively low percentage by historic standards, but if applied to the R4 trillion-plus pension industry, should be enough to cover expected withdrawals. Most importantly, however, is simply the fact that the JSE is a large and liquid equity market with an average daily equity turnover of around R20 billion. The average daily turnover on the local bond market is several times larger. As for global markets, these will not even notice if there is large selling by South Africans.”

At any rate, he says, market participants do not seem spooked by the prospect of two-pot retirement system withdrawals, as the FTSE/JSE All Share Index hit a new record close above 84 000 during the week.

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Biggest benefit of two-pot retirement system compulsory preservation of retirement savings

While most of the media attention on the two-pot retirement system has been on the ability to access the savings pot, Odendaal says the more important impact over time will come from compulsory preservation.

“At an individual level, people should end up with substantially higher retirement benefits all else being equal. Modelling by Old Mutual actuaries suggests that the average retirement benefit of pension fund members could increase from the current two to three times of final salary, to up to nine times of final salary, even with the full savings pot accessed.”

Although the two-pot retirement system reforms took several years to come to fruition, the timing is right, he says. “South Africa has a young population that will be moving into its peak earning and contribution years over the next decade or two. Meanwhile, the share of older people who will draw down from the retirement system is small.

“More money in, less money out means a growing pool of savings. The big challenge in South Africa is high unemployment, particularly youth unemployment. People cannot save for retirement if they do not work.”

Nonetheless, South Africa has a better demographic profile than many richer countries in the Northern Hemisphere, with smaller cohorts of younger workers that must support an ever-growing number of retirees, he points out.