Two-pot retirement system: implications for equities and investors

The two-pot retirement system that comes into effect on Sunday will not only give pension fund members the opportunity to withdraw funds from their savings pots, but it will also have implications for equities and investors.

“The introduction of the two-pot retirement system, together with possible interest rate cuts, decent momentum in wages and lower inflation could boost consumer confidence and drive an increase in spending in the months ahead,” Chantal Marx, head of investment research at First National Bank (FNB) Wealth and Investments, says.

This is expected to be positive for domestic retailers, particularly those selling clothing and furniture, she says. “There could also be some benefit accruing to the banks, as savers may use their withdrawals under the two-pot retirement system to pay down debt, which could improve asset quality and free up capital to drive higher quality loan origination as well as higher transaction activity.”

From Sunday, South Africans will be able to withdraw money from the savings pot component of their pension savings, but Marx warns that, given the landscape, this will also have implications for equities and investors in South Africa.

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Pension fund members will be able to withdraw up to R30 000 under two-pot retirement system

With the two-pot retirement system, one-third of your future monthly retirement contributions will go into a savings pot that you can access once every tax year and two-thirds will go into an investment pot, which will only be accessible upon retirement.

“On 1 September, 10% of the market value of your retirement savings on 31 August 2024, subject to a maximum of R30 000, will be transferred to your savings pot through a once-off process called seeding. This will be accessible on the implementation date.

Marx says the idea behind this retirement reform is to discourage pension fund members from early pension withdrawal by resigning or voluntary retrenchment, by allowing pension fund savers access to a smaller pool of funds for emergency use. This is expected to also have a longer-term positive impact on net capital flows from South Africa’s pension savings pool.”

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Pension fund members expected to withdraw about R40 billion

It is estimated that about R40 billion will be withdrawn from pension assets when the two-pot retirement system comes into effect, she says.

“While this is a chunky figure, it is less than what is typically lost in early access every year, although this is anticipated to still be a factor but to a much smaller extent.”

She says from a personal finance perspective, FNB would advocate for keeping “your fingers out of the pot”, but as an investor, there are ways to benefit from others choosing not to do so.

“Among the larger discretionary retailers listed on the JSE, most are trading above their two- and five-year average price-to-earnings ratio (PE) ratings. However, delving into history and looking at growth rates changes the picture somewhat.

“All these retailers, except TFG, are trading below their ten-year average forward PEs and all these names are trading a long way off the upper end of their fair value range as expressed by the standard deviation.

“Growth still looks very solid over the next three years for TFG, PPH and MRP. With the above tailwinds in mind, including the two-pot windfall, there is still opportunity in these names, even more so in the event of any short-term weakness.”

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Investors will benefit from two-pot retirement system, but where does the money come from?

However, Marx says there is a flipside too. “The money must come from somewhere. It is expected that it will flow out of domestic bonds and cash but given the size of these holdings in absolute terms, the flow impact is expected to be quite small.

“The introduction of the two-pot system may result in slight short-term pressure for asset managers, money managers, and insurers, but the long-term flow impact is still expected to be net positive.”