Two-pot retirement system in SA compared to other countries

South Africa’s two-pot retirement system was not the first in the world as the innovative system was implemented after considering global best practices in Chile, Singapore and Malaysia, as well as the US, UK and New Zealand.

There is comfort in knowing that we are not the first and that we are following a long tradition of similar systems, taking poignant learnings from each, Sanan Pillay, portfolio manager at Sanlam Investments Multi-Manager, says.

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Early access to retirement savings in Chile

Chile introduced multiple one-off withdrawal windows in response to the pandemic, allowing individuals to access up to 10% of their retirement savings in each window. People with smaller balances could withdraw even more.

Pillay says this approach led to 66% of eligible people making withdrawals during each window, with a third of them depleting their accounts entirely due to the higher limits for smaller balances. “The funds withdrawn were primarily used for consumption, emergency expenses and to repay debts.”

The forced sales of assets to meet withdrawal demands had several market repercussions, such as increasing interest rates and currency depreciation:

• The substantial withdrawals led to a flood of assets being sold, causing a significant drop in asset values across the board.
• Rising interest rates because of the reduction in available capital for purchasing government bonds resulted in higher yields as the government had to offer better rates to attract buyers.
• A steeper yield curve as the forced selling of bonds pushed yields higher, especially for longer-term bonds and reflecting increased future borrowing costs and reduced investor confidence.
• Reduced liquidity due to the sudden influx of assets for sale, coupled with fewer buyers. Sellers had to accept lower prices due to the reduced depth of the market.
• To stabilise the market, the Central Bank of Chile intervened by purchasing bonds, aiming to lower interest rates and manage the bond market volatility.
• Currency depreciation due to the decreased local funding capacity caused by the shrinking of the savings pool. The Chilean peso depreciated as investor confidence waned.
• Inflationary pressure due to increased consumer spending from the withdrawals as demand surged.
• A credit rating downgrade as the reduction in pension fund assets affected the government’s ability to manage its finances.

Pillay says the experience in Chile highlights several critical issues. “The repeated withdrawal windows created a sense of urgency among individuals, leading many to withdraw as much as possible out of fear that future opportunities might be limited.

“This was exacerbated by the economic crisis, which increased the demand for accessible funds. Consequently, members would have to contribute for an additional five to six years to restore their retirement savings to pre-withdrawal levels.”

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The lesson for SA from Chile

According to Pillay, South Africa learned from Chile’s experience and implemented a more structured approach. “The two-pot system is designed to prevent the problems associated with repeated large outflows by limiting withdrawals to once per year and focusing on a deeper, long-term solution.

“This system also seeks to balance mandatory contributions with the flexibility of early access, addressing current issues with resignation-based withdrawals. Research within Sanlam suggested that almost half of people who resign, choose to cash out their assets instead of preserving them.”

He says effective member counselling and financial advice will be crucial in helping people make informed decisions to avoid the negative outcomes seen in Chile.

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What SA can learn from dual accounts in the US, UK and New Zealand

In the US, early access provisions in the 401(k) system (workplace retirement plans) result in an estimated 40 cents flowing out for every dollar contributed into the system. Pillay says despite this significant outflow, the availability of early access is considered beneficial compared to a scenario with no access, where fewer people might participate in retirement savings.

“Additionally, allowing early access may prevent individuals from resorting to high-interest debt, offering a potentially less destructive financial alternative.”

Several countries, including the US, UK and New Zealand have either considered or piloted ‘dual account’ fund structures similar to South Africa’s new two-pot retirement system. These structures divide funds into two types of accounts: a liquid savings account and a less liquid retirement account.

Pillay says the rationale behind this approach is to ensure that retirement funds can maintain investments in less liquid assets, which often offer higher returns but are harder to sell quickly.

The lesson for SA from the US, UK and New Zealand

By having a separate, more liquid savings account, the system can manage regular withdrawals without forcing the entire portfolio into more liquid, potentially lower-return investments, Pillay says.

“This separation helps preserve overall portfolio performance and aligns with the goal of providing both immediate access to funds and long-term retirement savings.”

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Singapore’s and Malaysia’s ringfencing for specific needs

In Singapore and Malaysia, provident funds include separate sub-accounts ringfenced for specific needs such as housing and medical expenses. Pillay says these countries have struggled with the issue of people not saving enough for retirement, highlighting the difficulty of balancing immediate access with long-term savings.

“Singapore’s approach essentially forces people to save, which may be similar to the effect South Africa’s National Treasury is aiming for.”

The lesson for SA from Singapore and Malaysia

Allowing early access to retirement funds can reduce the amount saved for retirement and there is no perfect solution for ensuring adequate savings, Pillay says.

“However, permitting early withdrawals might encourage more people to join and stay in retirement savings schemes that they might otherwise avoid. The aim is to manage the negative effects of early access while still encouraging overall saving.”

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Poverty now versus poverty later

The core trade-off in implementing early access to retirement funds involves balancing immediate financial relief against long-term retirement security, Pillay says. “This trade-off is particularly significant in South Africa, where the need for emergency liquidity can conflict with the goal of ensuring adequate retirement savings.

“The effectiveness of early access provisions largely depends on a country’s overall social support and safety-net environment.”

He points out that countries with robust social security systems for the elderly can afford more liberal early access rules, as these systems provide a safety net for retirees. “Conversely, in regions like many African countries, where formal financial systems are less prevalent, early access to retirement funds can offer crucial emergency liquidity.”

Therefore, he says, the design of early access systems must be carefully aligned with the broader financial and social security context of the country. South Africa’s National Treasury appears to have taken these factors into account in its approach to balancing immediate needs with long-term savings goals.

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Other key learnings

Pillay says other key learnings include that the first year of implementing a two-pot retirement system might be challenging, but it is expected to yield long-term benefits by encouraging more people to opt into and remain in the retirement system and increasing overall assets in the industry.

He also points out that South Africa is in a high inflation, high-interest cycle which has many people feeling financially stretched. “Withdrawals at inopportune times in the market can have a negative, long-term impact on people’s savings as they struggle to make up their losses and retire later in comfort.

“There is a major opportunity cost to consider when making any withdrawal, which can compromise people’s retirement later. Time in the market is critical for compounding returns. No one knows for sure how the two-pot retirement system will play out, but the structured system in place should go some way to mitigating against major market risks.”