Two-pot retirement system: what will it mean for South Africa’s economy?

On Sunday 1 September, the two-pot retirement system will be implemented.  Will it give the economy a boost and help South Africans to preserve their retirement savings or will it lead to notable withdrawals that can hurt the liquidity and depth of local capital markets?

Ayan Ghosh, head of Cross-Asset Investment Strategy at Investec, says while the two-pot retirement system is largely lauded as a progressive regulatory reform that will benefit savers and the broader financial services sector in the long term, it will have far-reaching implications.

“Pension entitlements among South African households expressed as a share of nominal gross domestic product (GDP) is one of the largest across emerging markets, averaging 120% between 2018 and 2022. Research suggests South African consumers will use capital from the two-pot retirement system to reduce debt and fund living expenses.”

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Why South Africans want the money

For instance, the Sanlam Benchmark survey found that South African retirement fund members who withdrew benefits recently used the money to reduce short-term debt (51%) and fund living expenses (33%).

Ghosh points out that it is concerning that the survey highlighted that only half of the members surveyed indicated they were aware of the tax implications, which suggests initial withdrawals may surprise the upside.

“While affecting retirement savings, Investec research indicates potential economic benefits. If consumers access R100 billion or more in early pension withdrawals, the resultant spending and savings could boost real GDP in the country by more than 0.5% in 2025 and add R20 billion in extra tax revenue.”

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What happened with similar systems in other countries

Investec did some research on early pension withdrawal regulatory amendments implemented in Australia, Chile and Peru to better understand the potential implications and found instructive insights and potential lessons about the macroeconomic implications of pension fund withdrawals on capital markets.

“Australia allowed retirement fund withdrawals in a means-tested manner that were subject to taxes, unlike Chile and Peru. The inadequate design of pension fund withdrawals in Chile and Peru led to notable asset withdrawals and hurt the liquidity and depth of domestic capital markets.”

There were differing consumer responses in these three countries, he says.

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Australia: 0.8% of GDP in direct spending within four months

In Australia, people withdrew 1% of private retirement savings assets, or 2% of gross domestic product (GDP), in 2020. Nearly half of people who were eligible for withdrawals withdrew their money in the first ten days and three-quarters of those who had funds remaining after the first round withdrew again.

Australian households used a part of their pension fund withdrawals, 50%, to repay loans. The spending response after the loan repayment was very sharp, with 90% of spending occurring within the first four weeks. 

The majority (60%) of discernible spending was on non-durable products, as blue-collar workers and those with slightly lower wages withdrew more. Early pension withdrawals in Australia generated roughly 0.8% of GDP in direct spending within four months.

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Chile and Peru: significant withdrawals and increased deposits

After Chile approved early pension withdrawals in 2020, consumers drew on 23% of the total assets held in 2020, which equates to roughly 20% of the country’s GDP that year.

Chilean households also used part of the pension withdrawals to repay loans. As a result, credit card past due loans decreased below pre-pandemic levels, while non-performing loan rates for banks in Chile reached historic lows. Consumers also replenished cash deposits, which increased significantly between the first quarter of 2020 and the third quarter of 2021.

However, Ghosh points out, Chilean pension funds were negatively affected after they were forced to liquidate assets to meet the withdrawal demands, which reduced their domestic exposure to long-term domestic government and corporate bonds and bank stocks.

“While this increased financing cost for government and corporates, IMF data showed no clear evidence of negative performance among Chilean banking stocks relative to the local aggregate stock market index, largely due to the increased deposits.”

In the same way as Chile, Peru also saw significant early withdrawals from pension funds as a percentage of total pension fund assets under management due to the inadequate design of pension withdrawals.

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Where will South Africa go with the two-pot retirement system?

Ghosh says Investec believes that trends in South Africa will more closely mirror those seen in Australia. “As awareness levels regarding the tax implications improve and consumers gain a better understanding of the importance of increasing their retirement contribution over time, Investec believes pension fund withdrawals may diminish in subsequent years.”