What the new “Two-Pot” system means for your Retirement Fund Savings – Update to April 2024

National Treasury has released draft legislation implementing the much-awaited 2-Pot System. In this article, we highlight the essential aspects of the reform.

 What is the Two-Pot System? 

National Treasury has proposed the Two-Pot Retirement system.

Under this System, you may save up to one-third of your retirement contributions in a "Savings Pot" that you can access over a 12-month cycle. 

The remaining two-thirds of your contribution will be allocated to your "Retirement Pot", which is only accessible at retirement. 

The implementation date of this proposal has been postponed to 1 September 2024. 

Contributions to the "Savings Pot" will only occur from the implementation date of 1 September 2024. 

After much consideration, there is a once-off transfer from the "Retirement Pot" to the "Savings Pot". The once-off transfer will be 10% of the accumulated retirement savings prior to 1 September 2024, capped at R30 000 per member. This amount will be accessible for withdrawal on 1 September 2024.

Thereafter withdrawals from your savings pot are subject to a minimum drawdown of R2000 per 12 Month Savings Cycle and will be taxed as income.

The retirement fund industry will need to prepare and create liquidity for the immediate drawdown. Noting the Chilean experience (see below) as well as general indebtedness, most retirement fund savers will access the amount that will be available immediately. Careful planning and management will be required to avoid a liquidity event.

I have written an article on how access to accumulated Retirement Savings can negatively affect the currency, interest rates, and the investment market. 

This is highlighted by the recent experience in Chile, where early access to retirement savings was allowed during the COVID pandemic.

See the link to my article here: 

What is the implementation date of the 2-Pot System

The draft implementation date of this proposal is 1 September 2024.

How is the 2-Pot System different to the current System? 

Currently Retirement Fund members cannot access their retirement savings while working for their employer. Only upon withdrawal, including retrenchment, your entire retirement savings is accessible, leading to low preservation rates and poor retirement outcomes.  

Why has the 2-Pot System been proposed? 

We have a poor savings culture in SA. This can be attributed to a lack of knowledge of discretionary and retirement savings investments. In addition, discretionary savings are low due to savings platforms having high costs, high minimums, and daunting platform rules. Household savings average just above 2 per cent of GDP per annum, most of which is contractual savings for retirement funds. As such, households don't have access to emergency funds during periods of crisis, such as the COVID-19 pandemic. 

Therefore, members of funds find themselves cash-strapped; thus, it is common for members to resign to access their retirement savings. The proposed Two-Pot System can alleviate cash-strapped households during times of need, such as the COVID-19 pandemic, which could reduce resignations. 

In addition, the "Retirement Pot" that needs to be preserved till retirement will significantly improve retirement outcomes.

The proposed amendments, therefore, represent the best of both worlds.

How does the Two-Pot System impact Members' Retirement Outcomes?

Initial mathematical modelling performed by the Actuarial Society of South Africa (ASSA) suggests more than a 100% improvement in retirement outcomes under a specific set of assumptions.  

Implementing the Two-Pot System 

What would the changes to the investment strategy for Pension/Provident Funds be? 

We envisage a split investment strategy. 

The "Savings Pot" full accessibility over 12-month cycles would require a much more conservative investment strategy to manage volatility. This can be achieved using lower tenure but liquid instruments with lower yields. 

The "Retirement Pot" pot will be preserved till retirement. Given the inherently longer investment horizon, the investment strategy can be more aggressive, targeting higher returns. This can be achieved via higher exposure to riskier asset classes like equity and private equity, which tend to have higher expected investment returns.

What are the practical challenges with implementing the System? 

· Adapting administration systems and processes to cater for the proposed changes.

· Resolving the transferability of the Vested Pot, Retirement Pot and Savings Pot

· Redesign of Pension Fund investment strategy.

· Communication and education to members