September marks one year since South Africa launched its Two-Pot retirement system, designed to balance long-term savings with immediate financial needs. By allowing partial access to funds while protecting the bulk for retirement, the system aligns the country with global trends.
Source: Supplied. Mike Adsetts, Global Chief Investment Officer: Momentum Investments.
Although new locally, similar reforms abroad offer valuable lessons on potential pitfalls and best practices. Studying international retirement models can help ensure the Two-Pot system delivers sustainable, positive outcomes for South African investors.
The global context: A universal challenge
South Africa is not an outlier when it comes to reforming its retirement system. The challenge of striking a balance between liquidity and preservation is a universal one. As populations age and economic uncertainties rise, governments worldwide are looking for ways to protect long-term savings while providing a safety net for citizens in times of financial hardship.
Australia’s superannuation system, for example, is a globally recognised model for mandatory retirement savings. Introduced in 1992, it requires employers to contribute a percentage of an employee's salary to a retirement fund. The success of Australia’s system lies in its compulsory nature, which ensures high participation rates and a substantial pool of capital for long-term investment.
While it has faced its own challenges, including debates over early access during the Covid-19 pandemic, Australia’s model shows the power of consistent, disciplined saving. A key lesson for South Africa is that while partial access is crucial, it should not undermine the fundamental principle of long-term capital accumulation.
Chile's pension reforms, initiated in the 1980s, provide a different, more cautionary tale. The country moved from a state-run system to a private, individually managed account model. While this reform led to an increase in national savings and a boom in capital markets, it also highlighted a major risk: the responsibility for investment outcomes falls squarely on the individual.
This has often led to inadequate retirement incomes, particularly for low-income earners who may lack the financial literacy to make sound investment decisions. This experience highlights the critical importance of robust financial advice and education to ensure individuals make informed choices about their savings and withdrawals.
Singapore and Malaysia - both countries where citizens have typically not saved enough for retirement - implemented provident funds with separate sub-accounts, "ringfenced" for specific needs, such as housing and medical expenses. Lessons from Singapore and Malaysia highlight the challenge of balancing immediate financial needs with the goal of long-term savings.
Countries like the US, UK, and New Zealand have successfully used a system with separate accounts - one for liquid savings and one for long-term retirement. This approach allows for limited early access without compromising the entire fund's investment performance.
While there is no perfect system, what many countries are realising is that allowing some limited early access can encourage more people to participate in and remain committed to retirement-savings schemes. Key, however, is to manage the negative effects of early access while still promoting overall saving.
The importance of a sound investment strategy
South Africa’s introduction of the Two-Pot system isn't just a behavioural change - it's an investment paradigm shift. The introduction of the "savings pot" creates a more dynamic investment environment, where both financial advisers and investors must be more deliberate in their approach.
Drawing from international experience, it’s clear that the most effective retirement systems are underpinned by a few core principles:
- Portfolio construction: The Two-Pot system potentially creates a divide between short-term liquidity and long-term growth. The savings pot, with its potential for withdrawals, may require a more conservative, liquid investment strategy to avoid selling assets at a loss.
However, this needs to take into account that this pot should only be accessed infrequently in times of distress, so it is important to not be overly conservative with these assets as missed growth can be a significant opportunity cost. The retirement pot can be invested for higher long-term growth, taking on more risk to benefit from compounding returns. The key is to segregate these investment strategies to match the different time horizons of each pot.
- Disciplined investing: The ability to withdraw from the savings pot can be a double-edged sword. While it provides an important safety net, it also introduces the risk of eroding one's retirement nest egg. The lessons from countries that allowed mass withdrawals during the pandemic are clear: large withdrawals will significantly reduce an individual's final retirement balance. For the Two-Pot system to succeed, investors must view the savings pot as a genuine emergency fund and resist the temptation to make withdrawals for frivolous reasons.
- The role of advice: The complexity of the Two-Pot system, from tax implications to strategic asset allocation, makes professional financial advice more critical than ever. As the Chilean model demonstrates, relying solely on individual decision-making can lead to poor outcomes. Financial advisers act as guides, helping investors understand the long-term consequences of their choices and constructing portfolios that align with their unique needs and risk profiles. They are instrumental in ensuring a disciplined approach to saving and withdrawing.
The Two-Pot system is more than just a regulatory change; it’s an adaptive response to the realities for members in the retirement landscape. Our role is to be a forward-looking thought leader, drawing lessons from global experience and applying them to our unique local realities.
Every investors' needs and preferences are unique which is why it’s important that they are able to choose from a wide range of investment solutions with well-managed funds that excel in both quantitative and qualitative characteristics.
As one of the largest investment providers in South Africa, we are in a unique position to leverage our scale and global perspective. This approach reflects our belief that empowered investors are those who can navigate the new retirement landscape with confidence.
By providing expert guidance, sophisticated portfolio solutions, and a deep understanding of both local and international markets, we aim to help financial advisers and their clients make smarter investment decisions to ensure a secure and prosperous retirement.
