JONATHAN TEMBO: SA’s two-pot shift and global lessons for retirement reform

As SA navigates implementing the two-pot retirement system, there is also an opportunity to learn from other countries that have adopted similar frameworks.

On May 31, President Cyril Ramaphosa signed the Revenue Laws Amendment Act into law, ushering in the two-pot system. The system splits contributions into a savings pot and a retirement pot. The savings pot will hold a portion of retirement savings accessible during a person’s working life, for emergencies or other pressing financial needs, while the retirement pot will be used for preservation purposes, holding a portion of savings that will be accessible only on retirement.

The operational framework of the two-pot system will see 10% of retirement savings accumulated before September 1 allocated to the savings pot up to a maximum of R30,000. The balance will be placed in a third pot called the vested pot, which will hold retirement savings accumulated before implementation of the two-pot system. 

The savings in the vested pot will be protected under the vested rights, implying that they will be independent of the rules of the newly introduced system and will be governed by the regulations that were there before the implementation of the new system.

From the savings pot, a minimum of R2,000 will be allowable for withdrawal, and no maximum has been set, indicating that there is no limit to how much an individual can withdraw from the savings pot. However, there is a catch. Partial or full withdrawals will be allowable only once per tax cycle and will be taxable at a marginal rate set through an SA Revenue Service directive. 

Australia’s superannuation retirement system represents one of the systems resembling the two-pot framework SA has adopted. Established in 1992, the superannuation system initially required employers and employees to contribute a portion of their earnings to a superannuation fund, which would be preserved until retirement with restricted access.

With time, reforms were adopted to allow for early access to specific situations such as financial hardships, housing needs and terminal illness, similar to the benefits offered by the savings pot here.

Research studies of the superannuation fund show that preservation has been successful, leading to growth in total savings over time. However, reservations have been expressed over the underperformance, inefficiency and high expenses associated with the funds.

Another valuable case study is New Zealand’s KiwiSaver programme, a voluntary work-based retirement scheme that was introduced in 2007. In contrast to SA’s system, where employees leave investment decisions to the fund’s trustees, KiwiSaver contributors can choose the type of funds to invest in depending on their risk tolerance and goals.

Like Australia’s superannuation, the KiwiSaver has the two-pot characteristic of retirement preservation and allowance for withdrawals in cases of hardships or serious illness, or to first-time home buyers. Studies have shown modest impact of the KiwiSaver scheme on retirement savings in New Zealand and a limited impact on retirement funds adequacy because of their highly conservative investments.

Singapore’s Central Provident Fund (CPF), into which employers and employees contribute, sees retirement funds split into ordinary, special and medisave accounts. Ordinary account funds can be accessed for housing, investment and education purposes, and medisave for medical expenses, while special accounts are specifically preserved for retirement. Studies show that the CPF has performed well over time, increasing Singapore’s savings and has adequate income replacement rates of 60%-70% upon retirement.

SA can also draw lessons from Chile, which established its individual capitalisation pension model in 1981. In this model, employees make mandatory contributions to individual retirement accounts preserved for retirement. However, the system is also flexible, allowing for withdrawals for emergencies and hardships, with this option extensively used during the Covid-19 pandemic. Chile’s system is different in that employees have individual retirement fund accounts, which are decentralised in terms of management through private fund administrators, thus offering more control to the individuals over their funds.

Research studies show that the system was initially successful, but the flexibility aspect of allowing withdrawals during the pandemic led to serious reductions in income replacement rates on retirement and increased pressure on the fiscus.

These global cases show that SA needs to strike a careful balance between providing flexibility for employees and ensuring retirement funds are preserved for the long term.

Lessons from Australia’s system suggest that as it implements the two-pot system, SA needs to take precautions and ensure retirement fund managers have a framework on expected performance benchmarks and that their investment and risk management strategies align with international best practices.

In the cases of New Zealand and Chile, retirement funds adequacy may not grow as expected, emphasising the need to consider the long-term effect of withdrawals on the adequacy of retirement income replacement.

On the other hand, findings from Singapore show that the two-pot system can successfully ensure robust retirement incomes. As such, SA can learn from Singapore’s strategies to ensure strong and consistent performance of its retirement system.

• Tembo is a postdoctoral research fellow at the University of Johannesburg.