How to approach the envisaged Two-pot retirement system

South Africans have long struggled as retirement savers, with only around 5% retiring with sufficient financial means to maintain their pre-retirement lifestyle. This statistic underscores the need to comprehensively evaluate the retirement savings landscape.

According to Gary Mockler, CEO at GTC, leading financial wellness and advisory business “Saving a mere (say) 10% to 15% of one's earnings over a 40-year career and expecting it to sustain you for another 30 years in retirement, is inherently precarious. Moreover, the reality is that this gross contribution often includes deductions for insurance costs, fund charges, and administrative fees, resulting in a smaller less significant net investment amount funding retirement savings. As the sixth-largest provider of retirement fund administration in South Africa, GTC’s statistics concur with other industry surveys, reflecting an average net retirement contribution of around 12%.”

While contemplating the use of retirement savings for short-term needs, it is crucial to understand the origins of the "Two-pot system." Government has considered mechanisms of using long-term retirement savings for shorter-term investment objectives - for various reasons. This was initially driven by the financial stresses of the Covid-19 pandemic and subsequent lockdowns.

Concurrently there has been an increasing trend of employees using resignation as a mechanism to access their retirement savings (with punitive tax consequences). There is clearly a need for South African employees to have access to contractual savings to cover unanticipated events. The Two-pot retirement system - as currently positioned - appears to have evolved into a broader financial access system, detracting from the emergency contingency mechanism originally envisaged.

The question that a retirement fund member must address should not revolve around whether a portion of retirement savings can be accessed during their working years. Rather, the inquiry should focus on whether that member will be able to achieve their financial goals - both in the present and in their retirement.

Each retirement fund member measures their living standards and wealth accumulation according to their own benchmarks. To categorise retirement fund members and assess the South African retirement fund market generally, one would make use of the conventional Living Standards Measure (LSM 1-10).

By this standard, those closer to level 10 could well elect to measure themselves internationally. They could choose to work and reside elsewhere in the world. On the other hand, those on the lower end of the LSM scale (and in this exercise we should include the 33% of the South African population who are unemployed) will have far more modest benchmark aspirations, and sadly for many a more realistic socio-economic benchmark is the Upper Bound Poverty Line (UBPL), as defined and measured by Stats SA.

Mockler concludes, “As we approach mid-2023, it is unlikely that many South Africans, irrespective of their LSM categorisation, find themselves in the financial positions they aspired to, just a few years ago. As South Africans, we have not historically been avid savers. We are experiencing accelerated impoverishment. Enforcing compulsory retirement savings while disregarding many families' significant financial shortfalls is incongruous with conventional financial planning methodologies. Criticising the early withdrawal of retirement funds for immediate use is akin to blaming the symptoms and not addressing the underlying cause.

“At the same time that Government considers dividing compulsory monies into various pots (and robbing from Peter to pay Paul), they must prioritise economic growth initiatives, contain expenditure, ensure fair revenue collection from citizens, and account honestly for monies received and spent. Once these basic objectives are met, the Regulator may then consider the allocation of a finite amount of savings away from an individual’s long-term savings into short-term drawings. Until South Africans are able to create real wealth (and for many this is too grandiose an objective), we must acknowledge that desperate times call for desperate measures and that short-term financial stress takes priority over retirement savings.”