Potluck win for the South African fiscus

South Africa has finally overhauled its pension system to mandate the preservation of retirement savings until retirement age. The so-called ‘two-pot’ retirement system — introduced via the Revenue Laws Amendment Bill — came into force on 1 September 2024. Investment professional LINDA EEDES highlights the implications for the fiscus, corporate earnings and the broader economy.

The two-pot retirement system is a hybrid solution for competing needs: it preserves most future savings until retirement age, while still allowing retirement fund members to make annual withdrawals from a dedicated savings pot. This reform aims to enhance long-term financial stability while giving workers flexibility to access cash in emergencies.

Historically, pension withdrawals in South Africa have ranged between R100 billion and R160 billion annually, often driven by individuals resigning from their jobs to access their retirement savings. The two-pot system seeks to curb this trend by offering only partial access to savings without the need for resignation. However, access comes at a price — withdrawals are taxed at marginal income tax rates and not at the lower rates afforded to retirees.

The law will be applied prospectively from 1 September 2024. Existing retirement benefits at 31 August 2024 are subject to the old rules. On the go-live date, retirement funds would cede 10% of each member’s benefit to their savings pot — capped at R30,000 — which would be available for immediate withdrawal. Industry pundits estimate that members may withdraw between R60 billion and R80 billion from their savings pots in the first year.

Early data released by leading retirement administrators suggests that these estimates may not be far off. Momentum received 79,000 withdrawal requests in the first seven days of September — approaching R1 billion in aggregate — mostly from low-income groups. Meanwhile, Sanlam reported 20,000 withdrawal claims in the first two days of September, and the Government Employees Pension Fund processed over 17,000 claims and counting after the first week. By the time of writing, Old Mutual reported 170,000 claims worth R2.2 billion and Alexander Forbes had received more than 250,000 claims estimated at over R4.5 billion.

Although this represents a relatively small fraction of the country’s R6 trillion retirement savings industry, the economic implications of where this liquidity is directed could be meaningful. First up, National Treasury stands to benefit from the withdrawals — potentially generating around R10 billion in additional tax revenue. This would ease the government’s fiscal deficit, providing support to government bonds. The additional tax revenue will help to shore up public finances, offering some relief to the country’s strained budget.

Economists project that the two-pot system will lead to a consumer windfall, stimulating household consumption. The boost to spending, coupled with anticipated interest rate cuts as inflation moderates by late 2024, may lift economic growth rates by up to 0.7% in 2025.

The two-pot system’s impact on corporate earnings will vary by sector. Retailers could benefit from increased spending on essentials like clothing and groceries, or on furniture. Investments in the Foord unit trust portfolios such as Pepkor, which has a significant portion of sales linked to school clothing, and Lewis, the furniture retailer, may stand to benefit. The banking sector may also see improvements in asset quality and lower impairments if consumers use their withdrawals to pay off debt — despite lower net interest income margins. Retirement administrators and life insurers are likely to be net losers in the short term.

While any erosion of retirement savings is concerning, the two-pot system aims to secure more long-term financial stability by preserving two-thirds of savings for retirement, even in the event of resignations. Although not without risk, these near-term withdrawals could at least boost consumer spending and economic growth, offering some welcome short-term relief to retailers in what has been a challenging economic environment for all South Africans over the past decade.