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Looking Beyond the Two Pots: Exploring the Potential Macroeconomic Impact of the Two-Pot Pension System in South Africa

The introduction of the two-pot pension system in South Africa has the potential to significantly influence the country’s macroeconomic landscape, primarily through the potential increase in aggregate demand, as members access their savings pot, and through the promotion of intergenerational wealth creation through the retirement pot[1]. The retirement pot, which is inaccessible until retirement (except is certain cases)[2], and its rule of mandatory annuitisation, will minimise the financial burden of the government in supporting the elderly population who have no retirement savings, through the means-tested old age pension system. The two-pot system will therefore not only contribute to a more sustainable fiscal policy, but also redefine retirement planning at a macro level.


A critical issue addressed by the two-pot system is the large exodus of funds from pension fund annually due to resignation and withdrawal of pension savings. Many fund members, encountering such substantial sums, may mismanage these "windfalls", mistakenly perceiving them as inexhaustible wealth. This mismanagement echoes patterns observed in studies of lottery winners, who frequently squander their earnings and revert to their previous financial status.



Furthermore, with the increased media discussions and general public interest, the two-pot system will likely contribute to better financial literacy around retirement among South Africans. This approach could transform the macroeconomic environment by creating a more financially stable and self-sufficient aging population, reducing the dependency ratio, and potentially enhancing overall economic productivity. By providing a structured method of savings and limited access to pension funds, the system can mitigate the behavioural risks associated with sudden wealth acquisition and its subsequent mismanagement.


There are some additional potential benefits of this two-pot system which do not get the needed attention. And we discuss them here:


Killing Two-Birds with Two-Pots

According to the Sanlam Benchmark 2022, 63% of pension fund members surveyed report they were only provided with a withdrawal form at exit, 69% of respondents who had cashed in on their retirement fund at some point during their working lifetime, had no idea of the impact on their overall financial security during retirement, and 40% did not know of the tax implications of cashing out of their pension funds.

What was provided to you by your previous employer when you withdrew from the fund?

%

I was provided support from HR

13.86

I was provided access to a financial adviser

12.38

I was contacted by a retirement benefits counsellor

2.48

I was provided with literature on the impact of my financial decision on withdrawal

8.42

Nothing, I was just provided with the withdrawal form from HR

62.87

Total

100

Sanlam (2022)

Did the new employer encourage you to transfer your retirement savings to the new fund?

%

Yes, the new employer provided information

15.35

Yes, provided information and assisted with the process

9.90

No

74.75

Total

100

Sanlam (2022)


This lack of information on the available options, and the lack of guidance during employment transitions can have disastrous future consequences. The two-pot system can help avert this disaster and interestingly we can actually kill two birds with this two-pot system.


According to Momentum Metropolitan Holdings (MMH), South Africa needs 4 000 more financial planners and a large black-owned advisory firm. Jeanette Marais, the CEO of MMH Marais bemoaned the absence of any black-owned financial advisory firm in SA, but contends that there is a massive opportunity for the savings and investment industry, as only about 25% of SA's labour force provides for retirement. According to Jeanette, increasing the number of financial advisors in SA will help with financial inclusion[3].

However, archiving this 4000 target, and particularly, a large Black-owned advisory firm will be extremely difficult without an intentional policy direction. One way to go could be to have a pool of vetted Black-owned advisors and advisory firms and directing fund members nearing the retirement age to them. For example, members of the Government Employees Pensions Funds (GEPF), 5 years before their retirement, could be automatically allocated (using an AI system to avoid bias and corruption of the system) to vetted Black-owned firms or advisors who are willing to take these clients on at no fee, and provide them with once-off holistic retirement planning, estate planning and generational wealth planning advice.[4]  


The concept of homophily[5], proven to exist in financial planning (Stolper & Walter, 2009), will mean this is a practical and not necessarily a race-based approach[6]. With the amounts of benefits the GEPF pays out every year (about R137 billion)[7], we are likely to see better financial behaviours, and possibly, contributing to sustainable financial planning firms owned by Black advisors in this vetted pool, as well as an intentional and national approach to inter-generational wealth planning.


The Savings Pot and Aggregate Demand

Let’s not kid ourselves, many pension fund members will access their saving pot every year! This will likely lead to a new “increase” in disposable income which, depending on the magnitude, can have a significant impact on aggregate demand. There are two likely macroeconomic outcomes of this:


1.      The new increase in demand will be met with an increase in supply, which in turn may lead to demand for new hands (employees) to meet this demand. This will be a good for the economy in general.

2.      The new increase in demand will not be met with an increase in supply, which will likely put and upward pressure on inflation, and the Reserve Bank, in its quest to curb this increase in inflation, may increase interest rates and suck this “new increased disposable income” out of the system.


The talks around the two-pot system have been around the caution on its implementation and caution to fund members on accessing their savings pot. We believe that given the current financial strain in many households, many members will access their savings pot. In his Two-Pots-Two-Strangers argument[8], Prof Sarpong ropes in McConnell (2011) who reports that results from brain imaging have shown that when we think about our present self, the parts of the brain that are activated are different from the parts that are activated when thinking about other people. The same parts that are activated when thinking about other people are also activated when we think of our future selves. Based on this, it difficult to plan for the future because we see our present and future selves as two complete strangers (Sarpong, July 2024)[9].

That fund members who otherwise would not have accessed their pension before retirement may be tempted to access their savings pot. One of the biggest downsides, in addition to possibly jeopardising one’s desired retirement outcome, is that this will be added to one’s taxable income and taxed at the marginal rate. For some members, this may even push them to higher income tax brackets. On the other hand, this presents a potentially significant source of income to national treasury, and how treasury allocates this new income could also in turn have a positive and significant impact on the economy[10].  


It is up to government and the business community to prepare for the potential macroeconomic impact. The two-pot pension system not only promises to secure individual financial futures but also supports broader economic stability and growth if we prepare for the possible outcomes of fund member behaviours.


Notes

[1] Pension funds, provide member with the ability to transfer wealth from one generation to the next

[4] We may even go a step further and allocated all members regardless of age to willing advisors.

[5] In the context of financial planning, homophily refers to the tendency of individuals to associate and bond with similar others, which can influence their financial decisions and behaviours. For example, people might be more likely to follow financial advice from advisors who share similar backgrounds, experiences, or characteristics.

[6] This is under the assumption that the majority of the GEPF members are Black

[9] For more on this see Chapter 7: The psychology of retirement, in the book Frontiers in Financial Psychology

[10] This point was highlighted by Dr. Fredua Agyemang on the initial draft of this article. Dr Agyemang is a Post-doctoral Research Fellow, South African Research Chair Initiative (SARChI): Cities, Law and Environmental Sustainability (CLES), Faculty of Law, North-West University

 

References

McConnell, A. R. (2011). The multiple self-aspects framework: Self-concept representation and its implications. Personality and Social Psychology Review, 15(1), 3-27.


Momentum Metropolitan Holdings (MMH). (2024, July). SA needs 4 000 more financial planners and a large black-owned advisory firm, says MMH. Available at: https://www.news24.com/fin24/companies/sa-needs-4-000-more-financial-planners-and-a-large-black-owned-advisory-firm-says-mmh-20240510

 

Sarpong, P. (2024, July 1). Enhancing future self-continuity to improve retirement savings behaviour. Blue Chip Magazine. Available at: https://bluechipdigital.co.za/southern-africa-investment-news/enhancing-future-self-continuity-to-improve-retirement-savings-behaviour/



Sarpong, P., Alsemgeest, L., Nixon, P., Crafford, H., Macdonald, R., & Potgieter, K. (2024). Frontiers in Financial Psychology. LexisNexis South Africa.


Stolper, O. and Walter, A., 2019. Birds of a Feather: The Impact of Homophily on the Propensity to Follow Financial Advice. The Review of Financial Studies32(2), pp.524-563.

 


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