All you need to know about the new 2-pot system

Following the 2023 budget speech, many investors who are investing for their retirement have been asking whats the latest with the new 2-pot system 🤔

In this year's budget speech, the finance minister announced that National Treasury would republish the 2-Pot system. This revised legislation will include details on the amount of money that will be accessible immediately.

What is the 2-pot system?  

This is a system where investors are able to save up to one-third of their retirement contributions in a "Savings Pot" that one can access over a 12-month cycle; two-thirds of the contribution will be allocated to a "Retirement Pot".

This is expected to be implemented by March 2024. Meaning that the contribution of the “Savings Pot" will only take place after the implementation date of 1 March 2024.

Deresh Lawangee, CEO of RISE (a Fund Administration and Investment Management business and a subsidiary of EasyEquities), explains why the system is proposed, how it impacts members' retirement and the hurdles that may be an issue to implement this system.

Fund members cannot access their retirement savings while working for their employer. Only upon withdrawal, including retrenchment, your entire retirement savings is accessible, leading to low preservation rates and poor retirement outcomes. 

Why has the 2-Pot System been proposed? 

We have a poor savings culture in SA. This can be attributed to a lack of knowledge of discretionary and retirement savings investments. In addition, discretionary savings are low due to savings platforms having high costs, high minimums, and daunting platform rules. Household savings average just above 2 per cent of GDP per annum, most of which is contractual savings for retirement funds. As such, households don't have access to emergency funds during periods of crisis, such as the COVID-19 pandemic. 

Therefore, members of funds find themselves cash-strapped; thus, it is common for members to resign to access their retirement savings. The proposed Two-Pot System can alleviate cash-strapped households during times of need, such as the COVID-19 pandemic, which could reduce resignations. 

In addition, the "Retirement Pot" that needs to be preserved till retirement will significantly improve retirement outcomes. The proposed amendments, therefore, represent the best of both worlds.

How does the Two-Pot System impact Members' Retirement Outcomes?

Initial mathematical modelling performed by the Actuarial Society of South Africa (ASSA) suggests more than a 100% improvement in retirement outcomes under a specific set of assumptions.   

Implementing the Two-Pot System - What would the changes to the investment strategy for Pension/Provident Funds be? 

We envisage a split investment strategy. 
The "Savings Pot" full accessibility over 12-month cycles would require a much more conservative investment strategy to manage volatility. This can be achieved using lower tenure but liquid instruments with lower yields. 
The "Retirement Pot" pot will be preserved till retirement. Given the inherently longer investment horizon, the investment strategy can be more aggressive, targeting higher returns. This can be achieved via higher exposure to riskier asset classes like equity and private equity, which tend to have higher expected investment returns. 

What are the practical challenges with implementing the System? 

• Adapting administration systems and processes to cater for the proposed changes.
• Resolving the transferability of the Vested Pot, Retirement Pot and Savings Pot.
• Redesign of Pension Fund investment strategy.
• Communication and education to members. 

Given these practical challenges, we believe the proposed date of 1 March 2024 is ambitious.

Source: RISE, 2023 Budget speech, SARS