Pension funds across South Africa are gearing up for new regulations that will change South Africa’s retirement system to allow members to withdraw some of their money before they retire. This new two-pot system is expected to take effect towards the end of March 2024.

Understandably, it has led to many questions from stakeholders, including employers, members, trustees and fund managers. Some fund managers have been asking whether they will need different investment strategies for each pot since they may have different investment horizons.

How many investment strategies will be needed for all the pots in the two-pot system?

The two-pot system means each retirement fund will consist of a Savings Pot and a Retirement Pot. Or rather, these are the two predominant pots. There will be a third, the Vested Pot.

• The Savings Pot will form up to a third of someone’s retirement fund, and it is this portion that will be accessible in an emergency. This will start accumulating from the day the two-pot system comes into effect.
• The Retirement Pot will be made up of the remaining two thirds and members won’t be able to touch it until the day they retire. This, too, will start building up once the two-pot system is implemented.
• The Vested Pot refers to members’ retirement savings, including investment growth, up until the day the new system starts. This will continue to be managed the way it had been before the changeover.

Old Mutual Corporate’s and Old Mutual Corporate Consultants’ recommendation to trustees and ManCos is to keep things simple and to continue treating members’ total investments as retirement money. Consistently sticking with existing investment strategies, even in a two-pot world, is sure to improve fund members’ outcomes.

After all, we’ve done the research and studies, and we know what is required to invest successfully for retirement and how long one needs to stay invested for. We know what kind of investment structures are needed to achieve the best outcomes. So why lose sight of this? Trustees and boards must always remember that they’re running a retirement fund, which often is members’ only form of savings for their retirement. They’re not running a short-term savings scheme.

How Old Mutual Corporate Consultants will approach the two-pot system

As much as Treasury says that the one-third Savings Pot should only be used in an emergency, the reality is that we know that many members will dip into it. Our economy is stressed, and people are struggling financially. Those of us in the industry therefore anticipate that many retirement-fund members will access their Savings Pot as soon as possible, treating it as a kind of 13th cheque.

This means that the funds in the Vested Pot and Retirement Pot will become members’ long-term money. So, if we want to get sophisticated with investment strategies, the Vested and Retirement Pots will have to have long-term investment horizons.

The way we view them from an investment strategy perspective therefore won’t change and they will continue as they always have – here’s where our asset managers have always considered concepts like return over inflation, which will produce the right outcomes at retirement.

The Savings Pot is where we’ll have to do some thinking. How do we invest that money to protect that portion of members’ retirement investment from volatility? Although it may be invested for a shorter period than the other two pots, fund managers will still have to ensure that we don’t expose it to too much volatility. We don’t want a member to end up with less than they started with because of market fluctuations.

That said, overcomplicating things won’t be in the best interest of members. The default investment strategies of Old Mutual’s retirement funds like SuperFund have done well. If you look at most large umbrella funds, many members go with the trustees’ recommendations.

It’s unlikely that members will now start to drill down into the different pots and say, “I’m going to follow this investment strategy for my Vested Pot and that one for my Savings Pot and that one for my Retirement Pot.” These decisions probably will continue to be driven by trustees.

Once the two-pot system has been running for a year or two and we see data coming through and withdrawal patterns emerge, we’ll be clearer on the average amounts members are withdrawing, which will give us something to work with in terms of investment strategies.

There are bound to be some initial teething problems, but in the long run the industry will gain much greater direct engagement with members. Under the current ‘one-pot system’ members see their retirement savings as something far removed from them and having access to some of it will encourage them to learn more about their pension fund, how it works and how much they have invested.

Old Mutual Corporate and Old Mutual Corporate Consultants have always been proponents of educating our fund members and walking alongside them on the journey towards their desired outcomes at retirement. This won’t change and we’re gearing up our systems and our infrastructure to continue doing that. We believe the new two-pot system and early access to retirement funds will enable us to engage even more with members, and that will be a game changer for them and for us.

If you have questions about the two-pot system or need guidance on fund management, call 0860 468 378 or visit Old Mutual Corporate Consultants for more information.