Retirement funds are the new ‘must-have’ – thanks to the two-pot system

The introduction of the two-pot system has fundamentally changed how retirement savings are perceived. No longer viewed as a “pot of gold” at the end of a long rainbow, the system consists of two – or technically, three – pots, giving members a greater sense of ownership over their savings.

Andrew Davison, the head of institutional business at Old Mutual Multi-Managers, and Michelle Acton, the chief customer officer at Old Mutual Corporate, shared insights into the system’s early impact during the IRFA Conference in Cape Town this week.

Acton highlighted the expected influx of claims under the new system, saying, “Administrators have had to do a huge amount of work in terms of getting ready for the volumes, but when you start working with volumes, it changes the dynamic and the ball game entirely when it comes to admin systems. The ability to process 500 or 1 000 claims versus the ability to process 20 000 or 30 000 claims is a whole different ball game.”

In one instance, an individual withdrew R65 000 from their savings pot – R30 000 more than the anticipated maximum “seeded” money available for the first financial year. Acton noted they were discussing how members with multiple annuities, and consequently multiple savings components, would handle the system.

“What we have seen in general is that if a member had more than one pot, they are claiming from all of them. In that example, there was a member who had three different savings pots from different funds, and they came in and claimed everything. And that’s not a unique thing. One of the logical things is, don’t come get it all, leave some behind. And we haven’t necessarily seen that behaviour,” she said.

Occupational vs retail funds

The different experience between occupational and retail funds has also been telling. Acton explained that the volume of claims from occupational funds has been significantly higher.

“In terms of the savings fund access with our retail funds, we have seen much, much lower volumes. Probably about 25% of what we see in the occupational space … which I suppose shows the difference with retail funds being those that you select into by choice, and the perception that occupational funds are a grudge purchase.”

Interestingly, average withdrawals out of the retail funds are lower in terms of amounts that can be accessed.

High five for digital adoption and data-capturing

Digital adoption has become a significant trend.

“We have absolutely seen digital adoption. The shift has happened, which is amazing, because that’s really something you want to see,” Acton said.

Another major improvement is the accuracy of data. Acton noted that members are motivated to provide fund administrators with their correct details, “because without giving us the correct details, we can’t pay you the savings pot claim”.

She added that members are proactively contacting Old Mutual to update their information, “which is going to take us a long way going forward in terms of empowering members with communication and education that we haven’t been able to do in the past, because we haven’t been able to access members from a communication perspective”.

Davison pointed out an interesting trend. Although members are eager to provide their data, there have been quite a lot of cases where members reported a salary of zero, “because they knew that if they put that, then obviously no tax deducted from the savings”.

Watching values move is now a sport

Acton said members are actively going online to check their savings component values. After the seeding took place on 1 September, the savings component amount dropped below R30 000 only a few days later because of market fluctuations. Members began phoning in to find out what had happened to their money.

“And these are members who had their money in the market the whole time. No one noticed it goes down until the week after two-pot goes live, and they want to do a savings pot withdrawal. So, it is creating a huge amount more awareness in terms of what’s in their fund, which is what we’ve been asking for.”

Davison highlighted the pros and cons of people paying closer attention.

“From a data point of view, we’ve seen that a lot of people, especially younger people, check their value every single day, because you can now have an app, you’ve got access to your online value, and literally, people are checking their value every single day.”

One of the positive outcomes, he said, is that people now feel a stronger sense of attachment to their savings.

“They want to see it growing, and they are less likely to want to pull it out and make that value go down. So, in a way, it’s actually positive. People checking their value every day, they feel the sense of attachment to their savings that maybe wasn’t there before.”

Davison said the two-pot system has been a game-changer, giving members a real sense of ownership over their savings.

“Previously, somebody else had that: a fund, the employer.”

However, there is a downside: when members see their savings fluctuate, particularly when values drop, they might become anxious. This raises concerns about investment strategy, Davison said.

“Are we going to have to make sure that that value doesn’t fluctuate too much?”

He also pointed out that seeing the money in the savings component daily could tempt people to access it, even if they hadn’t previously considered doing so.

“Just a personal anecdote, I have a preservation fund. On the first of September, when I checked my value, I saw that there was this pot of R30 000, and it’s an interesting feeling, even in me, who is not a person planning to take my savings pot. Suddenly, it was a thing that was highlighted as something that I could give up. And it’s unfortunate in a way. It’s that saying of ‘money burns a hole in your pocket’.”

Retirement funds are now sexy

With all the attention the two pots have been receiving, retirement has become a hot topic.

Acton remarked, “What, you don’t have pots? Go get yourself a retirement fund.” She noted that this shift has brought retirement funds to the forefront of people’s minds.

“It’s becoming a conversation that hasn’t been happening before, and I think we will start seeing the benefits of that in terms of the fact that people are now not afraid to discuss their retirement.”

Davison agrees that the coverage has effectively put retirement on the map. He added that the overwhelming amount of communication regarding two pots is something he hasn’t witnessed in his many years in the industry.

“What is quite interesting, though, is despite all of that communication, there is still a lot of poor understanding of exactly how it works. So, more communication isn’t necessarily better. It’s something that we’ve thought about before. Unfortunately, we all have too much information, too much communication. We do need to find better ways of making sure that we are getting through to members,” he said.

Time to take a new look at fund structures

Acton stated that with the implementation of the two-pot system, the industry needs to re-evaluate some of the fund structures. She highlighted that one aspect of the two-pot system that has been “under-discussed and under-understood and under-focused on” is the exit process.

She said the exit process has undergone a complete transformation. When members resign, the option to withdraw 100% in cash is no longer permitted. Instead, there is now a requirement for partial compulsory preservation. Starting in September, individuals will have two-thirds of one month’s contributions that must now be preserved.

Acton said that although this may be fine in the long term, it underscores the need for firms to establish effective practices for members contributing small percentages. With only R50, R100, or R300 being allocated to the savings component each month, individuals will find it difficult to access their savings component.

“It really is important to start having a look at fund structures. We can’t keep up with those very small contribution rates. We need to be increasing it to start making it meaningful,” she said.

Bigger numbers aren’t necessarily better

Acton said that suddenly, numbers have become everything. “Everybody wants to hear numbers. What are you seeing in terms of the trends of people withdrawing? We’re seeing all age groups, from young individuals to those just a month away from retirement, coming forward to claim. It’s steady across all income bands, with no significant differentiation in who is making claims.”

She found it fascinating to see assumptions about certain groups or age ranges claiming funds. “And actually, we’re hoping that for some of these individuals, they are just testing the systems to check if they work.”

However, she noted that they were observing quite high volumes of claims across all demographics.

“In some of our funds, more than 50% of the membership has already submitted their savings pot claim. So, it is really interesting to watch. I think we’ll see a lot more behavioural insights as we progress in understanding savings behaviours.”