As the two-pot retirement system prepares to launch on 1 September, Alexforbes forecasts a staggering R50-billion asset outflow from the industry within the inaugural year.
During a webcast on 10 June to discuss Alexforbes’ annual results, chief executive Dawie de Villiers (pictured) said the group’s actuaries conducted thorough modelling, examining each member record to determine the transferable amounts and estimating withdrawals in the first year of the new system.
“Long story short, we estimate about 1% as a base estimate. In the upper end, probably 2%, but closer to 1%. And our assets are R500bn, so we expect R5bn […] And the industry is about R5 trillion, which means about R50bn of assets out of the industry for two pot in the first year,” De Villiers said.
He was quick to add that although the “numbers sound big”, when viewed as 1% of the assets under management, most funds, including balanced funds and those in which people invest such as pension funds, hold considerably more than 1% in cash.
“So, we don’t think that there will be any effect on the capital markets come two pots, and that makes it a good experience for all,” he said.
The two-pot system at a glance
With the implementation of the two-pot system, retirement fund members will be able to access a portion of their retirement savings annually without having to resign. Funds will have to create three components: a vested pot, a savings pot, and a retirement pot.
The vested pot will hold retirement savings accrued until the implementation of the two-pot system. No contributions can be made to the vested pot from 1 September.
From 1 September, one-third of contributions will go into the savings pot.
The savings pot will receive a lump sum (seed capital) from the vested pot. The seeding amount is 10%, capped at R30 000, of a member’s fund value at 31 August.
The other two-thirds will be allocated to the retirement pot. This pot will not be accessible, even when resigning, and must be preserved until retirement. This savings in this pot must be used to purchase an annuity at retirement.
Members can make one withdrawal per tax year from the savings pot. There is no withdrawal limit, but at least R2 000 must be withdrawn. Withdrawals will be subject to tax at the individual’s marginal tax rate. Additionally, an administration fee will be deducted before the net withdrawal amount is paid out.
At retirement, any remaining balance in the savings pot will be available as a cash lump sum or can be transferred to the retirement pot and used to purchase an annuity.
Read: Two pots: resist the urge to access your RA savings unnecessarily
Bracing for a wave of withdrawals
During his 2024 Budget Speech in February, Minister of Finance Enoch Godongwana announced an expected R5bn revenue boost from taxing two-pot withdrawals in the upcoming fiscal year, suggesting the anticipation of a large number of South Africans accessing funds from their savings pot once the two-pot system is implemented.
President Cyril Ramaphosa signed the Revenue Laws Amendment Bill into law on 1 June, giving retirement fund administrators, in particular, only a few months to organise their affairs before the 1 September deadline.
Industry leaders have already warned that members can expect payment delays when making withdrawals from the savings pot in September.
Read: Members can expect payment delays when making withdrawals from the savings pot
The implementation of the two-pot retirement system directly impacts Alexforbes’s administration system capabilities, digital suite, and engagement with members “on an unprecedented scale”. Commenting on the organisation’s preparedness, De Villiers said, “we are ready”.
More importantly, he said Alexforbes is focusing on educating and communicating with members, so that come 1 September, every individual member who is a client would have been engaged and informed about what to expect.
“It will be tight, it will be difficult and, you know, there will be hiccups. But I’m excited about the journey that Forbes is on to make this a good experience for the members,” De Villiers said.
He noted that the implementation of the two-pot system held a benefit for Alexforbes.
“Two pot forces us to talk to every individual that is in our ecosystem, all of our 1.1 million members that are under administration, plus all the other clients that are potential clients and want help from us. So, we are geared towards talking to them, to advising them and, hopefully, building a trust relationship so that they will save with us into the future,” De Villiers said.
Another plus is that the system fast-tracked the organisation’s digital transformation.
“As per normal corporate, we had a five-year plan. Now it has been done by the first of September, which is a lot of pressure but excellent transformation for Forbes in the digital space.”
Long-term impact – slowdown in outflow
De Villiers said he expects to see a drop in outflows over time.
“The preservation of two-thirds [in the retirement pot] is going to mean that, after the first year, you’re already going to see less and less and fewer outflows because every retirement after that, and retrenchment after that, there’ll be little bits. As they start saving into the two-pot system, that’ll be less.”
He said in the first five to 10 years, the impact on preservation will not be significant.
“But over time, it is certainly going to reduce their outflows considerably, which means the preservation is higher.”
De Villiers said the two-pot system will encourages increased saving in retirement funds because individuals will have some access to their money.
He explained that people have been saving minimally, about 13% or whatever the fund allows, instead of 20% a year because must resign to access their funds.
“So, I think over time, with the right advice and the right help, which we will certainly do, people can now save more in a very cost-effective, tax-effective way and still have access to some of that money over time. So, we might see positive effects coming through from two pots in terms of asset cap,” he said.
