South Africa Approves Early Access to Pension Funds Starting 2024
South African legislators have greenlit the early access to pension funds for savers starting next year, a move anticipated to prompt a surge in withdrawals, as acknowledged by the nation’s largest insurer. The decision was reached by Parliament’s standing committee on finance, chaired by Joseph Maswanganyi, who announced the introduction of a two-pot pension system effective March 1. Under this system, individuals can allocate one-third of their savings to an account accessible at any time, while the remaining two-thirds will only be available upon retirement.
Maswanganyi stated in Cape Town on Tuesday, “It is the decision of the committee that we proceed with the date of March 1, 2024. The modalities will be left up to the minister and the department, South African Revenue Service, and other entities, on how they approach the pension fund administrators.”
Pension reforms have been under consideration for nearly a decade but gained momentum due to the economic upheaval caused by the COVID-19 pandemic, resulting in a record-high unemployment rate. With retirement assets in South Africa totaling R3.34 trillion at the end of September, according to the Association for Savings and Investment South Africa, there has been increasing pressure on the government to make retirement provisions more accessible.
While the National Treasury and the retirement industry initially sought a delay until 2025 to ensure the readiness of relevant systems, the decision to proceed with the implementation from 2024 was finalized. Notably, Old Mutual, the largest insurer in South Africa, anticipates a surge in client requests to access their savings and has been upgrading its IT systems in preparation.
The bill is now set to go before the National Council of Provinces for concurrence before seeking presidential assent to become law. However, concerns have been raised by Ninety One, South Africa’s largest privately owned fund manager, regarding the risks associated with the two-pot system. Comparisons to Chile’s experience, where early pension withdrawals post-COVID-19 led to difficulties in rebuilding savings, underscore the potential pitfalls of such a system.
Hendrik du Toit, CEO of Ninety One, cautioned, “The two-pot system is there to help people in times of need, so I do understand that, and the complexities of implementation though are very substantial, but it’s very dangerous.” He emphasized the need to create an economy allowing people to retire with dignity, highlighting that only 6% of South Africans can afford a comfortable retirement, defined as receiving a pension of at least 75% of their final salary, according to Momentum Investments. South Africa’s savings rate has declined to 17.3% of GDP by 2022, trailing behind global peers with savings rates of up to 28% of GDP, according to World Bank data.
