By Vernon Wessels
The two-pot system has now been in operation for more than a month – but the hard work has only just begun.
While much of the focus has been on the administration and withdrawal processes, the next challenge for trustees is to decide on the investment strategies their funds should adopt.
A quick recap: since September, new pension fund contributions are split into a savings pot – a portion of which they can access and withdraw from once a year – and a retirement pot – where two–thirds of their pension will be preserved until retirement.
The industry expected a big rush, and they got it – the South African Revenue Service (SARS) said on October 14th that 1.15m withdrawal applications had been approved, totalling R21.4bn, since the new system went live.
The country’s largest pension fund administrator, Alexforbes, expects claim volumes to stay elevated this year, as many distressed members have yet to request withdrawals.
For Andrew Davison, the head of institutional business at Old Mutual Multi–Managers, the new system has created somewhat of a dilemma.
In an interview with Today’s Trustee, Davison said it’s impossible to predict when a member will have a financial emergency or wants to tap their savings.
This leaves a big question mark over what patterns will emerge: is everyone going to charge for the door each September; will they wait until December and use the money for a holiday; or wait till January to pay for school uniforms, books and fees?
Or will they resist the temptation, recognising that these funds are meant for retirement?
Members who regularly “raid” their savings may be better served by low-return investments like cash or short-term bonds, Davison said, as they are quickly and easily accessible.
But this creates complications.
Under Regulation 28 of the Pension Funds Act, the retirement pot’s investments must stay within certain limits, such as how much can be invested in any one type of asset, like shares or bonds.
So, if the savings pot is held in cash and a large portion of the two–thirds retirement pot is also in low-yielding assets, then the member is probably “too conservatively” invested, hindering their ability to achieve the inflation-plus-5% return needed for adequate retirement income, he says.
“This raises the question of whether Regulation 28 may need to be adjusted to cater for these practicalities of the new system”, Davison says.
When people quit their jobs, they can’t draw their entire pension as they could in the past, which means the two–thirds preservation component can be invested in “growth assets”.
This is where Davison reckons pension funds could invest in more illiquid assets such as unlisted companies, private debt, infrastructure, or private equity funds.
Typically, these assets are harder to sell than shares or bonds (making them illiquid) because they have long–term investment horizons or lock–in periods, are less in demand, and are often hard to understand. Right now, Regulation 28 limits investments in private equity to 15%, although funds can put up to 45% in infrastructure as part of the government’s investment drive.
“You can afford to be invested in less liquid assets, not necessarily 20% of the portfolio, but certainly a bigger portion than we’ve seen before,” Davison says. “I do think that this is an opportunity to rethink that allocation and say, ‘you know what, in that retirement pot, let’s bring in some more alternative assets.’”
The need to look elsewhere for investments is also being driven by a shortage of stocks on the Johannesburg Stock Exchange, where the number of listed companies has halved over the past 20 years to about 300. This limits investor choice.
Still, with the two-pot system still fresh and the amount of withdrawals still a moving target, trustees are struggling to get their heads around how these asset classes work.
It is a “buyer beware” space, Davison concedes. A lot of time and money will have to be spent training trustees to ensure the right investments are made and that someone else doesn’t run away with the “profits or excessive fees, and we’re left without much returns for our members”.
So, while the two–pot system crossed its milestone in September (some argue it was more of a millstone around their necks), the evolution has only just entered its second phase.
