Changes are on the horizon for investments in South Africa, and as someone who keeps a close watch on the market, I believe it’s essential to understand how these developments might affect us. The introduction of the two-pot retirement system, along with other economic factors, could significantly influence our investments and the broader economy. Chantal Marx, Head of Investment Research at FNB Wealth and Investments, has explained this system well, and I’d like to break down the key points for you.
1. Boosting Consumer Confidence and Spending
The introduction of the two-pot system, combined with possible interest rate cuts, steady wage momentum, and lower inflation, is likely to enhance consumer confidence. This could lead to increased spending, particularly in the discretionary sectors like clothing and furniture. I foresee this as a positive sign for domestic retailers, who could experience a surge in sales in the coming months.
2. Potential Benefits for Banks
With the new system in place, many savers might choose to use their withdrawals to pay down debt. This could be a boon for banks, as it may improve asset quality and free up capital for higher quality loan origination. Additionally, I anticipate an increase in transaction activity, further benefiting the banking sector.
3. New Withdrawal Options for Retirement Savings
Starting from 1 September, South Africans will have the option to withdraw money from the savings pot portion of their pension savings. Here’s how it works: one-third of our future monthly retirement contributions will go into a savings pot, accessible once every tax year. The remaining two-thirds will be placed in an investment pot, which can only be accessed upon retirement. On 1 September, 10% of the market value of our retirement savings as of 31 August 2024, up to a maximum of R30,000, will be transferred to the savings pot through a once-off process called seeding. This amount will be accessible on the implementation date.
Retailers – PE and Growth
Source: Bloomberg
4. Long-Term Positive Impact on Pension Savings
The main goal of this retirement reform is to discourage early withdrawal of pensions, whether by resignation or voluntary retrenchment, by allowing access to a smaller pool of funds for emergency use. I believe this will have a longer-term positive impact on net flows from South Africa’s pension savings pool, benefiting the overall financial ecosystem.
5. Investment Opportunities Despite Potential Outflows
It’s estimated that around R40 billion will be withdrawn from pension assets when the two-pot system comes into effect. While this may seem like a large sum, it’s still less than what is typically lost to early access every year. From a personal finance perspective, I would advise keeping “your fingers out of the pot,” but as investors, there are opportunities to capitalise on the choices of others. For instance, many of the larger discretionary retailers on the JSE are currently trading below their ten-year average forward PE ratios, presenting potential growth opportunities. Moreover, while funds may flow out of domestic bonds and cash, the overall impact is expected to be minor, with long-term flow effects likely to be net positive.