What comes next after the two-pot system?
Auto-enrolment is the next logical step towards retirement reform in South Africa, says Michelle Acton, Chief Customer Officer at Old Mutual Corporate.
The two-pot system marks a transformative step, potentially enabling South Africans to accumulate two to three times more in retirement savings over their lifetimes. But the question now is: what comes next? With South Africa ranked a dismal 44th out of 48 countries on the 2024 Mercer Pensions Fund Index, auto-enrolment could be the game-changer the country desperately needs to transform its struggling retirement savings landscape, as seen in other nations.
The real challenge we face is that many South Africans earning an income are simply not saving for retirement. David Knox, lead author of the Mercer CFA Institute Global Pension Report, speaking at the Old Mutual Corporate Thought Leadership Forum in August last year, made it clear how dire the situation is. “87% of the working-age population in the world’s top pension systems save towards retirement. In South Africa, the figure is likely closer to 25%,” he said. This stark contrast highlights just how much work needs to be done to improve retirement savings in the country.
Auto-enrolment: the next step in retirement reform
Policymakers are not ignoring this issue. In 2021, National Treasury confirmed its intention to tackle this gap as the next step following the two-pot framework. One proposed solution is auto-enrolment—a mechanism that automatically enrols employees in a retirement fund unless they actively opt out. This model, which has been highly successful in countries like the UK and New Zealand, has the potential to significantly expand retirement savings coverage in South Africa. However, implementation poses challenges.
Chris Axelson, representing National Treasury at the forum, acknowledged that while auto-enrolment is being considered, it must account for the financial struggles many South Africans face. “For some, the question is, what’s the point of having retirement reserves if you can’t live today?” he said.
He noted that South Africa lacks a mandatory public pension contribution, which is a significant weakness compared to global benchmarks. “Our pillar one is almost non-existent… We rely hugely on private pension systems and very low social pensions,” he said.
This raises important questions: Should auto-enrolment should be mandatory for all employers or targeted at higher? Should there be exemptions for lower-income workers while providing exemptions for those in financial distress.
Designing the path forward
Axelson’s comments underscore the tension between immediate financial needs and securing long-term savings goals—a balance that any future reforms must carefully consider. A likely approach would involve creating a “minimum benefit package” for employers and phasing the framework in over time. Larger employers would be expected to adopt the system first, with smaller businesses gradually incorporated.
Knox advocates for incremental implementation to ease the transition. “Be clever in terms of how you phase it in… start with low contribution rates and then introduce auto-escalation, so over time the contribution goes up,” he said.
This phased approach, while prudent, highlights the complexity of reforming a framework that aligns with South Africa’s diverse socio-economic realities. Experts estimate that a successful rollout of auto-enrolment could take five to ten years to implement sustainably.
Auto-enrolment a win-win
Beyond improving retirement outcomes for individuals, auto-enrolment offers systemic advantages. Larger member bases and simplified structures could reduce administrative costs, making retirement funds more accessible to smaller employers.
Olano Makhubela of the Financial Sector Conduct Authority (FSCA) highlighted this point: “You can get economies of scale, lower the costs, [and] get better outcomes for members.” These improvements would broaden inclusivity and encourage participation across the workforce.
Collaboration will be key
Makhubela also emphasised the role of collaboration in implementing any reform, highlighting the two-pot system as a strong example of how quickly progress can be achieved when stakeholders work together.
He noted that it has been encouraging to see the two-pot system come into effect, emphasising that its implementation required significant patience. “The unions had certain expectations, the government had certain expectations, and the regulator had to find the right balance.”
How employers and trustees can support auto-enrolment
For auto-enrolment to succeed, employers and trustees must play an active role in helping employees see the advantages of the system and maximise its benefits. Thembi Mazibuko, Chief People Officer at Pick n Pay, highlighted that financial well-being goes beyond just paying salaries – it requires holistic support: “We cannot see pensions and savings in isolation. It’s about the whole disposable income and the living wage we provide our people,” she said.
This perspective is critical for auto-enrolment because, while the system ensures more workers start saving automatically, many employees could opt out if they feel financially overwhelmed.
One keyway to reduce opt-out rates is through better financial literacy. Many employees struggle to understand interest rates, debt, and long-term savings benefits. Without this knowledge, they may not recognise the value of staying enrolled in a retirement fund.
Mazibuko stressed the importance of education, explaining that many workers do not have the tools to make informed financial decisions. She said, “people can’t read contracts. We take these things for granted. We’ve seen cases where employees find themselves in unfair, almost illegal transactions simply because they couldn’t read.”
This highlights the critical role employers and trustees must play in providing holistic support:
1. Providing clear, accessible information about retirement funds and auto-enrolment choices.
2. Helping employees’ budget effectively so they feel financially secure enough to remain enrolled.
3. Integrating financial education into HR and onboarding processes, particularly for low-income and vulnerable workers.
The success of the two-pot framework highlights the power of collaboration in driving retirement reform. While challenges remain, auto-enrolment is the next logical step to closing the participation gap. With thoughtful policy design, phased implementation, and strong public-private cooperation, South Africa can build a more inclusive and sustainable retirement system. As Knox put it, “We need to do better than we have in the past.” With the right approach, the country can lay the foundation for greater financial security in retirement.
Discover more insights
Stay informed on the latest retirement reform discussions and expert perspectives from the Old Mutual Corporate Thought Leadership Forum by visiting our website: Insights from the Forum – Old Mutual Thought Leaders Forum and for more information on Old Mutual Employee Benefits visit www.oldmutual.co.za/employeebenefits