The two-pot retirement system represents one of the biggest evolutions in the South African retirement industry landscape to date and aims to address two major challenges in retirement planning: leakage and access to emergency savings. Two seemingly conflicting issues.
The system’s design was shaped by global research on pension systems and established precedents to enhance participants’ financial outcomes. It has long been argued that early access to retirement savings increases poverty in retirement and undermines the aims of government tax subsidies that promote savings. However, limited access to retirement savings pre-retirement can help vulnerable participants to better smooth consumption and withstand unexpected shocks to income, health or marital status. The research therefore suggests that an optimally designed system combines both accessible and inaccessible savings accounts.
The two-pot system allows limited early access to manage shorter term financial needs, via the saving component which can be withdrawn once per tax year. To improve retirement outcomes, the system also mandates preservation of the retirement component on job separation pre-retirement. From 1 September 2024, contributions to funds are being allocated on a one third, two thirds basis between the savings and retirement components respectively. Historic rights are protected via the vested component, which houses any savings up to 31 August 2024, plus future growth thereon.
Historically, retirement outcomes from pension and provident funds, also known as occupational funds, were undermined by poor preservation rates and leakage (i.e. cash withdrawals) pre-retirement. Legislation allowed occupational fund members to cash in all their savings when changing jobs, relying on taxation to deter cash withdrawals and encourage preservation. This proved problematic and between 1964 and 2002, at least nine official commissions of enquiry into pension issues noted high rates of leakage despite the tax penalties.
Since 2012, several retirement reforms have been implemented to align the tax treatment of, and retirement benefits from, occupational and retirement annuity funds. However, before the two pot system, withdrawal rights from occupational funds were unchanged. Per the Alexforbes Member Insights Report, 2021, the percentage of occupational fund members preserving their savings on withdrawal decreased from 11.5% of members in 2012, to 9.6% of members in 2020.
An aim of the 2021 annuitisation legislation was to improve preservation rates by making transfers between pension, provident and retirement annuity funds entirely tax-free, but the situation was complicated by the potential forfeiture of vested rights and preservation rates only marginally improved to 14.4% of members by 2022, based on the similar data from Alexforbes. Preservation had to be better enforced.
Interestingly there were two attempts to introduce compulsory preservation before the two-pot system. In 1967, the Cilliers Committee recommended compulsory preservation on job separation, but despite further investigations in subsequent years, no legislative action followed. Then in March 1980, a report from an interdepartmental committee of inquiry into specific pension matters proposed mandatory preservation, with withdrawals allowed only on retirement, death, disability, sequestration or exit from the labour market due to marriage. This led to a bill in 1981 mandating full preservation, with some protection of vested rights, and phasing out of provident funds by closing them to new entrants. However, as workers relied on cash withdrawals on exit due to poor retrenchment and unemployment benefits, fierce opposition from organised labour led to the ultimate shelving of the bill.
Arguably, compulsory preservation was successfully introduced almost 60 years after it was first proposed because of the incremental approach taken to introduce the necessary reforms, coupled with the acknowledgment of different financial needs and extensive stakeholder engagement. Suffice to say, it has been a long journey to get here, but a necessary evolution of the system when considering early experience.
Ten and half months in and hundreds of thousands of members have claimed billions from their savings components. A recent analysis of the experience at Alexforbes, who administers retirement savings on behalf of roughly 1.2 million institutional fund members, show over 580 000 claims, totalling payouts of over R8.5 billion. The rush to submit claims was also notable, with almost half of the claims being submitted within days of the members being eligible to do so.
Pension fund administrators have consistently reported high claim volumes, despite marginal tax rates applying to withdrawals. The finding is not surprising, considering that tax disincentives were ineffective in the past, and globally its ineffectiveness is noted.
Although more research is needed to better understand spending and behavioural patterns of members accessing their retirement savings, early experience suggests that younger individuals, with lower balances and earning lower salaries, are more likely to claim. Also, that individuals are using the amounts withdrawn to meet immediate consumption needs, to service debt and as spending money. The experience again aligns with international experience.
In Australia, retirement savings are mainly housed in defined contribution Superannuation funds, or Supers. Policy mandates participation in Supers for all working Australians with prescribed minimum employer contribution rates on behalf of workers. Individuals can also make voluntary contribution top-ups and contributions are tax favoured, up to annual limits. Any withdrawals from Supers before retirement are tightly controlled, with only very specific hardship withdrawals allowed with the approval of their tax authorities. An exception to strict early access came about in 2020 because of the COVID 19 pandemic and members were given the option withdraw up to $A20,000 in two tranches of $A10,000 each, without explicit tax penalty on such withdrawals. By the end of this concession, around 15% of all participants accessed their Supers early and around 40% of these withdrew in both rounds, representing 3.5 million individuals who made at least one application at an average payment of $A7,638.
Analysis indicated that younger, more financially fragile individuals, with lower income and lower levels of financial literacy, were more likely to opt for early access compared to older, wealthier individuals. The amounts withdrawn were mostly either at the limit, or the maximum available to the individual. Research exploring the motivations for individuals withdrawing indicated that around 58.7% of withdrawers reported using the funds to smooth consumption and pay immediate expenses or cover lost income, while 26.6% wanted accessible savings in case they needed it in the future. Furthermore, members who reduced high interest debt and boosted personal savings, may have increased their overall financial wellbeing.
Chile’s pension system also mandates employer contributions on behalf of employed individuals, supplemented by voluntary savings. Withdrawals from the mandatory accounts before retirement are prohibited, but in response to COVID 19, the Chilean government also allowed small balances to be removed in full, and 10% of larger balances could be accessed early subject to an overall maximum withdrawal. The concession was initially introduced as a once-off withdrawal in the year, but was later expanded to allow two subsequent withdrawals, thus potentially allowing three withdrawals within 12 months.
During the first round, around 82–84% of eligible individuals applied, and of those, approximately 95% applied for the maximum amount available to them. The second and third rounds saw declining participation, as many had already withdrawn what they could. On average, members withdrew 37% of their balances and 19.1% emptied their accounts fully in the second round. The average proportion withdrawn continued to decline to 22.6% in the third round. The percentage withdrawn was higher for women and at younger ages, with a bias to smaller accounts.
The Australian and Chilean experience shows that when given the option to withdraw, many financially vulnerable participants did so, opting for the maximum amount possible and taking the benefits as soon as possible. Despite variations in pension systems, consistent patterns emerge among individuals most likely to withdraw their retirement savings – typically younger individuals with low savings balances, limited financial literacy, and financial vulnerability. Therefore, speculation remains whether members can weigh up the short term benefits of early access vs the longer term consequences to retirement outcomes. It is probable that most did not – or did not know how to – consider the impact of their decision to withdraw on their longer term retirement outcomes.
In South Africa, we should consider these, and other, international learnings as well as our own experience to better understand who are making withdrawals and why, and how to better pro-actively engage them to ultimately improve their financial wellbeing. As practical experience grows, it becomes increasingly important to identify and understand the factors driving early access to retirement savings and their impact on financial wellbeing. While these factors may appear straightforward, a nuanced approach is essential to fully grasp the complexities that are often deeply interconnected.
Furthermore, because vested components still represent big proportions of total savings and are still available in cash on withdrawal, it is likely to be many years before a meaningful effect on preservation is observed. There is also the possibility of members accumulating small retirement pots across various administration platforms and measures for effective consolidation and sustainable administration are key to ensure improved outcomes resulting from these preserved pots. It is important to bear in mind that objectives of the system are long term, and stakeholders should consider, and measure, the outcomes accordingly.
There are residual challenges, for example, access on retrenchment and wider coverage. These issues are complex and need to be considered in conjunction with wider social security benefits. Stakeholder alignment is important, and it will probably require combined efforts from the private and public sector to make any meaningful progress to address these issues.
Although there is much future work to be done, it is important to celebrate the progress. The implementation of the two pot system after two failed attempts at mandatory preservation was a positive evolution in the retirement fund industry. And it serves as testament of what is possible.
This article was written by Andrea Bezuidenhout, on behalf of the Retirement Matters Committee of South Africa. The content is based on the research paper, “Third time lucky? South Africa’s path to mandatory pension preservation” co-authored by Megan Carswell, Andrea Bezuidenhout and Stephen Walker and presented at the International Actuarial Association Joint Colloquium held in São Paulo in May 2025.