The psychology of retirement savings and pensions (part 1)

by Stephen Walker | 29,Feb,2024 | Actuarial Society of SA, Employee Benefits, Q1 2024

I write this article in January 2024, the new year has arrived and we look forward to a year filled with major events, both in South Africa and abroad. National elections are scheduled to be held this year, which will inevitably have an impact on pensions and benefits. The implementation of two-pots is expected to be effective 1 September 2024, which is the compromise date suggested by the Minister of Finance. In next month’s budget speech, the Minister of Finance is expected to confirm this date. The debate about the ongoing use of the R350 SRD grant as a pseudo-Basic Income Grant and the calls for formalisation of a Basic Income Grant continue, and will also likely be touched on in the budget speech.

Preservation versus access

The exact details of the two-pot system are yet to be finalised, but we do have a better idea now of what it will look like. As the Actuarial Society of South Africa, we have supported the introduction of the two-pot system from the outset. Individual actuaries have raised their concerns around this system allowing early access to retirement savings, which they argue will lead to a worsening of retirement benefit outcomes. However, the expectation is that the introduction of compulsory preservation for two thirds of benefits will more than offset this over the long term, thereby significantly increasing retirement benefit outcomes overall.

As consultants we are advising trustees, management committee members and retirement fund members to share the message that early access to retirement savings should only be used for emergencies. For many years we have been doing the same by encouraging members of retirement funds to not take cash withdrawals when changing employers, which has not changed the fact that most people have been doing exactly that for as long as anyone can remember.

So, what do we expect to happen once two-pot is implemented? In 2023 the Zambian national pension scheme introduced an option to allow members once off access to 20% of accrued benefits, subject to meeting certain criteria (minimum of 5 years of membership and being aged at least 45). This was the first time that such early access was allowed, since compulsory preservation was required previously. There was an expectation that this early access would be popular, especially amongst low income workers (membership of the Zambian national pension scheme is compulsory for almost all formal sector workers). However, what happened amounted to almost being a “run on the bank”, with nearly all eligible members claiming their money within the first few months of this option being implemented. This covered the full range of members, including high income earners.

Similarly, other countries in the developing world that have introduced such early withdrawal options (for example Chile and Peru), have likewise seen massive uptake with people keen to withdraw as much as possible as soon as possible. Despite warnings about the impact on their future pensions. Why would we expect anything different here in South Africa?

As valuator to a number of closed defined benefit pension funds in the private sector, for a while now I have been sharing a particular view: “Members of these funds are typically older, closer to retirement, higher income earners, so I do not expect much demand from them for early access to retirement benefits”. However, as time passes, more and more of my consulting colleagues are challenging me on this view – “Might not such individuals also find themselves desperate for immediate cash? Wouldn’t some of these individuals want to cash in money to be able to move it offshore to international investment accounts?”

The experience in Zambia has partially been put down to a lack of faith in the national pension system. Interestingly, following this large scale withdrawal more informal sector workers are now seeking to join the national pension scheme voluntarily, as they have seen their family and friends being able to access money from the scheme. One would hope that a similar effect will be seen in South Africa, where our informal sector workers would be more likely to save for retirement if they have some flexibility in being able to access a significant part thereof if the need arises.

Rightly or wrongly, a lack of faith in our country, in our government and in our financial services sector is likely to help drive the demand for early access to retirement benefits in South Africa. Every time retirement reform is mentioned in the media, there seems to be a knee jerk reaction to panic. Over this past festive season, I was once again having to explain to family and friends “No, the government is not planning to nationalise your retirement savings, that is not what the media articles are saying, please go read the articles again, please speak to your appointed consultants”.

Becoming pension influencers

How can we influence people to make better decisions about their retirement savings? Clear communication is the right starting point. Too little information will not help, too much information will not help either. The right balance needs to be struck. Trustees, management committee members, HR officials and consultants should continuously seek to preach the same coherent message – that retirement savings are meant for retirement, these should only be accessed early in case of a true emergency. The reality is that the majority of people will likely still access their benefits early, but we should still try to discourage this even if only a minority of people listen and benefit from doing so.

Small things do make a difference. Instead of calling it a “savings account” it may help if funds call refer to an “emergency savings account” or an “emergency access account”. Just to help drive the message home.

Projected benefit statements are a useful tool to encourage members to save more towards their retirement by showing what their expected future benefit outcome looks like. These have been increasingly used to encourage preservation of retirement savings when people change jobs. This should be extended to also discourage early access to retirement savings under two-pot, also by demonstrating the impact on expected future benefits.

Funds are required to have retirement benefit counsellors available. Members should be encouraged to speak to the retirement benefit counsellors on an ongoing basis, to better understand the importance of retirement savings and preserving those savings.

People tend to dissociate their current selves from their future selves. As human beings we fixate on present day consumption and effectively see our future selves as being different to our current selves – so why should I sacrifice my current happiness for this other person? This trend is increasingly the norm among younger generations, who are far more focused on current day issues and also find life to be relatively more challenging than it was for older generations in years gone by.

We need to find ways to encourage people to become friends with their future selves, to care about their future selves. It is a well known statistic, which I first heard 30 years ago, that only roughly 6% of retirees in South Africa are financially comfortable. Pensioners have a lot of free time and lots of wisdom to share. One way to help current day workers to understand the importance of saving sufficiently for their retirement and also preserving the money for retirement is by having pensioners address them about their experience in retirement. And what they would have done differently years ago, given the chance. This will people picture their future selves more clearly and to become more concerned about the well-being of their future selves.

Interestingly, research in the US has shown that people react better when saving for their future self is explained as a social responsibility, similar to caring for their friends. Instead of continually trying to explain to people that it is in their own interests to save for their retirement.

We will be sharing a second article on the idea of using psychology, particularly behavioural economics, to help encourage people to make better decisions when it comes to retirement savings in next quarter’s Pensions World publication.


Stephen Walker
Chairperson of the Retirement Matters Committee at Actuarial Society of South Africa | + posts