Chantal Marx | Head | Investment Research | FNB Wealth and Investments Solutions | mail me |
The introduction of the two-pot system, together with possible interest rate cuts, decent momentum in wages and lower inflation, could boost consumer confidence and drive an increase in spending in the months ahead. This is expected to be positive for domestic retailers, particularly discretionary names (clothing and furniture mainly).
There could also be some benefit accruing to the banks, as savers may utilise their withdrawals to pay down debt, which could improve asset quality and free up capital to drive higher quality loan origination as well as higher transaction activity.
Implications for equities and investors
The two-pot retirement system came into effect from 1 September 2024 and South Africans are able to withdraw money from the savings pot component of their pension savings. However, given the landscape this have implications for equities and investors in South Africa.
With this new system, one third of your future monthly retirement contributions will go into a savings pot that you can access once every tax year and two thirds will go into an investment pot, which will only be accessible upon retirement.
On 1 September, 10% of the market value of your retirement savings on 31 August 2024, subject to a maximum of R30,000, will be transferred to your savings pot through a once-off process called seeding. This will be accessible on the implementation date.
The idea behind this retirement reform is to discourage the early withdrawal of pensions (by resignation or voluntary retrenchment) by allowing pension fund savers access to a smaller pool of funds for emergency use. This is expected to also have a longer-term positive impact on net flows from South Africa’s pension savings pool.
It is estimated that about R40 billion will be withdrawn from pension assets when the two-pot system comes into effect. While this is a chunky figure, it is less than what is typically lost in early access every year (although this is anticipated to still be a factor but to a much smaller extent).
Keeping your fingers out of the pot
Of course, from a personal finance perspective, we would advocate for keeping “your fingers out of the pot”, but as an investor there are ways to benefit for others choosing not to do so.
Retailers – PE and Growth
Source: Bloomberg
Among the larger discretionary retailers listed on the JSE, most are trading above their two- and five-year average PE ratings, however, delving into history and looking at growth rates changes the picture somewhat.
All these retailers, bar TFG, are trading below their ten-year average forward PE’s and all these names are trading a long way off the upper end of their fair value range as expressed by the standard deviation.
In conclusion
Growth still looks very solid over the next three years for TFG, PPH and MRP. With the above tailwinds in mind, including the two-pot windfall, there is still opportunity in these names, even more so in the event of any short-term weakness.
There is a flipside as well – the money must come from somewhere. It is expected that it will flow out of domestic bonds and cash – but given the size of these holdings in absolute terms, the flow impact is expected to be quite small.
The introduction of the two-pot system may result in slight short-term pressure for asset managers, money managers, and insurers – but as noted in the first paragraph of this note, the long-term flow impact is still expected to be net positive.
Related FAQs: Two-pot system impact on savings and investments
Q: What is the implementation date for the new two-pot system in South Africa?
A: The implementation date for the new two-pot system is 1 September 2024, when the provisions of the new legislation take effect.
Q: How will the new two-pot system impact retirement fund savings for South Africans?
A: The new two-pot system will allow retirement fund members to access a portion of their provident fund and retirement fund savings earlier, which can have a significant impact on their overall retirement savings strategy, potentially leading to substantially higher retirement benefits.
Q: Can South Africans withdraw funds from their provident fund under the new two-pot system?
A: Yes, under the new two-pot system, South Africans will be able to make withdrawals from their provident fund, but these withdrawals will be taxed according to the regulations set by the South African Revenue Service.
Q: What are the two pots in the new two-pot retirement system?
A: The two pots in the new two-pot retirement system consist of a retirement pot, which is preserved for retirement, and a savings pot, from which members can withdraw funds for emergencies or other needs during their working life.
Q: How will the new legislation affect the retirement funds of South African citizens?
A: The new legislation is designed to enhance the flexibility of retirement funds, allowing members to access their savings in a more manageable way, thereby potentially increasing their retirement fund savings over time.
Q: What impact can the two-pot system have on my retirement saving strategy?
A: The two-pot system will allow for greater liquidity in your savings, which can encourage members to save more, ultimately leading to substantially higher retirement benefits when they retire.
Q: Will there be any limitations on how I can use the withdrawals from my savings pot?
A: Yes, while you will be able to make withdrawals from your savings pot, the new two-pot system will likely have guidelines on the amount and frequency of these withdrawals to encourage responsible saving and ensure long-term financial stability.
Q: How can I participate in the two-pot system once it takes effect?
A: To participate in the two-pot system, you will need to ensure that your retirement fund is compliant with the new legislation. Fund administrators will provide information on how new contributions will be allocated between the retirement pot and the savings pot.
Q: What will be the important impact over time of the new two-pot system on South African equities?
A: Over time, the two-pot system may encourage more investment in South African equities as members seek to grow their retirement savings, potentially leading to a shift in how retirement funds are managed and invested within the South African retirement landscape.
