Two-pot retirement system: how other countries make it work

South Africa implemented the two-pot retirement system a year ago on 1 September 2024 and up to now pension fund members have withdrawn more than R60 billion.

While this brought relief for many families, there are concerns that annual withdrawals will leave members with too little money to retire on. How does it work in other countries?

Mike Adsetts, global chief investment officer at Momentum Investments says September marks one year since the implementation of South Africa’s two-pot retirement system, a reform aimed at balancing people’s need for long-term retirement savings with their immediate financial needs.

“This dual-purpose framework, which allows partial access to your retirement savings while preserving the majority for retirement, brings South Africa in line with a global trend.

“While the two-pot retirement system is new to our shores, many countries have navigated similar reforms, offering valuable insights into potential pitfalls and best practices.

“By examining international retirement models, we can better understand how to ensure the two-pot retirement system delivers sustainable, positive investment outcomes for South Africans.”

ALSO READ: Two-pot retirement system in SA compared to other countries

South Africa not the first to try the two-pot retirement system

Adsetts says South Africa is not an outlier when it comes to reforming its retirement system.

“The challenge of striking a balance between liquidity and preservation is a universal one. As populations age and economic uncertainties increase, governments worldwide are looking for ways to protect their citizens’ long-term savings while providing a safety net in times of financial hardship.”

He says Australia’s superannuation system, for example, is a globally recognised model for mandatory retirement savings. Introduced in 1992, it requires employers to contribute a percentage of an employee’s salary to a retirement fund.

The success of Australia’s system’s lies in its compulsory nature, which ensures high participation rates and a substantial pool of capital for long-term investment, Adsetts says. While it has faced its own challenges, including debates over early access during Covid, Australia’s model shows the power of consistent, disciplined saving.

“A key lesson for South Africa is that while partial access is crucial, it should not undermine the fundamental principle of long-term retirement savings.”

ALSO READ: Two-pot retirement system: withdrawing for the right reasons every year

How the two-pot retirement system works in Chile

Chile’s pension reforms, initiated in the 1980s, provide a different, more cautionary tale, he says. The country moved from a state-run system to a private, individually managed account model.

While this reform led to an increase in national savings and a boom in capital markets, it also highlighted a major risk – the responsibility for investment outcomes falls squarely on individuals, who often withdraw too much.

This often led to inadequate retirement income, particularly for low-income earners who may lack the financial literacy to make sound investment decisions.

Adsetts says this experience highlights the critical importance of robust financial advice and education to ensure individuals make informed choices about their savings and withdrawals.

ALSO READ: Two-pot retirement system: 75% of second year withdrawals are repeats

The two-pot retirement system in Singapore and Malaysia

In Singapore and Malaysia, both countries where citizens typically did not save enough for retirement, authorities implemented provident funds with separate sub-accounts “ringfenced” for specific needs, such as housing and medical expenses.

Adsetts says lessons from Singapore and Malaysia highlight the challenge of balancing immediate financial needs with the goal of long-term savings.

He also points out that countries such as the US, UK and New Zealand successfully used a system with separate accounts where one is for liquid savings and one for long-term retirement. This approach allows for limited early access without compromising the entire fund’s investment performance.

ALSO READ: Two-pot retirement system complaints mainly about unpaid contributions

No perfect system, but limited early access works

Adsetts says while there is no perfect system, many countries are realising that allowing some limited early access can encourage more people to participate and remain committed to retirement savings schemes.

However, he says, it is important to manage the negative effects of early access while still promoting overall saving.

That is why a sound investment strategy is so important, Adsetts says.

“South Africa’s introduction of the two-pot retirement system is not just a behaviour change, it is an investment paradigm shift.

“The introduction of the savings pot creates a more dynamic investment environment, where both financial advisers and investors must be more deliberate in their approach.”

Drawing from international experience, Adsetts says it is clear that the most effective retirement systems are underpinned by a few core principles.

ALSO READ: Two-pot retirement system: the trends one year on

Portfolio construction

The two-pot retirement system potentially creates a divide between short-term liquidity and long-term growth. The savings pot, with its potential for withdrawals, may require a more conservative, liquid investment strategy to avoid selling assets at a loss.

However, this needs to consider that the pot should only be accessed infrequently in times of distress and therefore it is important to not be overly conservative with these assets as missed growth can be a significant opportunity cost.

Adsetts says the retirement pot can be invested for higher long-term growth, taking on more risk to benefit from compounding returns. The key is to segregate these investment strategies to match the different time horizons of each pot.

ALSO READ: Two-pot retirement system: Almost 4 million withdrawals close to R57 billion

Disciplined investing

The ability to withdraw from the savings pot can be a double-edged sword, Adsetts warns. While it provides an important safety net, it also introduces the risk of eroding your retirement nest egg.

“The lessons from countries that allowed mass withdrawals during the pandemic are clear; large withdrawals will significantly reduce your final retirement balance.

“For the two-pot retirement system to succeed, investors must view the savings pot as a genuine emergency fund and resist the temptation to make withdrawals for frivolous reasons.

ALSO READ: Two-pot retirement system: rather find an alternative than dip into the savings pot

The role of advice

The complexity of the two-pot retirement system, from tax implications to strategic asset allocation, makes professional financial advice more critical than ever. Adsetts says as the Chilean model demonstrates, relying solely on individual decision-making can lead to poor outcomes.

“Financial advisers act as guides, helping investors understand the long-term consequences of their choices and constructing portfolios that align with their unique needs and risk profiles. They are instrumental in ensuring a disciplined approach to saving and withdrawing.”

He says the two-pot retirement system is more than just a regulatory change but an adaptive response to the realities for members in the retirement landscape.

“Every investor’s needs and preferences are unique, which is why it is important that they can choose from a wide range of investment solutions with well-managed funds that excel in quantitative as well as qualitative characteristics.”