The Two-Pot Retirement System, which will divide members’ benefits into two separate pots: a savings pot and a retirement pot, started in South Africa on 1 September 2024.
The implementation of the two-pot pension system in South Africa will surely spark significant interest across the continent, and our beautiful Land of the Brave is not excluded from this conversation. This innovative approach to retirement savings has garnered attention for its potential to enhance retirement outcomes, and provide greater flexibility for individuals.
As Namibia grapples with its own pension reform efforts, particularly the contentious issue of compulsory preservation, the two-pot system emerges as a compelling alternative that warrants careful consideration.
Understanding the two-pot system
The two-pot system divides a pension fund member’s savings into two distinct portions:
1. The Preserved Portion: This portion is locked away until retirement or a specified event, such as a severe illness or disability. Two-thirds are reserved for retirement, ensuring financial security for members to sustain themselves during their retirement years.
2. Accessible Portion: One-third of retirement funds are preserved in a savings component that can be accessed at any time, subject to certain conditions. It offers members greater flexibility to meet immediate financial needs, or invest in other opportunities.
The two-pot system offers several advantages, including enhanced flexibility, which gives members greater control over their retirement savings, allowing them to balance immediate needs with long-term retirement goals. It can also improve retirement outcomes by encouraging members to save for retirement while providing access to funds for specific needs, helping individuals achieve a more financially-secure retirement. Additionally, the system may reduce reliance on social security by encouraging individuals to take responsibility for their own retirement savings. However, while the two-pot system offers these benefits, it is not without challenges.
One key consideration is the need for member education, as implementing the system requires educating members about the benefits and risks associated with each portion of their savings. There may also be additional administrative costs for pension funds, which could impact member returns.
Another challenge is the potential for misuse, where members might jeopardise their long-term retirement security by misusing the accessible portion of their savings. Lastly, a strong regulatory framework is essential to ensure the integrity and sustainability of the two-pot system.
The Namibian context
In Namibia, the proposed compulsory preservation provisions under the Financial Institutions and Markets Act, No. 2 of 2021 (FIMA) have sparked significant debate. These provisions suggest that pensioners may be required to preserve up to 75% of their retirement fund, at least until early retirement, although this remains a point of contention.
Many argue that these provisions are overly-restrictive and limit individuals’ ability to access their retirement savings when they need it most, and you know the situation with our beloved “black tax conundrum” and other economic situations we are faced with each day. The two-pot system could offer a viable alternative that addresses these concerns, while still promoting retirement savings.
The two-pot system could bring several potential benefits to Namibia. It may encourage Namibians to save more for retirement by providing a balance between flexibility and security, leading to increased retirement savings.
Additionally, the system could help reduce reliance on the Namibian social security system, thereby ensuring its long-term sustainability. Furthermore, by offering individuals greater financial flexibility, the two-pot system could stimulate economic growth through increased investment and consumption.
Namibia would need to develop a comprehensive regulatory framework to govern the two-pot system, ensuring its effectiveness and fairness. Additionally, implementing this system would involve additional administrative costs for pension funds. Educating Namibians about the benefits and risks associated with the two-pot system would also be crucial for its success.
The two-pot pension system offers a promising alternative to the current compulsory preservation proposal in Namibia. By providing a balance between flexibility and security, the system could enhance retirement outcomes for Namibians, reduce reliance on social security, and stimulate economic growth. While there are challenges to be addressed, the potential benefits of the two-pot system make it a worthy consideration for Namibia’s pension reform efforts.
*Andreas Shaanika is the direct clients manager for the corporate segment at Old Mutual Namibia.