The two-pot retirement system: clearing misperceptions and highlighting benefits


Blessing Utete, managing executive of Old Mutual Corporate Consultants, emphasises the need for thorough preparation and enhanced financial literacy initiatives to ensure a successful transition to the new system.

HR professionals are increasingly required to stay abreast of an array of issues affecting human capital. This expanding role includes staying informed about legislative reforms, emerging trends in remuneration and benefits planning, and now the ‘two-pot retirement system’. Heralded as the most extensive reform since the annuitisation of provident funds in 2017, the system will bring significant changes that HR leaders need to understand to effectively guide their workforce.

From 1 September, the two-pot retirement system mandates the preservation of two-thirds of retirement savings for future income while allowing access to one-third for urgent financial needs. This structure will bolster long-term financial security by preventing employees from withdrawing all their retirement savings when they change jobs, while providing flexibility to address immediate financial concerns.

Feedback gathered by Old Mutual Corporate from attendees of various conferences revealed that many had the same questions or concerns about the practical implementation of the retirement reforms. Specific issues highlighted include the rules governing withdrawals, the potential for fraud, and tax implications associated with the new system.

“These concerns should not overshadow the significant benefits of this very exciting reform, which will result in many more South Africans, particularly young workers, reaching a more stable retirement,” says Blessing. “The importance of thorough preparation and targeted member education is critical for its success.”

The role of HR professionals

HR professionals play a pivotal role in the successful implementation of the two-pot system and need to ensure:

  • Thorough preparation for transition: collaborating closely with the company’s retirement fund administrators to ensure a smooth transition. This includes providing clarifying guidelines on fund access, relevant forms, and how the claims system will work.
  • Internal marketing communication campaign: developing a targeted communication strategy, especially for employees over 55, who will not have 10% of their savings automatically allocated to the vested pot, but will choose how to structure their savings within 12 months, is critical.
  • Strengthen organisational cybersecurity: educating members on phishing threats and encouraging regular updates of security settings. Insist they verify communications before withdrawing savings and report suspicious activities.
  • Enhance financial literacy: educating employees on their benefits and structure of the two-pot system, addressing misperceptions and emphasising the importance of creating other forms of liquidity to avoid accessing retirement savings during an emergency.

Dealing with misconceptions

“We also need to confront several misapprehensions head-on around retirement reforms, specifically to facilitate a successful integration of the system,” says Blessing.

Misperception 1: The transition to the two-pot system affects all members’ savings and future contributions in the same way.

Reality: For the majority of South Africans, the transition is designed to be automatic for all eligible retirement fund members, requiring no action on their part. Pre-existing savings as of the effective date will automatically be allocated to the vested pot, with up to 10% of these savings, capped at R30,000, seamlessly transferred to the savings pot.

Members of provident funds who were over 55 years old as of 1 March 2024 will be the exception. Because they’re eligible for retirement, they will by default remain in their existing pension and provident fund. They will instead be given a choice to structure their savings according to the Two-Pot System and will have 12 months to make the selection.

Misperception 2: The two-pot retirement system will enable individuals to access and be paid their retirement funds beginning on 1 September 2024.

Reality: Although the legislation will be in effect from 1 September, disbursements won’t commence immediately. Significant system preparations and a series of processes – such as deployment, seeding calculations, and verifications – must occur first, likely taking at least five working days before a payout. Funds will need to communicate to members about the claims process and when they will be ready to start processing claims.

A seeding calculation involves determining the initial amounts to be allocated to different ‘pots’ or accounts based on existing retirement savings. This calculation depends on the current amount of savings in each member’s retirement account and their market value. This means that this could take several working days to weeks, depending on the rules set by the fund. Old Mutual Corporate has already developed a calculator for this, ensuring a smooth and efficient transition for our clients.

Misperception 3: Access to retirement savings under the new system must occur immediately on 1 September 2024, or members will forfeit their entitlements.

Reality: Members are not required to make any immediate decisions on whether to withdraw as of 1 September 2024. Instead, they maintain full control over their funds, with the flexibility to access their savings pot at any future point when it becomes necessary. In fact, it’s more beneficial for members to allow their savings to remain invested, thereby potentially increasing their value.

Misperception 4: The two-pot retirement system will lead to underperformance of assets, reducing the long-term value of savings.

Reality: The structure of the two-pot system – comprising a ‘retirement pot’ for long-term growth and a ‘savings pot’ for short-term needs – is an accounting exercise, not an asset allocation or investment strategy change. The adjustment of the two-pot system – dividing funds into a ‘retirement pot’ for long-term growth and a ‘savings pot’ for short-term needs – is primarily a matter of organising and categorising funds within existing financial structures. Regulation 28, which governs asset allocation, will continue to ensure diversified portfolios, mitigating risks and supporting consistent returns.

Misperception 5: The two-pot retirement system introduces tax complexity.

Reality: The two-pot system maintains the existing taxation framework, providing straightforward guidelines to help businesses and members manage their contributions effectively. Withdrawals from the savings pot before retirement are taxed as part of the individual’s annual taxable income, calculated using their marginal tax rate. Total contributions to retirement funds still receive the significant tax-deductible status they have always received.

Misperception 6: The two-pot retirement system invites fraud and corruption.

Reality: Retirement funds already employ robust measures to protect against fraud and ensure the security of members’ savings and personal data. Most funds in South Africa feature advanced security protocols, including encryption and multi-factor authentication, to prevent such risks. As with any new capability, creating a new transaction capability, as introduced by the two-pot legislation, does mean that it will open funds to increased fraud risk.

However, it is how this risk is managed and the security measures put in place that are crucial. It is essential for members to stay vigilant and informed about potential threats, especially criminals posing as representatives of their retirement fund. We encourage members to regularly update their security settings, verify communications from their fund administration before agreeing to withdraw any savings, and report any suspicious activities. These proactive steps can significantly enhance their security and peace of mind.

Blessing urges HR managers to actively engage with the reform process and educate their workforce about the benefits of the two-pot system. “Preparation is essential to fully leverage the advantages of the two-pot system,” he concludes. “Reach out to your fund administrator for support on the new system as soon as possible.”

Related articles