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November 1, 2023

Two-pot retirement system – a buffer for financial hardship

By Riaan Botha, Head of Benefit Consulting and Actuary

The proposal from Treasury to postpone the implementation of the two-pot retirement system to March 2025 was noted with a sigh of relief from the retirement industry, and will allow for the much needed time to implement the vast amount of administration system and process changes.

And perhaps now, it is good time to refocus on the bigger picture of two-pot. On the one hand, it aims to address the fact that people simply do not have adequate savings for retirement. We know that the current system does not achieve the results expected from a retirement system. According to calculations, members retiring under the new retirement system will be substantially better off due to the forced preservation of the retirement pot.

The second concern Government wants to address is “the lack of access in cases of emergency by some households that are in financial distress”.

In an article published in BusinessTech[1] on 1 June 2022, FNB indicated that it takes an average of five days for a middle income consumer to spend 80% of their monthly income. Another harsh reality is that 30% of their income is spent on secured debt (house, car) and up to 35% on unsecured debt (credit cards).

The average household is barely surviving from month to month, and it is understandable that in the event of a financial emergency – such as an unexpected large medical bill or a car breakdown – people have no other option than to turn to their credit cards or other forms of debt. Although the immediate need is addressed, the household still has to service this additional debt, until the next emergency occurs requiring further debt, and so the cycle continues…

As a result, an overwhelmingly large portion of our population is overly stressed, which spirals into depression, health issues and the knock-on effect of lower productivity and absenteeism in the workplace.

Several research papers have been written over the years about the reasons why people do not save. Many point to the fact that people find the financial industry complex and just do not know where to start. This is especially true for those who are already struggling financially. Frankly, if you are struggling to barely get by from month to month, it is difficult to place any focus on saving, be it for the short or the long term.

The challenge is not unique

The lack of access to money to provide for an unexpected emergency or financial hardship is not limited to South Africa, nor to developing countries. In 2019, the Organisation for Economic Co-operation and Development (OECD) conducted an in-depth comparison of retirement fund structures worldwide, and as can be seen from the table below, many countries allow early access to retirement savings:

  Preservation Early access allowed Conditions
 Australia Yes Yes Disability, terminal illness, severe financial hardship
 Belgium  Yes Yes Specific use
 Canada Yes Yes Disability and other
 Chile Yes No Changed during Covid
 Columbia Yes Yes Linked to age and level of benefit
 France Yes Yes Death of partner, over-indebtedness, purchase of home
 Germany Yes Yes Flexible
 Greece Yes Yes “Withdrawal” on resignation – benefit below EUR2 000
 Iceland Yes Yes Home loans
 Ireland Yes Yes Ill health only
 Italy No Yes Disability, unemployment
 Mexico Yes Yes Unemployment and marriage only
 NZ Yes Yes Significant hardship, illness disability, purchase of home
 Poland  Yes Yes Severe illness, real estate (must repay)
 Portugal Yes Yes Unemployment, illness/disability
 Turkey Yes Yes % linked to years of membership
 UK Yes No Ill health only
 US No Yes Financial hardship, medical expenses, funeral, education fees, etc. – 10% tax penalty


Some countries have stricter controls in place than others, but in essence, many make provision for access to money in the event of financial hardship, or an event which may lead to financial hardship, such as unemployment or disability.

UK trial run on hybrid funding

The United Kingdom makes for an interesting case study. As indicated in the table above, the UK currently does not make provision for early access. This topic has, however, been debated and researched for several years.

The reason why there is pressure to allow early access is the fact that their own population is facing financial strain daily. According to the research division of the National Employee Savings Trust (NEST)[2], around 57% of the UK population are either struggling financially or are financially squeezed, with many falling behind with payments, and having little or no provision for financial shocks.

A trial run was conducted by NEST and Harvard University over a period of four years, with five large employers with 80 000 employees participating. Surveys conducted amongst the employees indicated that 50% struggled to pay unexpected expenses of £300 at any given time. Another 46% indicated that they would welcome assistance to save towards a buffer for unplanned expenses.

Hybrid savings (where employees could save for emergencies in a separate “jar”) were implemented on an opt-in basis. Unfortunately, only 1% of employees signed up. Behavioural challenges (such as the tendency towards inaction) and present bias (tendency to prefer immediate rewards today, rather than greater rewards later) were indicated as reasons for the low take-up.

The research conducted on the behaviour of the employees who did sign up was quite surprising and warrants a closer look:

  • The barrier to saving was lifted, as the participants did not have to make any complex financial decisions on what product to invest in; and it was easy to save, as it was deducted via their payroll.
  • 4% of the participants reached the cap set on the savings and started contributing more to their pension fund, and the proportion of participants making additional pension contributions increased from 2.5% to 3.5% after 18 months of signing up. This was exceptional, as only 1.5% of NEST scheme members have ever made an additional direct contribution to their pension savings.
  • 99% of participants still had active accounts open after 18 months, indicating a savings habit being established.
  • 6 out of 10 participants accessed their money when needed, but only accessed what they needed.
  • Interestingly, 1 in 4 participants kept their savings jar open, even after leaving the employer, and continued to make deposits.
  • After a period of 12 months, 99% of the savings jars were still active, and the median savings were £380.

Imagine the impact this could have had on the 50% of employees who indicated that they struggle to pay an expense of £300, had it been implemented on a compulsory basis.

Removing barriers of saving

The two-pot retirement system essentially removes the barriers to saving. Members do not have to make complex choices regarding suitable financial products – it is done for them via payroll and their retirement fund. Members can put their trust in employers and trustees and feel safe in the knowledge that their money is well managed, and take comfort in knowing that they have a buffer against financial hardship.

The beauty is that people are not required to contribute more; we are only allocating their money more effectively and for two specific purposes, namely short term and long term saving.

As an industry and trustees, we have a duty to our members, to educate them and guide them. We must change our own narrative from “you can access your money” to “we are helping you to create a buffer for unexpected financial expenses or hardship”.

Let’s make the new retirement system the success it is designed to be!


First published in Pensions World Quarter 4 of 2023

[1]BusinessTech, South Africa’s disposable income squeezed further by latest hikes, FNB, June 2022.

[2]NEST is the UK’s workplace pension scheme set up by the government.