Discovery warns on risks of two-pot system withdrawals

Retirement funds and employers must get more involved in helping fund members address debt, financial management and the rise of online gambling if South Africa has any hope of getting retirement preparedness above 6%.

This is according to Guy Chennells, the chief commercial officer for corporate and employee benefits at Discovery. He was addressing the Institute of Retirement Funds Africa (IRFA) Conference in Cape Town on Monday.

Chennells was presenting an update on data that Discovery had compiled regarding two-pot withdrawals since the system was introduced in the South African retirement fund industry in September 2024.

He said though the two-pot system has created a rebasing of every individual’s expected retirement outcomes, the question remained whether people will have enough in retirement, not just more than they would have had without the two-pot system.

“Six percent is what they say is the proportion of South Africans who will get to retirement with enough [to retire comfortably] … It’s been hanging around for a long time … so, 6% remains … but it’s not moving,” he said.

He said the two-pot system behaved as “a tide that lifts all boats”. The system created three segments in the retirement funds of members, namely a savings pot, which receives one-third of retirement fund contributions, a retirement pot, which receives all new contributions, and a vested pot, which contains all savings accrued before September 2024.

Chennells said statistics showed that people in the highest withdrawing age brackets were not youngsters, but those 30-40 years old who are withdrawing at a rate that is 1.8 times higher than the 50-plus age group.

“You can see that, by age, people in the highest withdrawing age bracket, which is not the youngsters, it’s the 30- to 40-year-olds who haven’t yet hit that 40-year ‘ooh, shucks, I’m really going to retire one day’ moment, but are also in the phase where the realities of trying to feed your family, buy a house, put your kids through school and grow your standard of living are really biting.”

He said withdrawal data shows that women are facing growing pressure to cover costs and support families, especially with the prevalence of households led by a single woman, and this finds expression in the two-pot withdrawal data.

Lower-income people generally withdraw at rates three times greater than higher earners, but a differentiator emerges where higher-income earners managed their money poorly.

“You would think that income really determines someone’s financial reality and the way that they will, therefore, interact with their savings pots. You see six times higher withdrawal rates for those of low income versus those of very high income.

“What was really almost alarming when we overlaid the Vitality Money dataset over this dataset is that the statistic completely reverses when you take the way someone is managing their money into account … Those high-income people who are managing their money poorly … withdraw at 3.5 times more than low-income people who are managing their money well.”

He said these trends, at a granular level, were being driven by the intersection between financial management and mental well-being.

“Unless we can address the root cause of helping people to deal decisively with debt … we’re not going to make progress. But also, they need to change their way of managing money, we need to influence their behaviours and we need to respond to the emerging challenge of gambling.”

He said Discovery will release a solution called Debt Reset, which directly addresses financial management and debt, a contribution optimiser that harnesses member behaviour and a solution to respond to the pressure that gambling is placing on savings.