The government is expected to release proposed measures for a two pot retirement system in early 2022. The system, which would allow for one or more withdrawals before retirement from their “access pot”, comes with the trade-off that members need to keep the balance of their retirement fund savings in their “preservation pot” until they retire should they resign.

While the government’s attempts at addressing multiple retirement issues is to be applauded, in their effort to make retirement funds everything to everyone, they also risk reducing their impact to nothing for no one.

The amount of work and consultation that must be done to re-design the existing retirement system to allow for limited withdrawals and mandatory preservation is extensive, and legislating the inclusion of a two-pot system will require retirement funds to develop additional investment strategies and increase their monitoring, administration, and governance burden.

Instead of imposing reforms onto existing funds, government should consider micro pensions schemes. With micro pensions, small amounts of money that informal and formal workers can individually save during their working lives are invested collectively not to only provide for short-term requirements but also to yield returns in the long-term. Micro pensions have successfully been deployed in many frontier and emerging market countries, including India, Uganda, Ghana, Nigeria, and the Solomon Islands.

This kind of innovation could be adopted by South Africa, which has a long history of informal savings in the form of stokvels and other savings clubs.

South Africans also appear ready for such an alternative based on recent consumer research by market research firm, KLA. They surveyed potential recipients of the proposed basic income grant (BIG), asking them what they would do with a monthly grant. While basic needs were considered important, there is an indication that consumers are also thinking of ways to save and grow their money to create financial security — with 51% indicating they would open a savings account to save their money, 20% would join and contribute money to a stokvel, while another 34% would invest money in unit trusts, shares and bonds.

Along with the will to save evidenced in this research, South Africa also has a well-developed investment and pensions industry with the skills and experience to manage short- and long-term savings. The country’s well-developed banking industry also has a large digital footprint amongst both formal and informal workers.

Banks are increasing their digital footprint by, for example, allowing new clients to sign up online without visiting a branch. Capitec Bank announced earlier this year that in the six months up to August, they managed to increase their digital client base by 22% to nine million clients. That means that more than half of their 17 million client base is now digital. Digital financial inclusion strategies like this provide an excellent platform for micro pensions to operate. Micro pension schemes seem like an obvious answer to both government and peoples’ needs.

– Petri Greeff
Head of Investment Advisory Services, RisCura