A Case for the Two-Pot Pension System in Zimbabwe

The Zimbabwean pension industry is worryingly declining due to increased currency volatility experienced by the country over the past two decades. The first quarter (Q1) Pensions Report by the Insurance and Pensions Commission of Zimbabwe (IPEC) confirms the dire situation in the industry.

According to the Q1 report, out of the 966 registered funds, only 481 were active, constituting 49.79% of the industry’s funds. The remaining 485 funds were inactive, with 372 of them earmarked for dissolution. The industry’s total assets decreased by 21.06% in US dollar terms, from US$2.1 billion in March 2023 to US$1.66 billion in March 2024. This decline was primarily driven by exchange rate distortions, which affected the valuation of major asset classes like investment properties and listed equities.

Given this background, it is evident that there is an outcry from pension fund members, retirees, companies, pension associations, regulators, and the government regarding this undesirable trend in the industry. Action and innovation are necessary to reverse this situation.

Two-Pot Pension System Introduced in South Africa
The South African government introduced the Two-Pot pension system in 2024. This system has been praised by local analysts as innovative and a positive step in the right direction. The primary goal of the South African two-pot pension system is to give individuals more flexibility and control over their retirement savings, while still ensuring that enough funds are set aside for retirement.

Starting from September 1, 2024, all retirement contributions will be divided into two separate pots: a savings pot and a retirement pot. The Savings Pot allows individuals to access a portion of their retirement savings for emergencies or short-term needs. On the other hand, the Retirement Pot is preserved until retirement and is intended to provide a steady income stream during retirement.

For individuals who already have retirement savings, a “vested component” is created. This component is not subject to the two-pot rules, allowing individuals to transfer a portion of it to the savings pot if desired.

How the South African Two-Pot Pension System works:
Splitting Contributions: From September 1, 2024, all retirement contributions will be divided:
One-third will go into the savings pot.
Two-thirds will go into the retirement pot.
Accessing the Savings Pot:
You can access the savings pot once a tax year.
The amount you can withdraw is not capped, but there may be tax implications.
You can use this money for emergencies or other short-term needs.
Preserving the Retirement Pot:
The retirement pot is preserved until retirement.
You cannot access this money before retirement.
This pot is intended to provide you with a steady income stream in retirement.
Vested Component:
If you already have retirement savings before September 1, 2024, those savings will be placed in a “vested component.”
This component is not subject to the two-pot rules.
You can access a portion of the vested component (10% or R30,000, whichever is lower) to transfer to the savings pot.
Benefits Of Implementing a Two-Pot Pension System in Zimbabwe
Protection of Members Against Inflation and Currency Fluctuations
Savings Pot Flexibility: The savings pot can be used to address short-term financial needs, such as medical expenses or home repairs. This allows members to access funds when the currency is depreciating, preserving the purchasing power of their retirement savings.
Retirement Pot Preservation: The retirement pot can be invested in longer-term less liquid assets, such as government bonds, properties, infrastructure, and alternative investments to protect against inflation and currency fluctuations. This helps ensure that the accumulated savings can provide a sustainable income stream in retirement.
Improved Financial Security
Emergency Fund: The savings pot can act as an emergency fund, providing a safety net in case of unexpected financial challenges.
Retirement Income: The retirement pot can provide a reliable source of income in retirement, helping members maintain their standard of living.
Stimulation of the Economy
Increased Member Disposable Incomes: The two-pot system provides members with access to pension assets, thereby increasing their disposable incomes. This allows them to handle financial shocks without resorting to costly debt.
Portfolio Rebalancing: The establishment of two distinct funds can stimulate demand for capital market assets that align with the investment strategy of each pot. In Zimbabwe, most pension fund portfolios have been heavily invested in long-term assets, resulting in a reduced demand for short-term assets, which play a crucial role in the development, growth, and liquidity of the local capital market.
Case Study of Implications of Two-Pot Pension System in Other Countries
Investec Asset Management of South Africa researched the impact of early pension withdrawal regulatory amendments implemented in Australia, Chile, and Peru, and below are the findings:
Withdrawal Policy: Australia allowed retirement fund withdrawals in a means-tested manner (i.e. The amount of benefit a pension member received, depended on how much money they earned or had) that were subject to taxes, unlike Chile and Peru. According to the research, the inadequate design of pension fund withdrawals in Chile and Peru led to notable asset withdrawals and hurt the liquidity and depth of domestic capital markets.
Withdrawal Spend in Australia: In Australia, 1% of private retirement savings assets, or 2% of gross domestic product (GDP) was withdrawn in 2020. Nearly half of those eligible withdrew in the first 10 days and three-quarters who had funds remaining after the first round withdrew again. Australian households used part (50%) of pension fund withdrawals to repay loans. The spending response post the loan repayment was very sharp, with 90% spend occurring within the first four weeks. The majority (60%) of discernible spending was on non-durable products, as blue-collar workers and those with slightly lower wages withdrew more. Early pension withdrawals in Australia generated roughly 0.8% of GDP in direct spending within four months.
Withdrawal Spend in Chile and Peru: After Chile approved early pension withdrawal in 2020, consumers drew on 23% of the total assets held in 2020, which equates to roughly 20% of the country’s GDP that year. Chilean households used part of the pension withdrawals to repay loans. Credit card past due loans decreased below pre-pandemic levels, while non-performing loan rates (NPLs) for banks in Chile reached historic lows. Consumers also replenished cash deposits, which increased significantly between Q1 2020 and Q3 2021. However, Chilean pension funds were negatively impacted after they were forced to liquidate assets to meet the withdrawal demands, which reduced their domestic exposure to long-term domestic government and corporate bonds, and bank stocks. While this increased financing cost for government and corporates, IMF data showed no clear evidence of negative performance among Chilean banking stocks relative to the local aggregate stock market index, largely due to the increased deposits. Similar to Chile, Peru also saw significant early withdrawals from pension funds as a percentage of total pension funds assets under management given the inadequate design of pension withdrawals.
Potential South Africa implications: Investec believes that trends in South Africa will more closely mirror those seen in Australia. Pension entitlements among South African households expressed as a share of nominal GDP is one of the largest across emerging markets, averaging 120% between 2018 and 2022. Research suggests South African consumers will use capital from the two-pot system to reduce debt and fund living expenses. For instance, the Sanlam Benchmark survey found that South African retirement fund members who withdrew benefits recently used the amount to reduce short-term debt (51%) and fund living expenses (33%). While impacting retirement savings, Investec research indicates potential economic benefits. If consumers access R100 billion or more in early pension withdrawals, the resultant spending and savings could boost real GDP in the country by more than 0.5% in 2025 and add R20 billion in extra tax revenue. As awareness levels regarding the tax implications and consumers gain a better understanding of the importance of increasing their retirement contribution over time, Investec believes pension fund withdrawals may diminish in subsequent years.
Areas to Review in the Pensions and Provident Funds Act [Chapter 24:32] When Considering Implementing the Two-Pot Pension System in Zimbabwe
Implementing the South African-style two-pot pension system in Zimbabwe would require significant amendments to the Pensions and Provident Funds Act. Here are some potential areas of focus:
Separation of Retirement Funds
Creation of Two Funds: Introduce provisions to allow for the creation of two separate retirement funds within a single pension scheme.
Allocation of Contributions: Specify the percentage of contributions to be allocated to each fund, likely following the South African model of one-third to the savings pot and two-thirds to the retirement pot.
Access to Funds
Savings Pot Access: Clearly define the conditions under which members can access funds from the savings pot. Consider factors such as frequency of withdrawals, minimum withdrawal amounts, and tax implications.
Retirement Pot Preservation: Establish strict rules for preserving the retirement pot until retirement, with limited exceptions for certain circumstances (e.g., terminal illness).
Tax Treatment
Tax Implications: Outline the tax implications of withdrawals from both pots, including potential tax exemptions or deductions.
Contribution Deductions: Ensure that contributions to both pots continue to be tax-deductible.
Governance and Administration
Fund Trustee Duties: Clarify the duties of fund trustees in managing and administering the two separate pots.
Investment Guidelines: Establish investment guidelines for each pot, ensuring that the savings pot is invested in more liquid assets while the retirement pot can take on higher-risk investments for long-term growth.
Transitional Arrangements
Existing Funds: Determine how existing pension funds should be transitioned to the two-pot system. This may involve creating new funds or splitting existing funds.
Legacy Benefits: Address the treatment of legacy benefits that were accrued under the previous system.
Member Education
Information Requirements: Mandate pension funds to provide members with clear and concise information about the two-pot system, including its benefits, risks, and implications for their retirement planning.
Farai Gwaka is an Investment Professional and is currently a ZAPF Counsellor representing the Association of Investment Managers Zimbabwe (AIMZ). The views expressed in this article are solely my own and do not necessarily reflect the opinions of ZAPF and AIMZ or its staff. Any advice or information provided should not be considered professional advice and should not replace consultation with a qualified expert.-Finx