Africa-Press – South-Africa. South Africa can win big from the implementation of the two-pot retirement system, with it set to benefit savers and asset managers through greater preservation of savings.
As a greater share of retirement savings is preserved until maturity, South Africa can bolster its poor savings rate and the pool of funds available for investment.
Ultimately, this can lead to greater fixed capital formation and faster economic growth, provided other factors such as improved sentiment and confidence in South Africa’s economy fall into place.
This is feedback from FNB Wealth & Investments CEO Bheki Mkhize, who outlined the potential benefits of the two-pot system and how South Africans are engaging with it a year after it was fully implemented.
Mkhize said the data FNB is seeing indicates that the steady state of withdrawals is lower than expected, indicating much better financial behaviour from South Africans saving for retirement.
“I think it is actually lower than the expected level of withdrawals at a steady state. There are definitely pockets of concern with certain age categories, particularly those closer to retirement,” Mkhize said.
“But, I still do think, and I have said this before, that the data indicates the two-pot system will improve outcomes in the long run.”
Mkhize explained that the better outcomes are largely a result of the system forcing two-thirds of savings to be invested until maturity.
In contrast, before the two-pot system came into effect, individuals who changed jobs or resigned would have to completely exit from their employer-administered retirement savings, breaking the compounding process and resulting in excessive fees.
As a result, the two-pot system will result in a greater share of retirement savings being invested until maturity, expanding the pool of investable assets in South Africa.
This expanding pool is vital for South Africa’s economic growth over the long run, which is more of a function of fixed investment rather than consumption.
Mkhize noted that other emerging markets have been extremely successful in leveraging increased retirement savings to fund infrastructure investment.
However, he acknowledged that this will ultimately rely on increased confidence in the local economy and faster economic growth.
Another aspect of this equation that is much more difficult to tackle is creating a culture of saving for the future, which requires increasing investment from financial services institutions in the importance of investing over the long run.
Getting cash off the sidelines
FNB Wealth and Investments CEO Bheki Mkhize
Another issue Mkhize noted in translating increased savings into economic growth is getting cash off the sidelines and creating the confidence necessary to spur fixed investment.
He pointed to data which indicates that investors are still holding a significant share of their capital in cash investments and are hesitant to deploy it in financial markets or spend it.
This signals a lack of confidence in the local economy, which is replicated when looking at big corporates in South Africa.
South African corporates are sitting on over R1.5 trillion in cash, which could be deployed in the local economy and significantly boost activity over the long term.
“I think we have a long history where corporates in South Africa tend not to want to put any of their cash at risk. They regard cash as a necessity, a backstop they need to have in place from a comfort and security perspective,” Stanlib chief economist Kevin Lings said.
“And with a low level of confidence, corporates are watching their costs closely, keeping investments limited, and keeping cash handy to take advantage of opportunities when they arise.”
Lings explained that the main factor preventing more significant private sector investment in the local economy is a lack of confidence.
Elevated policy uncertainty and an unstable political environment have continued to knock business and investor confidence in South Africa.
Coupled with a stagnant local economy, which has grown at an average annual rate of 0.8% for the past decade, businesses are unwilling to invest in the local economy.
“So, generally, it is a confidence thing. Confidence is a leading indicator of increased investment. Without it, funds do not flow into the local economy,” Lings said.
“We find around the world that in order to inspire more private sector investment, you must first get the confidence.”
Without confidence in the local economy and political environment, companies are unwilling to undertake long-term investment decisions.
“Companies undertake a certain level of investment that is maintenance and, to a large extent, that can happen irrespective of the level of confidence,” Lings said.
“This is the case in South Africa. Companies are investing to keep their machinery functioning and business operating, not growing.”
“This is an investment you simply have to undertake in line with renewal or maintenance cycles. It is kind of business-as-usual capex.”
This investment is insufficient to grow the local economy meaningfully and for companies to begin creating jobs.
“What we really need in South Africa is what we call expansion capex, and that tends to be a function of confidence,” Lings said.
“This type of capital is unlikely to suddenly and miraculously materialise overnight, despite trillions sitting in cash.”
“You have to have policies in place that are going to lead to that outcome. Our view is that the best way to start that is through public-private partnerships.”
For More News And Analysis About South-Africa Follow Africa-Press
