“Save for your retirement” they say. What a joke.

I find it “funny” that financial advisors often say that you must save at least 15% of your income for retirement.

With a very tough economy worldwide, many people struggle to make ends meet, never mind save for the future. Are there other ways to look at the imperative to have access to cash in your later years?

Below is a short conversation between Graeme Codrington and myself – over a glass of champagne! – where I propose we rather talk about flexibility – and understand the unqiue challenges each person faces. I also share an article by Deresh Lawangee, the CEO of RISE (a company part owned by EasyEquities) which those thinking about their finanical futrues may also find useful.

Article by Deresj Lawangee – CEO of Rise:

National Treasury released draft legislation enabling early access to retirement fund savings, colloquially known as the “2-Pot System”. 

Under this system, members will have access to a portion”(“the Savings Pot”) of their retirement fund savings without the need to resign. 

The “Retirement Pot” will not be accessible till retirement. 

The Chilean Retirement System has inspired many recent changes in the South African Pension Funds Act, including early access to retirement funds. 

Therefore it would be opportune to reflect on the Chilean experience and apply those lessons to the South African retirement landscape.

A Background on the Chile Retirement System

Chile launched an individual capitalisation scheme in 1981 to reduce the old-age financial crisis. The Chilean pension system worked as private pension insurance where every working citizen has to pay 10% of their monthly taxable wages. These funds were the responsibility of private entities or AFPs (Administradoras de Fondos de Pensiones). 

Chile’s famed $200 billion private pensions system, based on individual capital accounts, has served as a model for dozens of emerging markets since its establishment during Augusto Pinochet’s military dictatorship four decades ago.

Chile was the first nation to abandon a government-sponsored pension system in favour of mandatory private retirement savings.

Early Access to Retirement Funds- A Chilean Perspective

As a result of the COVID-19 pandemic, people faced an uncertain future and immense pressure to survive. As such, the income of the Chilean working population was drastically reduced. 

After the pandemic economic storm hit the country, 80% of pension fund account holders requested around 40% of withdrawal from their retirement savings.

Members of Chile’s National Congress recommended letting Chileans withdraw pension funds to weather the economic and health catastrophe brought by COVID-19. President Sebastian Pinera signed a plan on 24 July 2020, allowing citizens to withdraw up to 10% of their pensions to endure the impacts of COVID-19. To date, four withdrawals in 10% tranches have been approved.

As a result, 10.5 million Chileans withdrew pension funds, and $20.2 billion were spent in the first attempt. And as of 2021, the withdrawal scaled up to $49.9 billion. 

According to the IMF, withdrawing funds from pensions accounted for 14% of GDP, and 30% of individuals depleted their pension accounts early. 

The Central Bank of Chile warned citizens that the withdrawals would weaken the Chilean Peso, increase the cost of borrowing and possibly trigger a liquidity crisis. These pension funds were supposed to be utilised only after retirement. Still, due to political failure, unprecedented withdrawals led to a high amount of uncertainty about the future of the country’s pension system. 

Lessons from Chile

Inducing a Market Crash

The Chilean model allowed access to accumulated Retirement Fund savings, which typically would be invested in long-term asset classes such as equities and bonds. The demand for withdrawals resulted in a fire sale of these long-term assets. Asset Managers were required to sell shares and bonds under duress to realise cash to fund these withdrawals. The fire sale negatively impacted local investment markets, weakened the Chilean Peso, and increased the cost of borrowing.

In the proposed 2-Pot legislation released by National Treasury, access is only provided on new monies accumulated in the “Savings Pot” from the implementation date. Member will not be allowed access to current accumulated savings. As such, South Africa should avoid the market crash induced in Chile.

Sustainability of the Retirement System

In this regard, the proposed South African legislation provides that the “Retirement Pot” is preserved for retirement. As a principle, preservation was missing from the South African Pension Funds Act, and its introduction will significantly improve retirement outcomes. Preservation will also ensure the sustainability of the retirement fund industry.

Education and Communication

It isn’t easy to differentiate the need to access Retirement Savings. Some members have a genuine capital requirement, while others will irresponsibly abuse the system. Educating members on the impact of early access to retirement savings in old age is essential. 

We also need to educate members on responsible uses of capital.

Given the proposed implementation date of 1 March 2023, much work must be done, making the implementation date unfeasible.

Conclusion

The Chilean experience is an interesting case study for South Africa on the eve of the National Treasury implementing early access to Retirement Funds. In general, National Treasury’s proposed access to retirement funds will avoid much of the market risk induced in Chile. However, significant work needs to be done to educate members on the responsible use of capital over the short term without losing focus on attaining healthy retirement outcomes.