13 September 2024
Regulation has never been more relevant or impactful than in recent times. It plays a crucial role in ensuring businesses operate fairly and transparently, preventing fraud and creating an economic environment where fair competition thrives, and clients are protected from exploitation. However, with each new piece of regulation comes increased complexity. This often necessitates additional education for both internal and external stakeholders, including clients. Unfortunately, this complexity can also lead to misinterpretation and misunderstanding, which in turn creates room for error. Important steps in embedding new regulation in the financial sector is the development of IT processes and client-facing information materials, which can divert focus away from innovation.
The upside of Two-Pot
A recent example of regulatory complexity is the introduction of the Two-Pot Retirement System in South Africa. As Warren Buffet once said, “Never let a good crisis go to waste”. While the Two-Pot System brings challenges, it also offers significant benefits. One of the most widely acknowledged advantages is its potential to improve retirement outcomes. By limiting immediate access to retirement funds while offering some liquidity in a separate savings pot, the system aims to enhance overall retirement savings. This is expected to have a positive impact on South Africa’s historically low savings rate, helping more individuals secure their financial futures.
In addition, it's anticipated that approximately half of savings withdrawals will be used to service debt, with the remainder likely to be spent in the broader economy, potentially providing a short-term boost to South Africa's economic growth.
Financial education overtaking innovation in focus
Despite these advantages, the Two-Pot System is not without its challenges. The added complexity introduces higher costs, not necessarily in pricing but in the additional resources required to manage the system. Many administrators are finding that the effort needed for development and client education is detracting from their ability to focus on innovation. Even with thorough educational campaigns aimed at informing members about the potential impact of early withdrawals, the estimated 4% of total pre-retirement being withdrawn seems to be materialising.
Clients need sound advice and financial planning, now more than ever
Another unexpected challenge is how economic pressures might push individuals to make poor financial decisions. When the economy is struggling and markets are down, people might be tempted to make withdrawals at the worst possible time, selling investments at a low point—a phenomenon known as sequencing risk. This raises an important question: should the savings pot be invested with a focus on capital protection while retirement funds are geared toward long-term growth? Ensuring that the overall portfolio is appropriately balanced and aligned with long-term goals is essential to avoid de-risking too early.
The right balance
While the Two-Pot System offers the promise of improved retirement savings and short-term economic benefits, it also presents new challenges that must be carefully managed. Striking the right balance between liquidity and long-term growth, educating members, and managing the complexity of the new regulations will be crucial to maximising its potential benefits. Though innovation may take a backseat for now, the system’s success will depend on the ability to adapt and ensure that it fosters financial security in the long run.
