Pension Law Spurs R100bn Outflow, Boosts SA Bonds

South Africa's new pension law allows early access to savings, potentially improving retirements by 2 to 2.5 times.

By Athena Xu

7/10, 08:31 EDT

Key Takeaway

  • South Africa's new pension law allows early access to one-third of retirement savings, improving outcomes for retirees, says Alexforbes.
  • The reform may lead to initial outflows up to 100 billion rand ($1,660 per saver), benefiting retailers and building stocks.
  • Surge in demand for South African bonds driven by foreign investment and optimism in the new coalition government.

South Africa's Pension Fund Reform

South Africa's new pension fund law, effective from September 1, allows savers early access to a portion of their retirement savings. This reform is expected to significantly improve retirement outcomes for many South Africans. Under the new system, savers can contribute one-third of their savings into an account accessible at any time, while the remaining two-thirds will be available only at retirement. Alexander Forbes Group Holdings Ltd. anticipates that this change will lead to a surge in withdrawals initially, but the preservation of the larger portion of savings will enable more comfortable retirements.

John Anderson, Alexforbes Solutions Executive, stated in a webinar, "For new members going forward, they’re expected to have a 2 to 2 1/2 times better retirement outcome," even if the maximum allowed amount is withdrawn from the accessible savings portion. This reform comes in response to the current situation where only 6% of South Africans can afford a comfortable retirement, according to Momentum Ltd. The average South African can expect to earn only 16% of their working salary in retirement, compared to 88% in Brazil and 70% in Turkey, as per the Organization for Economic Co-operation and Development.

Economic Impact of Pension Withdrawals

The new rule also allows a one-off opportunity for savers to withdraw up to 30,000 rand ($1,660) as the system transitions. Alexforbes estimates that the industry will see outflows of about 1% to 2%, with total exiting funds reaching up to 100 billion rand. This influx of funds is expected to benefit retailers, as people often use these savings for consumption purposes. Ann Leepile, Alexforbes Investments Chief Executive Officer, noted, "We also expect some minimal benefit to accrue to building stocks" because people typically use the funds to repair and renovate their homes.

Surge in South African Bonds

The recent surge in demand for South African local-currency bonds is a promising sign for the nation's financial markets. Optimism surrounding the new broad coalition government has led to a significant influx of foreign investment. Net purchases of South African debt by foreigners have already surpassed the total for all of 2023, indicating international investors' confidence in the coalition's ability to address longstanding economic issues such as slow growth and high unemployment. This newfound confidence has driven South African bonds to outperform other emerging market local-government debt.

Inflation moderation and expectations of interest rate cuts further bolster the attractiveness of South African government bonds. The yield on 10-year notes has remained around 11.04%, the lowest since February 2023. Additionally, the reduced cost of credit default swaps signals a lower perceived risk of South African debt, reflecting investor confidence in economic prospects under the new government. However, the potential for further gains in South African bonds may be limited by their already-substantial performance. The upcoming budget statements will be crucial in assessing the government’s commitment to fiscal consolidation and economic reforms.

Brookfield's UK Insurance Venture

Brookfield Asset Management has applied to the UK’s Prudential Regulation Authority for an insurance license, marking a strategic shift in its approach to entering the UK insurance sector. Previously, Brookfield considered bidding for UK insurer Pensions Insurance Corporation (PIC) but decided to start its own insurance company instead. This move aligns with a broader trend of private capital entering the insurance space, with firms like Apollo leading the way.

Brookfield has built a $20 billion separately managed insurance business in the US and Canada and sees the UK as a lucrative market. Defined benefit pension schemes in the UK hold £1.7 trillion of assets, with a significant portion yet to be shifted off corporate balance sheets. Rising interest rates have reduced or eliminated funding shortfalls, leading to an increase in bulk annuity transfers. In 2023, there were £50 billion of such transfers, up from £12 billion in 2017, a level expected to remain constant for the next decade.

Street Views

  • John Anderson, Alexforbes Solutions (Cautiously Optimistic on South Africa's pension reform):

    "For new members going forward, they’re expected to have a 2 to 2 1/2 times better retirement outcome."

  • Ann Leepile, Alexforbes Investments (Neutral on the impact of early access to pension funds):

    "We also expect some minimal benefit to accrue to building stocks because people typically use the funds to repair and renovate their home."