Retailers look set to score handsomely from a chunk of savings — possibly between R40bn and R50bn — that will pour into the economy from the new two-pot retirement system.
The contentious system is meant to give South Africans access to part of their retirement savings for emergencies. Inevitably, this will lead to many using the opportunity to loosen their spending belts.
Analysts canvassed by the FM expect retailers with the highest proportion of credit, as well as so-called value retailers, to be among the biggest beneficiaries of the two-pot system.
TFG CEO Anthony Thunström estimates that the pension reforms will provide a R40bn-R50bn increase to household incomes, which will have a significant impact on the local economy over the next six months. “We hope consumers will be prudent and prioritise the paying down of debt. We do, however, expect discretionary spend to increase as a result, with TFG’s range of brands well positioned to benefit from any uptick in consumer spending.”
Other retailers have already pencilled in the expected positive upswing towards the end of the year.
The 2024 Old Mutual Savings & Investment Monitor’s deep dive into the two-pot system shows that the number of working South Africans with retirement savings provision (income R8,000-R119,000) who said they were likely to withdraw their savings has dropped significantly, from 62% in 2023 to 52% this year.
Vuyokazi Mabude, head of knowledge and insights at Old Mutual, attributes this trend to heightened awareness and education about the two-pot system, alongside improved economic conditions. The Monitor suggests that people’s confidence in the adequacy of their retirement savings affects their views of the two-pot system. “Higher confidence appears to also typically correlate with a positive perception of [the system], while working South Africans who have lower confidence in the adequacy of their retirement savings display greater scepticism.”
The group believes the system will result in better outcomes for more South Africans. “Research undertaken by Old Mutual Corporate Consultants suggests that over a lifetime of savings in an occupational fund, like a pension or provident fund, a member can expect to save between two and three times more money than in the old system,” says Mabude. The system is designed to offer greater flexibility during emergencies while safeguarding long-term savings by preventing members from withdrawing their entire balance — “a practice that has proved to be the greatest destroyer of long-term value”.
Izak Odendaal, chief investment strategist at Old Mutual Wealth, says the government and various financial institutions suggest that between R50bn and R100bn will be withdrawn in the next month or two now that the system is in effect. “This will largely be a one-off event, as future withdrawals will be based on a third of contributions from September onwards and will therefore be spread out over time.”
These withdrawals will be taxed, so government coffers will swell. “In the February budget, an additional R5bn in tax revenue was pencilled in due to two-pot withdrawals.”
Spend trends
And consumers will have money to spend. Odendaal believes a portion of withdrawals will go towards settling debt, but the remainder will be spent since it is unlikely that people will withdraw savings only to save that money again. “Combined with lower inflation and the coming rate cuts, the medium-term outlook for consumer spending has therefore improved.”
While there is much speculation about the quantum of this expected development, Investec says the release of retirement savings will support household consumption expenditure growth in the fourth quarter of this year and the first quarter of next year by about R40bn if fully utilised.
Ayan Ghosh, head of cross-asset investment strategy at Investec, reckons there is scope for R100bn in early pension fund withdrawals in South Africa. That’s assuming 50% of the people who are eligible actually withdraw their funds — which would be in line with what transpired in Australia.
He says that in March 2020, the Australian government announced that eligible people could withdraw up to A$10,000 from their private retirement savings accounts by June 30, and another A$10,000 from the first of July. “It is worth highlighting that Australia’s experience of the pandemic was far better than most other countries, with per capita death rates less than a tenth of those in the US.”
Ghosh adds: “Members who withdraw their benefits are likely to reduce short-term debt and then fund living expenses.”
He adds that early pension fund withdrawals in South Africa may surprise on the upside, with banks, credit retailers, food (including increased alcohol spend) and apparel retailers among the key beneficiaries, as they have the highest exposure at the low-income level. “This echoes the spend trend post-pension fund withdrawals as evidenced in Australia, Chile and Peru.”
The breakdown will see R100bn in pre-tax withdrawals. But this is whittled down to R40bn after tax and debt settlement — presuming a marginal tax rate of 20% and that 50% of the after-tax withdrawal goes into paying off short-term debt.
The two-pot system came into effect this week. Officially the system is aimed at promoting the preservation of retirement fund investments until members retire — though allowing access to a portion of their accumulated savings.
While the erosion of life savings could be cause for concern, the relief to the retail sector will be most welcome. Local shop owners haven’t seen much growth in the retail pie for years — and are now having to contend with offshore online retailers including Shein and Temu, as well as a local offering by the gargantuan Amazon.
Jean Pierre Verster, CEO and founder of Protea Capital Management, says people are trying to estimate how big an impact the two-pot system will have. “Anecdotally the whole reason they [the government] did this is that there were thousands of people who were resigning just to get access to their retirement savings. So, let’s see if this stops it.”
Verster points out that the two-pot system only starts now that the law has been put in place. “I don’t expect a huge drawdown of that pot in the near term, but over time it could be a significant cash inflow to households that are under stress. One would hope that, if it is the case, they use that money well. The best way to use it is to pay off expensive debt, not to consume anything with that money.
“Big picture, I would say the retailers with a lot of credit exposure could benefit. The first one that comes to mind is a retailer like Lewis, with mostly credit sales and mostly higher-value items in terms of furniture and appliances.”
Verster also points to the JSE’s apparel credit retailers, such as Truworths and TFG. He says if people aren’t as responsible in the use of the money they access — by paying off debt — hopefully they will at least spend on items that are less discretionary.
Another beneficiary could be a retailer such as Pepkor, whose sprawling brand Pep has a significant portion of sales linked to school clothing.
Verster says even retailers of bigger-ticket items might benefit from a two-pot windfall. “Consumers might look to put down a deposit on a car. So you could have the likes of Motus, Combined Motor Holdings and Super Group benefit, and to a smaller extent Bidvest [which owns the McCarthy vehicle dealerships].”
But he cautions: “We do need to see if this will move the dial. It could be that people are overestimating the benefit to retailers from the system coming into effect.”
Itumeleng Mothibeli, MD of the Southern African business at Vukile Property Fund, says the possible impact of the two-pot system is still being fathomed. He agrees it will bring some cash into the broader system but adds that it will hit those consumers who are already under pressure.
“So, depending on where the pressure is coming from, you may find that people manage debt exposure. It allows them room to breathe within the household, which doesn’t mean it goes to retail. And maybe part of that exposure is the listed big retailers that have a debt book so it goes towards that, it gives them capacity, and over time they claw up on that capacity.”
Rising optimism
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, expects value retailers to benefit from the two-pot impact — “but only slightly”.
“The segment of the population who will actually make use of this for spending purposes is not that substantial in the greater scheme of things. Another round of load-shedding will have a much more profound impact.” Still, he argues that retailers likely to benefit would be Pep, Lewis, Ackermans, Mr Price and possibly Shoprite.
Treurnicht says both Pepkor and Mr Price are value retailers, with the former probably even more highly leveraged to the lower LSM groups in South Africa. He says demographic data shows that the lowest LSM groups haven’t recovered to the extent that the higher groups have, and even those with jobs are still behind in terms of real wages.
Fenestra Asset Management CEO William Meyer says there’s been a lot of chatter in the market about the two-pot system and how much money will flow from it. But he does not see it as a panacea for the market and improved spending.
“If you pull that money out you’ll get taxed heavily, and what people should do is just pay off debt and not spend. But they probably will pay off debt and then start spending again.”
Meyer contends that the more important element is the general improvement in the economy. “I think that will be a much stronger factor boosting sales. If we can continue with this more positive economic outlook and people being slightly more optimistic — and we continue making progress with load-shedding and stamp out some corruption — there will be a lot more money to go around. That’s quite positive.”
Evan Walker, portfolio manager at 36One Asset Management, says a big factor that could favour value retailers is the annual drawdown on the two-pot system being capped at R30,000. “It’s going to take Sars [the South African Revenue Service] a while to do all the clearance. But my sense is that one-third allocation to that two-pot system will be withdrawn in perpetuity ... and from that bottom end of the market. It will be more marginally supportive for the value guys than for [upper-end retailers such as] Woolworths or Truworths.”
In any event, Walker expects there could be quite a significant amount of retail spend coming back in the next 12 months, given that the economic outlook is improving. “I don’t think the two-pot system is good for South Africa. But ultimately you’re going to have people spending more money — up to one-third of their pension money.”
Walker points out that the apparel market is not like the food market, where Shoprite and Checkers are the dominant players. “On the apparel side it’s less apparent who the long-term winners are. It’s such a muddle and they’re all fighting for a slice of the pie, and I don’t think that slice is getting materially bigger. It’s getting a bit bigger with two-pot but not materially ... it’s not quadrupling in the next five years. There are a lot of entrants in that space and it’s more competitive.”
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