Smart Money - Michelle Acton on how Two-Pot is changing retirement savings

[00:00:03][music] >> Hello and welcome to Smart Money. Today we're talking Two-Pot and whether its investment design adequately protects members from timing risk. Joining me in conversation is Michelle Acton. She's Chief Customer Officer at Old Mutual Corporate. Michelle, thanks so much for joining us today. First things first, what's Old Mutual Corporate um corporate research revealed about how members are using the savings pot?

[00:00:41]>> Thanks so much. It's great to be here. I think one of the major learnings we're picking up from from what our research is telling us is the the big driver is living costs. People are accessing their Two-Pot money to fund their day-to-day living expenses primarily. That is the main reason. Secondly is around emergencies and then thirdly debt. And that's interesting because when we went live with Two-Pots, one of the big drivers everybody was telling us they were coming to use the money for was saying, "Actually, we're going to use it to settle debt." But 18 months to 2 years in, actually when we asking them, "What did you use it for?" the overwhelming response is day-to-day living expenses.

[00:01:24]>> And that's particularly interesting, right? Because what it shows is that we've got members using the savings pot as a financial pressure valve, if we can call it that. So, accessing money because life has become expensive, unpredictable, urgent.

[00:01:39]But in those moments, members don't necessarily have the luxury of waiting for the right market conditions, right?

[00:01:46]So, talk us through the kind of timing risk this brings into the equation.

[00:01:52]>> Yeah, so I think that's very interesting. Everybody talks about the fact that you can't time the markets, and it's exactly the right thing when it comes to two-pot savings. So, what we have seen is our volume significantly increase in March because, of course, being a new tax year. Otherwise, we're finding a consistent drawing based on when people actually need that money.

[00:02:10]They're not waiting for any particular event or timing for the market to be up or down. It's about I need my money now.

[00:02:17]The last thing I think about is where the markets are. Now, of course, this is pension fund money. So, it is invested in the market. And so, a good example is this year in March, we had a insignificant increase in our number of two-pot claims coming through because of the beginning of the tax year, but it happened to coincide as well with the Iran war and the markets dropping. So, people did the did almost secondary damage because they started withdrawing at a time when the markets had gone down as well. Um so, it almost has an a bigger impact on their ultimate retirement savings than otherwise it would have.

[00:02:54]>> Absolutely. So, how is this impacting how employers and trustees are now having to think about the savings pot?

[00:03:03]Because on the one hand, they've got to protect members from short-term market volatility, like you've just highlighted, and on the other hand, still target those long-term returns for sustainable retirement outcomes.

[00:03:15]>> Absolutely. And I think key is this is still retirement fund money. So, whatever employers and trustees need to do, they need to make sure the money's invested to earn the returns you need to give you decent retirement. So, we always talk about the CPI plus five, you know, inflation plus five is a sort of returns you need, but those do often come with volatility because, of course, the more you have to take more risk to get higher return.

[00:03:40]Um so, what's important though is you can't then take the savings pot money and then go and invest it in in in a cash portfolio, which only gives you inflation plus one, maybe inflation plus two, because first of all, not everyone's claiming their two part. So, so you don't want to start investing money for short-term investment returns or protection when actually you want to make sure this money still invested for the long-term purpose, which is retirement fund money. And I think that's been the benefit of smoothing.

[00:04:07]So, what we've seen in the smoothing portfolios is they actually enable to give you still the aggressive portfolio returns you expect of inflation plus five, but without the negative uh short-term movements. So, it almost gives you that win-win of enabling employers and trustees to to get a portfolio that can give you the the short-term volatility risk management you need for those members that are going to access, but still give the longer-term investment return performance uh that you need to make sure members are going to be okay for retirement for those who don't access their savings part.

[00:04:42]>> And it also puts a certain kind of responsibility on funds as well.

[00:04:46]Because where you've got policy having solved for access, funds are now needing to solve for timing risk, right? So, what investment design questions should funds now be asking? And what kinds of investment uh design options can help reduce timing risk for members that are accessing their savings during difficult market conditions?

[00:05:08]>> Sure, I think that's a good question. I think first of all, when you are setting a retirement fund investment strategy, you first of all, you've got to make sure you can get the long-term return. I think that's critical.

[00:05:19]Um so, you've got to make sure in terms of designing your investment strategy, it is designed for longer-term uh um uh inflation well in excessive inflation-beating performance. Because contributions on their own is not enough. So, so when you're designing it, you first got to step, this is a retirement fund, it's got to make sure it helps members at retirement managing both their lump sum and their their drawdown at retirement. So, that's your first piece. The other thing is, can you do that at the same time as reducing short-term volatility? And and it's it's that that is where you need when you're looking at it going, "Okay, how do we manage short-term volatility risk?" And how do we manage to be able to do that smoothing piece or enabling that those who do access can access it? Um but without that short-term piece. So So it's really looking at how do you balance the both? And there it's looking at can you find a fund design that doesn't do one over the other? So it's not saying either I can solve for short-term or I can solve for long-term, but I can't do both. It's having a look at can you design or have an investment strategy that optimizes for both of those pieces? Because we've seen in our fund structure as much as we would like to be able to say that people ultimately don't access. We know that some of them are doing. In fact, up until now, we've got about 80% of those who can have accessed. So there are going to be members who are going to access it. So we've got to try and see how do you as a fund um as a trustee, as an employer, manage your investments so that you can still facilitate for that, but not also cost those 20% who are not claiming uh long-term investment return. So I think that's important aspects.

[00:07:01]>> So as an employer or a trustee, I mean, what are the let's say the top three critical questions they should be asking their consultants or their investment providers right now?

[00:07:12]>> Sure. I I think that the first question is um when it comes to investment strategy is we're talking about the savings pot piece. And what's critical is there's a whole investment in there in your retirement fund. So So it's about making sure have you got the right holistic investment strategy for your members, managing um making sure you can get ultimate or decent long-term returns.

[00:07:35]The second element is very much around the um the short-term volatility risk and how is that managed? And can you manage that uh still within getting higher levels of return? And then the other piece is around liquidity and is the portfolio sufficient from a liquidity to be able to manage those withdrawals as they occur.

[00:07:56]>> Michelle, is there a a bigger opportunity for employers with two-part data now giving them this clearer view of the financial pressures in the workforce that they can that they can and should be leveraging?

[00:08:11]>> Absolutely. I think what is what what the two-part stats are really showing us is is what we're hearing and what is the reality on the ground. Okay.

[00:08:21]Members, employees are under significant financial pressure.

[00:08:25]We're seeing we know we talk about inflation, cost of living crisis, etc. So it's it's really important to how employers can provide support to their employees around managing this time. And And what we want to do is deter people from withdrawing. So so but that's not an overnight thing. It's not like if I tell you now don't withdraw, you're going to stop withdrawing if you've already decided you're going to withdraw. And I think it's really about providing employees and working with your employee force around financial tools of longer term, how do I manage my money?

[00:08:58]How do you give them the tools? It's okay saying you must save more for retirement but if they can't pay for groceries at the end of every month, you're having the wrong conversation. So I think it's the need there's a need an absolute need for how do we help employees around financial education, budgeting tools. It's it's it's a bigger picture thing. It's not just saying don't access or wait for this or it's more working with your employees. And when we speak to employees, they are often believe they they need help from the employer.

[00:09:31]They believe the employer is very well positioned to provide that level of support because often when we speak to employees they go, "We need help. We need financial advice."

[00:09:40]Um and we'd love our employers to actually help us with that. So, I think it's something that there is an expectation as an employer in that right position to help facilitate that level of education and that level of financial um support literacy levels that are required. So, that not only as an employer do you provide great employee benefits, great retirement benefits for your employees, but it's really also providing the tools that help employees to better understand what they've got and in the longer term really become much better at managing their overall finances.

[00:10:15]>> So, as we wrap this conversation up, I've got to ask, given the high withdrawal activity we've seen and the motivation or the reasoning behind those withdrawals, do you believe that the two-pot system is achieving what policymakers intended or has it exposed new risks that the industry now has to solve for?

[00:10:37]>> Sure. The implementation of two-pot has actually been a fundamental shift in our industry. So, it really has done a significant change.

[00:10:45]It is absolutely doing what it's designed to do. I mean, we have spent the last few minutes discussing the access side. But, what we haven't discussed is the fact that what two-pot when that legislation was brought into place, what it also did is it made preservation compulsory. So, it's also saying historically, pre-two-pot, when I resigned, I could take all my money.

[00:11:05]Right? So, we had full access, but I had to change jobs to get that access. Now, the new system is saying, "Actually, you can have access to some not linked to changing jobs, but the rest of it you actually now do need to lock away and preserve for retirement."

[00:11:21]And what we have seen in terms of the improved preservation rates um has been astronomical since two-pot has gone uh gone live. So, we have seen not uh yes, we've seen access on the front end, but we've seen more than just the legislative requirement preservation actually coming through in in our in our numbers when people are resigning. So, we are finding that because people are now being told you've got to preserve some, they're going, "Actually, maybe I want to preserve all."

[00:11:51]Because I didn't realize I could preserve, I needed to lock in, etc. So, we are seeing phenomenal change in behavior on that aspect, and that's what we need to see. Because just to give you sort of a a few stats, and me being an actuary loves to throw numbers at the equation, but but at the moment, South Africans in our fund and in general are only save only retiring with about two to three times their annual savings at retirement. I mean I mean, sorry, two to three times their annual salary. Now, two to three times your annual salary, it is not enough to live the 20 years you're going to after retirement.

[00:12:24]With two parts in that compulsory element a compulsory preservation element now being brought in, we are anticipating that number's going to shift from two to three times your annual salary up to nine times. That is more than three times improvement in retirement outcomes into the future. So, I do believe as a system, it is working on how it's been designed to work, and we are seeing really great positive outcomes already in member behavior since September 2024 when it actually came through.

[00:12:56]>> Absolutely, Michelle. Thanks so much for having joined us in conversation today.

[00:13:01]A great place to leave it. Michelle Acton is Chief Customer Officer at Old Mutual Corporate.

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