Chile/Peru: Early Access Smart?

eph-news-chili-peru

A] Prelude

One of the most relevant aspects of retirement savings is whether it is in the interest of participants in a retirement plan to only have access to the funds and claims as of the formal retirement age. Or whether it should be possible to, under certain circumstances, be allowed to use those funds (partially) already before that age. For example in case of an emergency or in case of disability.

An example of this increased pay-out flexibility we see in the USA and UK whereas the rules are (still) much more strict in The Netherlands and Germany.* 

* For more information about these countries, we gladly refer to the following links on our website:

As South-African retirement-fund members, administrators and employers count down to the Two-Pot Retirement System’s 1 September 2024 launch date, it’s worth looking across the Atlantic to the examples of Chile and Peru, to see what happens when early access to retirement savings goes wrong.

Both countries allowed retirement-fund members to access their retirement savings early during the Covid-19 pandemic. In both cases the move led to adverse results for many retirement savers.

B] Impact Early Access

“Peru and Chile allowed individual members several rounds of access to their savings,” says Sudhir Ramdass, Consulting Actuary at Old Mutual Corporate Consultants (OMCC). 

“Peru did this over six rounds, while Chile allowed three rounds (and contemplated a fourth). In Peru, the main reason stated in the measures and public debate was to provide liquidity to households affected financially by the pandemic. However, lax restrictions on withdrawal led to many members completely depleting their pension accounts. 

From April 2020 to May 2022, the total outflow amounted to nearly half of the country’s SPP pension scheme – equivalent to 10% of Peru’s GDP in 2019.”

The numbers in Chile looked even worse. There, about 10.5 million Chileans (out of a population of barely 19.5 million) withdrew their pension funds. According to the International Monetary Fund, those withdrawals accounted for 14% of Chile’s GDP.
A full-blown financial crisis loomed, with the Central Bank of Chile warning that further withdrawals would devalue the Chilean peso and trigger a national liquidity crisis.

“Before Covid-19, Chile held over USD200 billion in one of the largest, best-funded defined contribution (DC) programs in Latin America,” says Ramdass. “Ultimately, some 4.2 million participants (nearly 30% of the population) were left with zero retirement savings.”

C] South-Africa’s readiness for reform

That’s not to say that South-Africa’s Two-Pot System will lead to the same disastrous outcomes. After all, South-Africa in 2024 is very different to Peru or Chile in 2020.*

* For general pension information about South-Africa we refer to our following website link:
https://expatpensionholland.nl/south-africa-expat-pensions 

The early access changes in many other developing and emerging economies, like Peru and Chile, evolved out of the pandemic crisis. “In contrast, the Two-Pot development in South- Africa, whilst accelerated by the pandemic crisis at the time, is a necessary detour on a planned roadmap of retirement reforms,” says OMCC Managing Executive Blessing Utete.

“These reforms have been consistently designed to increase the likelihood and level of contributory retirement savings being preserved for retirement. The South-African retirement landscape has already undergone a series of reforms since 2012 to address improvement of retirement outcomes.”

Utete adds that, over the longer term, South-Africa’s collective investments and financial markets also feature enough sophistication, liquidity and diversification to absorb the impact of early withdrawals from the retirement system. “On the whole and in exchange for some access to contributory savings, the compulsory preservation of two-thirds of all monies to retirement is a game-changer and would improve retirement outcomes for most participants.”

Ultimately, the Two-Pot Retirement System is expected to lead to more savings being preserved and invested before retirement and will bring South-Africa’s savings rate of about 2% of GDP more in line with the Organization for Economic Co-operation and Development’s (OECD) preferred levels of around 7% of GDP.

“This can only have good consequences, as such savings would have to be invested and contribute to capital formation at the real end of the economic landscape,” adds Utete.

D] Lessons from Chile/Peru

It is often said that wisdom is learned from those who have travelled the road you are about to walk. And while the circumstances may be different, some of the lessons learned at such great cost in Chile and Peru also hold for South Africa.

The Chilean and Peruvian experiences are healthy lessons to learn, as it emerged from some studies that levels of education were a key differentiator in whether early access led to negative outcomes or not.

Research findings indicated that lower-income members withdrew more often and a higher portion of their savings. Areas with higher average education levels withdrew a smaller share of their retirement assets. Regions that held the most favorable view of the Chilean pension system withdrew a smaller share of their starting balances – indicating a link with trust in the system.

The implication is that it’s essential that the average member participating in the retirement system receives information, disclosure and understanding as to the consequences of their choice to either preserve or withdraw their available savings.

“It is important that the Two-Pot legislation is accompanied by member communication”. “And the timing of such member education is also critical. It is for this reason that South African legislation requires benefit counselling when members go on retirement, as well as disclosure upon entry, transfer and exit from retirement schemes. 

The same diligence should be considered when members make choices on accessing their Savings Pot. The Savings Pot need not be seen and used as the first port of relief in a financial emergency. Proper financial coaching would suggest that members need to be educated to create other emergency savings. ”

E] Finally

For South-Africa’s retirement-fund administrators and participating employers, the takeaway is clear: ensure your members or employees understand what they’re doing when they request early access to their retirement savings.

For members and employees, the lesson is even clearer: the Two-Pot Retirement System is about encouraging you to preserve your retirement savings. Just because you can access some of those savings, doesn’t mean you should!