South Africans are not good savers. The 2023 Old Mutual Savings & Investment Monitor found that 30% of respondents had savings that would only last them one month or less. The same survey found that of those who left or changed their jobs in the past two years, 76% took at least some of their retirement savings in cash (including 30% who took it all in cash).

Meanwhile, Old Mutual Workplace Benefits Primary Research, powered by LIMRA, found preservation levels to be low across all age groups and funds, with retirement fund members under the age of 30 typically withdrawing nearly all their retirement benefits in cash when they switched jobs.

This cash-strapped environment, in which National Treasury estimates that 94% of working South Africans will not be able to retire comfortably, needs to change if retirement outcomes are to improve. Those changes are rolling out in the form of a series of retirement reforms. Following the implementation of the Two-Pot Retirement System on 1 September 2024, National Treasury’s next proposed step is to ensure all employed South Africans are saving for their retirement.

As it stands, South Africa has a ‘quasi-compulsory’ retirement system. It’s not a requirement for employers to provide retirement benefits – and, as Old Mutual Workplace Benefits Primary Research, powered by LIMRA, confirms, not all employers do. ‘However,’ says Michelle Acton, Retirement Reform Executive at Old Mutual, ‘if you do choose to provide retirement benefits, then they have to be compulsory for all eligible permanent employees in the company.’

Acton also highlights the plight of some groups of workers. ‘We have a massive number of people who are income-earning but they don’t earn a regular amount per month, every month,’ she says. ‘They are contractors, informal workers, freelance workers… people who have a feel for what their income is, but who live in a feast-and-famine cycle. The retirement system is not designed for those people.’ That’s where the next step in National Treasury’s retirement reforms comes in: auto-enrolment.

What is auto-enrolment?

In a brief published in 2021, National Treasury defined auto-enrolment as ‘making the employer enrol all employees in a workplace pension scheme or another approved scheme, to which the employer must make a minimum contribution; employees have the option of opting out of the scheme’. In the same brief, National Treasury estimated that around 30% of workers in South Africa’s formal sector are currently not participating in a retirement fund.

‘We just don’t have enough people in an occupational retirement fund of some sort,’ says Stephen Walker, Head of the Actuarial Consulting Team at Old Mutual Corporate Constultants, ‘and what our government calls auto-enrolment, other countries call something else. In Australia, it’s called superannuation, and there is no opt-out. In the UK, there is a possibility of opting out of the auto-enrolment system. The idea is that when you join an employer, they automatically put you on a pension scheme and it’s up to you to opt out. If you don’t, you’re locked in.’

Walker cites Nigeria’s system as an example of how it could work here. There, only a few million people out of a population of over 200 million have formal employment. ‘Nigeria uses compulsory minimum contributions,’ he says. ‘Everybody must belong to an approved pension scheme, and they must contribute a minimum of 18% of their earnings (including a 10% contribution from the employer).’

The UK model

Automatic enrolment was introduced in the United Kingdom in 2012, adding to the existing state social systems. It was rolled out in phases, starting with the largest employers, followed by medium-sized employers and finally small employers. All employers are required to automatically enrol employees into a pension scheme (and make contributions to their pension) if the individual:

• is classed as a ‘worker’
• is aged between 22 and 66 (state pension age)
• earns at least £10 000 per year
• ordinarily works in the UK

Individuals generally contribute 5% of their earnings, while employers contribute 3%. The government also subsidises auto-enrolment in the form of tax relief on contributions. Individuals may choose to opt out of auto-enrolment. If they do, they lose out on their employer’s contribution as well as on the tax relief.

How it could work in South Africa

We believe that all earning South Africans should be in a retirement fund. ‘This is the benefit of National Treasury’s proposed auto-enrolment, which seeks to ensure that there is some level of minimum contribution to a retirement fund,’ says Acton. ‘Ideally, government would provide the structure by setting up a well-run, well-governed, very low-cost, potentially subsidised, basic catch-all defined contribution scheme for atypical workers and low-income earners.’

Employers would be free to choose whichever approved retirement fund they prefer, but this new, low-cost government fund would act as a default. ‘We need a system where every working South African is contributing towards their retirement, with no option to opt-out. This would be mandatory coverage. Very low-income earners who are in retirement are already suitably covered by Old Age Grants, so this new system would apply to people earning above a set threshold.’

‘A public-private partnership approach would then see the private sector taking care of the rest of the market with more flexible and complex options,’ says Walker, adding that South African retirement funds are generally well run and well governed.

Our suggested model

• All employers would be required to enrol their employees in a pension scheme (and contribute to their pension).
• This would apply to all working South Africans, including freelancers, gig workers and casual workers.
• Employers would be free to choose their preferred fund.
• s a default, government would provide a very low-cost, basic defined contribution scheme.
• here would be no opt-out option.
• This would be introduced in a staggered approach, starting with large employers.

The 2023 Mercer CFA Institute Global Pension Index ranked South Africa’s retirement system among the world leaders for integrity (with a score of 76.6). The regulator and the industry would need to work together to prevent price gouging and exorbitant costs. ‘To guarantee a low-cost option, National Treasury would make it a requirement for all retirement funds to offer a minimum benefit structure,’ says Walker. In this scenario, National Treasury would set a policy that requires anybody who earns an income to put a portion of that into an accredited retirement fund. ‘There would be a minimum contribution rate, which should apply to everyone,’ Acton explains, ‘and with that would come a set of minimum benefits.’

National Treasury would then set the minimum criteria for funds to be accredited. ‘In this case, Treasury would say that a fund can only be accredited or registered by the FSCA if it includes a basic, core minimum retirement benefit,’ she says. ‘That core minimum could, for example, be a 10% contribution, with R50 for costs, plus a funeral benefit and a death benefit. Whatever they set it as, that would then become the basic benchmark that every fund would have to offer. And every income earner would have to be a member of one of those retirement funds.’

In a sense it would be like the prescribed minimum benefits that apply to South Africa’s medical aid schemes, where retirement funds would be required to offer a set of core benefits.

‘A system like this could not be introduced overnight,’ says Walker. ‘It should be phased in over a five- to 10-year period to allow for affordability, as happened in the UK.’

The case for auto-enrolment

The chief benefit of auto-enrolment, says Acton, is that it will enable savings that otherwise wouldn’t happen. ‘It will also simplify the system, because it’s quite complex. So a basic, minimum-required package will need to be provided.’ This will reduce costs, she points out, because current retirement packages are a ‘push sell’. ‘Nobody googles “I want to buy a retirement plan for my employees”, clicks on the link, says “buy” and it’s done,’ she says. ‘Normally, financial advisers or salespeople need to go out and tell an employer why it’s so important – and that costs money. Plans are also complex to set up and manage, which requires expertise to support them. These products don’t sell themselves.’

Auto-enrolment would flip that ‘push’ to a ‘pull’. ‘If it’s mandatory and everybody needs to do it, the costs would drop dramatically,’ Acton says. ‘You’d have the scale and you wouldn’t have to spend so much money trying to sell it. While advice will always be important, you’d cut out distribution costs, sales costs, commissions and so on, because consumers would simply choose the accredited fund they want.’

Old Mutual estimates that up to five million extra contributors could join the system to their own benefit. ‘Autoenrolment will create a new culture of savings,’ says Acton. ‘Saving for retirement will just be what everyone does, like paying taxes. We don’t have that culture at the moment. It’s going to take a generation to shift, but it will make a massive difference.’ Another huge benefit, according to both Acton and Walker, is that it will force innovation. ‘We should start to see solutions for small employers – employers of three, four, five people, for low-income earners, and so on,’ says Walker.

Acton adds that it’s also likely to transform the retirement world away from salary-linked deductions to income-linked deductions, introducing more flexibility into the system to cater for workers with variable or irregular incomes, especially in the informal sector.

Benefits to society

Auto-enrolment would create a situation where every income-earning South African is putting money away towards their retirement. Link that to the Two-Pot Retirement System, and the retirement component also includes an emergency short-term savings element.

‘This would take away the need for Tier 2 social security retirement benefits,’ says Walker. ‘And thanks to the reforms and innovation, you would have efficient, accessible, low-cost retirement fund options for the market to choose from. This is very similar to what happens in the rest of the world. The idea is: if you work, you contribute. No-one debates it. It’s just how it is.’

This eases the burden on society, where so many people – the so-called ‘sandwich generation’ – find themselves having to support their children as well as their ageing parents. Old Mutual’s 2023 Savings & Investment Monitor found 43% of its respondents sitting in exactly this circumstance, with both adult and child dependants.

‘We’re trying to encourage some financial independence as much as possible,’ says Walker. ‘This inter-generational support is going to become more difficult, especially given that people are living longer and longer. Previous generations had pensions and medical aid funds that they could stay on for the rest of their lives, but that’s not the case now, especially as we have moved away from a “job for life” culture. New generations have different experiences and different challenges as they age. That’s a large part of what auto-enrolment is trying to solve for.’

Two-Pot Retirement System: The Employee vs Employer View

Perhaps surprisingly, 76% of employees surveyed in the Old Mutual Workplace Benefits Primary Research, powered by LIMRA, consider themselves moderately or very knowledgeable regarding the new legislation that will allow employees access to a portion of their retirement savings (pension or provident fund) before retirement.

Of the employees who have some knowledge of the Two-Pot Retirement System, 53% intend to withdraw all or some of their retirement savings when it becomes available. More females, under-45s, those with lower personal incomes (R12 000 to R29 999) and more employees with partners and who have dependants, said they plan to withdraw the maximum amount allowed this year. In contrast, significantly fewer employers (only 61%) rated themselves moderately or very knowledgeable about the Two-Pot Retirement System. Of those employers who have some knowledge of the new legislation, 51% do not intend to change their contribution amount to the retirement savings fund. However, 45% of all employers say they are planning to help their retirement savings funds ensure there is enough liquidity to make funds available for members who choose to access them.

* This article originally appeared in the Old Mutual Mindspace Thought Leaders Forum special issue. Read the full publication here.