Defined Contribution (DC) funds are the default in South Africa’s retirement industry, but these funds are volatile and – despite the reduced costs – can lead to poor retirement outcomes. Speaking at the 2024 Old Mutual Thought Leaders Forum, Colin Haines, EMEA Chief Commercial Officer, Wealth Solutions at Aon, presented a compelling argument for an alternative solution: Collective Defined Contribution (CDC) funds.
‘CDC can be used to improve pensions at retirement by as much as 30% on average,’ Haines said, adding that the Royal Mail in the United Kingdom is in the process of launching a new CDC plan for all its 150 000 postal workers.
‘In the UK, CDC plans were introduced in the 2021 Pension Schemes Act as an alternative design to both Defined Benefits (DB) and Defined Contribution (DC) funds. At Aon, we argue that CDC can support a drive to consolidation and investment in high returning assets for longer to fuel the growth in the national economy,’ Haines said.
Haines explained that CDC provides cost certainty, as employer and employee contributions are fixed – just like in a typical DC plan. ‘But CDC is collective, so it works by pooling the contributions and investment returns to help provide a target pension,’ he said. ‘That’s the key difference: it provides a target pension. The assets are managed collectively by trustees on a pool basis, so you don't need members to choose their own funds. And CDC can offer what many employees want in retirement: a target inflation linked to income, which has been generated from their contributions. It’s payable for life and it does not require them to make big, complex financial or investment decisions at retirement, or even to buy an annuity at poor times in the market.’
Risk-sharing among fund members
In the panel discussion that followed Haines’s presentation, Fred van der Vyver, Head of Corporate Savings & Income at Old Mutual, underlined the profound implication of South Africa’s move from DB to DC.
‘We have shifted the investment risk and the longevity risk onto each individual member,’ he said. ‘There’s no risk-sharing happening in a DC fund at the moment, and we’ve seen the consequence, which is the volatility of it. Some people are way better off than they would have been in a DB fund; others are way worse off than they would have been in a DC fund.’
John Anderson, Executive for Solutions and Enablement at Alex Forbes, agreed. ‘The purpose of a [retirement] fund is to provide income,’ he said. ‘I think over the years, we’ve lost that through the system. The first challenge is breaking the mindset of individuals that, “It’s my pot of money and my investment.” In reality, individuals should be purchasing an income. It’s a subtle but very important and powerful concept. We’ve tried over the years to change people’s mindsets by providing projection statements, for example, to translate their “pot” into an income. But people don’t look at that. They don’t engage with it.’
Fatima Vawda, CEO of 27four, argued that South Africa’s retirement reforms have already been pushing the industry towards what a CDC system would achieve. ‘We took away quite a bit of the responsibility away from the member by establishing a default portfolio,’ she said. ‘We know that around 2% of members in fact apply member investment choice. We also know that with the Two-Pot Retirement System and forced preservation, we are moving away from a focus on capital protection at retirement and towards income protection.’
Any shift towards CDC funds would, however, require an education drive among retirement fund members. ‘We’re seeing it now with the Two-Pot Retirement System, where levels of understanding of general pension concepts are very low,’ said Blessing Utete, Managing Executive at Old Mutual Corporate Consultants. ‘There’s a lot of thinking needed around how we get better engagement and better education for employees, so that they can start understanding basic concepts and then graduate to some of the more complex systems.’
Van der Vyver wrapped up the discussion by encouraging retirement industry stakeholders to think beyond the current defaults. ‘There are alternative risk management solutions available,’ he concluded. ‘The key takeout is what that empowers you to do. If you have a good risk management system, you can then take more risk and deliver better outcomes on average.’