South Africa is on the cusp of completing a decades-long arc of retirement reform. With the Two-Pot system in full swing and compulsory preservation rules now in place, the next phase is perhaps the most palpably needed: compulsory coverage with minimum contribution rates. Mandatory retirement coverage for all formal-sector employees is the bold next act to achieve this aim.
South Africans working in the formal sector have long been branded as “bad savers”, leaving millions dependent on government support through old-age grants. An oft-repeated statistic is that only 6% of working South Africans will have the means to retire comfortably. One source for this failure lies in the findings from research in 2020, which show that only around 58% of people employed in the formal sector contribute to retirement funds or pension products. With informal-sector coverage being far lower, the overall average number of South Africans saving formally for retirement drops to only 43%. In addition, Statistics South Africa data from 2023 shows that roughly 73% of South Africans over the age of 60 receive the state’s old-age grant.
These figures certainly support the claim of “bad savers”, but what if it’s not only about individuals saving badly, but also about a retirement system that falls short of its own aspirations? What if, as a society, we are prone to instincts that prioritise today’s needs above those of tomorrow? And what if we could learn to plan for tomorrow because the retirement system equips participants across the board with the tools and incentives to do so? This is what dominates debate around the next step in our retirement reform journey. The key to that debate is the question of voluntary vs compulsory savings in achieving universal coverage.
Where we are, and why it’s not enough
Sudhir Ramdass, a Consulting Actuary at Old Mutual Corporate Consultants, sees the progress made in recent years as essential groundwork needed to shape the course of how we save for our future. “We’ve made great progress over the past decades, culminating in the introduction of the Two-Pot Retirement System,” he says. “Now, we tick the box on maximising preservation and we tick the box on what you can do with your money at retirement.”
But a few remaining design creases still need to be ironed out, as some employees find themselves underprepared for retirement, despite saving throughout their working lives. That shortfall is a result of a lack of guardrails that ensure individuals are saving enough to fund their retirement. In the absence of a more structured and pervasive retirement savings ecosystem, employees can hardly be blamed for not contributing enough, for long enough, or at all. “With the average South African retiree having retirement savings of roughly only two times their annual salary, this is a crisis of epic proportions,” Ramdass says. “Studies show that most people are not saving, especially when their employers do not provide benefits. So it’s hardly surprising that many people suddenly realise, at the age of 45, that they don’t have enough saved for retirement. But by then, it is often too late.”
What default systems around the world have proven
Stephen Walker, Principal Consultant at Old Mutual Corporate Consultants, points to international evidence that the “default approach,” through either auto-enrolment or mandatory contributions, or both, rather than relying on employees to actively choose to save, is the most reliable way to achieve wide coverage and adequate saving.
Walker cites Australia’s wildly successful retirement system, commonly known as the superannuation system, which now provides cover for more than 90% of the country’s workforce through a mandatory contribution system. We also have a local example of the success of default contributions: the Unemployment Insurance Fund (UIF) is compulsory and, as a result, covers some 90% of private sector workers.
In the UK, employees earning £10 000 (R239 000) per year are automatically enrolled in a workplace pension scheme. “The approach is to email new members, giving them one month to opt out,” he explains. “What happens in most cases is that employees don’t opt out. They just go into the pension scheme because they think, okay, I need to be on the pension scheme.”
“Human apathy is the default,” Walker says. “So putting someone onto a pension scheme by default is a good thing, because the vast majority of people will just go along with the default.” Walker is clear: “Whether we go the auto-enrolment route or the superannuation compulsory contribution route, we need to bring in some guidance. Without that, the system leaves too much to chance. And too many workers, especially those without financial knowledge or bargaining power, will miss out.
We have already tested the model, just not everywhere
“In some areas of our retirement system, we already have compulsion,” Walker says, referring to sectoral determinations. “If you work in the security industry, you must belong to the Private Security Sector Provident Fund (PSSPF). It’s compulsory.” But compliance with such sectoral determinations can be inconsistent, and in some areas, practices that stretch the rules are a concern. This was rife, he says, in the private-security sector, where fly-by-night companies would do all they could to avoid their obligations under such sectoral deals. Even in better-governed environments, the urge to undercut remains. He recounts how some employers in industry funds are trying to argue that the minimum contribution rate hurts their ability to attract talent because higher rates mean lower take-home pay. “What’s the point of putting employees into a pension fund when they aren’t committing enough to their retirement savings?” he asks. His frustration points to a bigger issue: employers might be able to tick the box by providing for their staff’s pension, but at rates that meet the letter of the law, not the spirit. That’s why Walker proposes a national framework: “What I’m describing is a sectoral determination across the whole of the formal sector.”
But what about the informal sector?
Ramdass notes that workers in the informal sector remain marginalised from the traditional retirement savings system. While statistics show that nearly one in five of all workers is employed in the informal sector, informal worker membership of retirement schemes is fractional. OECD research indicates that only 2% to 5% of informal workers across Africa participate in retirement schemes.
Roughly two-thirds of these, nearly two million South Africans, run informal businesses. This means they are not registered for income tax or VAT, operate without formal contracts, and often work in 2025unlicensed entities. Their income tends to be low and irregular, they lack job security, don’t have access to insurance and credit, and there is no formal retirement age.
“These features form structural and regulatory barriers to voluntary participation in the retirement system,” Ramdass says. We need solutions that take on contributions that vary in both amount and frequency, accommodating periods of furloughs or financial hardship for our members. This would also require the development of new fee models.
The state of affairs is not entirely bleak. There is evidence that approximately 800 000 stokvels handle annual transfers of R49 billion for over 11 million people, pointing to community-driven solutions filling the void. Recent surveys and studies also suggest the informal MSME economy is larger than commonly believed, with an estimated 13 million people employed in these businesses. “The informal economy may be more robust and less monolithic or bleak than generally assumed,” says Ramdass. More data and insights into this sector should be extracted as a first step towards developing appropriate financial solutions drawing from the community practices and innovation.
Making it politically and practically viable
Ramdass is pragmatic about making this reform land: “You don’t immediately make the minimum default contribution 10%. We need to recognise that it could take 10 years to get to 10%. So, for now, let’s say it is 2%, then 4%, 6% and 8%, and then 10%.”
Another way to introduce mandatory cover could be a dual threshold based on income and age. “Everybody who earns R10 000 or more and/or is over the age of 25 should be contributing to a retirement fund,” he says.
Below that salary, where employment is most likely to be informal, and below that age, where employment is likely to be entry-level or intermittent, savings can be voluntary or directed into alternate pathways, such as micro-pension schemes. There are several examples of well-established programmes in many regions in the sub-Saharan continent, such as the Kenyan Mbao and KNEST schemes, Mazima in Uganda, or the EjoHeza Long Term Savings Scheme introduced in Rwanda.
Phasing by employer size is another lever. Ramdass points to examples where default contributions were introduced by staff count, starting with large enterprises and gradually lowering the threshold to include smaller businesses. This multi-dimensional phasing strategy ensures the reform is scalable, non-disruptive, and politically feasible while still delivering national coverage over time. “Again, the nature of informal-sector employers can be accommodated in this approach, allowing for the unique features and behaviours of these groups,” says Ramdass.
Micro-pension schemes across Africa and other developing regions offer a roadmap. Building viable options will require an appropriate licensing and legal framework, bundling micro-pensions with financial products that support financial inclusion, establishing alternative administration and management platforms at the right price points, leveraging technology, and introducing tax and fiscal incentives to boost participation.
*This article originally appeared in the 2025 Old Mutual Mindspace Thought Leaders Forum special issue. To read more and subscribe, click here.