How adequate is South Africa’s pension system? Can it keep delivering, and can it be trusted? These are important questions, and ones that we should all ask – both of our national retirement system in general, and of the specific funds in which we have invested our retirement savings.
The 2022 Mercer CFA Institute Global Pension Index released in November 2022, set out to answer these questions by comparing 44 countries’ pension-fund systems. It looked at three factors to be able to rank them: adequacy, sustainability, and integrity. South Africa ranked 34th.
Some local media headlines were somewhat skewed. ‘SA’s pension system slips further down the global rankings’, read one. ‘South Africa has one of the worst pension systems in the world’, claimed another. The former was unfair; the latter was simply untrue. In fact, South Africa’s total score of 54.7 – its highest since it was first included in the index in 2014 – puts it on par with developed economies like Japan (54.5), Italy (55.7), and Austria (55.0).
To compare South Africa’s overall score (54.7) with that of the top-ranked country, Iceland (84.7,) does not compare like with like. South Africa is the only African country included in the index, which means it is being compared to countries that don’t necessarily have the same socio-economic conditions to take into account. It also has a population of nearly 59 million, while Iceland’s is just 357 000. (One of the largest Umbrella Funds in the country, Old Mutual SuperFund, alone has more members than Iceland has people.)
However, it’s instructive to look at the index’s findings from their objective perspective, and to see where and how our systems can improve.
Improving South Africa’s retirement system
In terms of integrity, South Africa scored a B+. Our pension-fund system’s integrity received a rating of 78.4, which reflects the good governance of our retirement funds, the rigour of our policies and regulations and the strength of our Pension Funds Act
If the index measured one of the largest funds in the country like the Old Mutual SuperFund in isolation, I am confident that it would score even higher in terms of integrity, based on its largely independent board of trustees and strong governance policies. South African retirement funds have made great strides in the management and oversight functions.
What brought South Africa’s overall score down were its two Ds: 44.2 for adequacy and 49.7 for sustainability. Here, the Mercer report recommended the following four interventions that could raise the country’s overall index value:
• increasing the minimum level of support for the poor;
• increasing the coverage of employees in occupational pension schemes, thereby raising the level of contributions and assets;
• introducing a minimum level of mandatory contributions into a retirement-savings fund; and
• introducing preservation requirements preventing members from withdrawing funds from occupational pension schemes prior to retirement.
Increasing South Africa’s old-age state grant is easier said than done. South Africa has a small tax base relative to the size of the population. We also have high unemployment and slanted income inequality rates. In this context, there will always be constraints on what South Africa’s grant system can hope to achieve.
That said, we are already seeing positive moves in terms of coverage, mandatory contributions and preservation.
Deferred retirement solutions
South Africa’s Achilles’ heel is that our retirement-fund system largely covers people who are formally employed. We need innovative, African thinking around how we solve this. However, there are encouraging developments on the legislative front that are helping to improve coverage and sustainability.
One of the reforms came a few years ago when government regulations changed so that it is no longer compulsory that retirement-fund members start receiving their benefits the day they hit retirement age.
With deferred retirement, you can become a paid-up member of your retirement fund when you reach retirement age and leave the money in the fund. That way, your money will continue to grow with interest until you decide to purchase an annuity.
There are three benefits to leaving your money in your retirement fund for a while: your investment will have grown, the cost of your annuity will be cheaper (because you’re older), and you’ll get a better retirement outcome.
At the moment, Old Mutual SuperFund has 603 members doing exactly that as deferred retirement members.
Meanwhile, about 47 000 Old Mutual SuperFund members – about 10% of the Fund’s overall membership – are SuperFund Preserver members. These are individuals who have changed jobs, and are now contributing to another retirement fund but still have money preserved in Old Mutual SuperFund.
Minimum retirement contributions
In terms of mandatory minimums, Old Mutual SuperFund was ahead of the curve when it introduced minimum contribution rates.
As my colleague Andrew Davison has said: ‘If you don’t contribute enough to your retirement pot, there won’t be enough to grow.’ Members should be saving at least 15% of their salary, excluding costs, aiming for a return of 5% above inflation over 35 to 40 years.
Low contribution levels are simply not sustainable, and there is no point in having a retirement fund just for the sake of having a retirement fund. It needs to be meaningful. It needs to drive the desired retirement outcomes. It shouldn’t just be a box-ticking exercise.
The two-pot system for retirement savings
The Mercer report’s recommendation around preservation comes at a time when South Africa’s National Treasury is introducing legislation that aims to achieve exactly that. Old Mutual supports the proposed two-pot system for retirement funds, as it introduces a measure of compulsory pension preservation. We expect it to have a massive impact on retirement savings going forward.
Our retirement system cannot be sustainable if it allows retirement-fund members to withdraw 100% of their benefits, in cash, every time they change jobs. The two-pot system will ensure the preservation of two-thirds of members’ future retirement savings. Under the current regulations fund members may take one third of their retirement savings as a lump sum. Put simply, the two-pot system will therefore allow easier, earlier access without actually detracting from benefit outcomes.
Importantly, retirement fund contributions will still be tax deductible up to 27.5% of taxable income (or ZAR 350 000 per annum). Any contributions above these caps will be allocated to the retirement pot.
Once the two-pot system is in place (at the time of writing, the proposed implementation date is 1 March 2024), National Treasury has suggested plans to introduce auto-enrolment at a later stage. This would require employers in the formal sector to put their employees onto an approved retirement fund, with a government run national pension fund as the default option for those employers who do not want a private sector run solution.
According to research by Andrew Donaldson, a former deputy director general of National Treasury for the 2021 PLA Conference, 58% of people in South Africa’s formal sector are currently saving towards retirement. If auto-enrolment sees compliance levels similar to the Unemployment Insurance Fund’s (UIF) 90%, it would mean that 90% of formally employed South Africans will be saving for their retirement. While that doesn’t solve the problem for informal-sector workers or the long-term unemployed, it would nonetheless be a significant improvement.
This, surely, will improve where South Africa’s pension-fund system ranks when compared to other countries. More importantly, it will improve retirement outcomes for millions of retirement fund members.
Boosting retirement outcomes
South Africa’s retirement industry certainly has room for improvement, but it’s moving in the right direction. We’ve known for some time that the South African pensions model – particularly the private sector – is well regarded internationally and ranks right up there with some of the best in the global market. Change takes time, but as long as the government continues to implement necessary legislation like mandatory preservation and industry leaders like Old Mutual SuperFund continue to provide innovative solutions, improvement will be inevitable.
By Blessing Utete
Blessing is Managing Executive of Old Mutual Corporate Consultants.