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SA’s pension system scores high on integrity, but global study flags risks and shortcomings

SA’s pension system scores high on integrity, but global study flags risks and shortcomings

In a comprehensive study of 44 global pension systems, accounting for 65% of the world’s population, South Africa scored 44.2 for adequacy, 49.7 for sustainability and 78.4 for integrity.

Between rolling blackouts and government (and corporate) corruption, South Africans have much to complain about, but the country’s pension system recently scored a high 78 on integrity in the 14th Mercer CFA Institute Global Pension Index (MCGPI).

A high level of regulation and the government’s attempts to encourage saving through tax incentives played a role in the higher integrity rating. However, South Africa fell short when it came to the two other focus areas of sustainability and adequacy.

The top three systems — Iceland, the Netherlands and Denmark — all received an overall A ranking based on their sustainable and well-governed systems, which provide strong benefits. In comparison, South Africa received a C, indicating that although its pension system has some good features, several major risks or shortcomings have been flagged.

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65% of the world’s population. South Africa scored 44.2 for adequacy, 49.7 for sustainability and 78.4 for integrity. To put this in context, Iceland scored above 83 in all three categories.

Belinda Sullivan, the head of corporate consulting strategy at Alexander Forbes, Mercer’s strategic partner in Africa, notes that the index this year focused on the shift from defined benefit to defined contribution funds.

“South Africa has a relatively mature defined contribution environment, with this shift having started more than 30 years ago. However, despite the opportunity to save in the private sector, there have been insufficient measures in place to ensure that more people have some kind of retirement savings and that they preserve these savings for retirement,” she says. 

The net effect is that although many may start out saving for retirement, continual changes from one company retirement savings scheme to another, combined with the opportunity to withdraw funds mean that these members end up with insufficient savings and are forced into reliance on family support, government grants or both. 

Sullivan advocates that the government removes the means test of the state old age pension to ensure a minimum safety net and removes the current disincentive to save as a result of the means test.  

“Employers who do not have retirement savings plans in place can also make a change by putting something in place for their employees. Research indicates that individuals are 15 times more likely to save via employer schemes rather than on their own. 

“The two-pot system proposed by National Treasury will also make a significant difference in terms of improving the amounts preserved by individuals.  

“Lastly, access to advice is key for members to improve their outcomes and ensure the sustainability of their income throughout their working lives and in retirement.”

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Retirement fund landscape changes

Over the last 10 years, South Africa has introduced several changes in the retirement fund landscape, which include standardising tax treatment across retirement products, default regulations giving members access to wholesale-priced retail solutions and making it compulsory to buy a pension for sustainable income in retirement.

National Treasury released details about the “two-pot system” in August. The new system is supposed to take effect from 1 March next year, although some industry experts are sceptical about the practicality of the implementation date. 

The changes mean that retirement fund members will be able to access a third of their retirement savings, housed in a “savings pot”, while 70% of their savings will be ringfenced in the “retirement pot”. However, you will no longer be able to access your retirement savings when changing jobs.

Ronald King, the head of public policy and regulatory affairs at PSG Wealth, says it is important to note that the one-third accessible pot will only be created in March next year and will in effect be empty. 

“You will therefore only have access to one-third of your future savings. It is also important to note that any withdrawals from the one-third pot will be taxed at your marginal (highest) tax rate and the ins and outs of how this will impact the sum that you have when you eventually retire is a worthwhile discussion to have with your financial adviser before making any decisions,” he cautions.

The Mercer Index proposals tie in with imperatives that are currently the focus of the government and industry, such as increased participation in private pensions, introducing a minimum level of contributions, an increased level of support for the poorest, and reducing leakage or withdrawals from the retirement savings system before retirement.

Dr David Knox, a senior partner at Mercer and lead author of the study, says people have been assuming more responsibility for their retirement savings amid high levels of inflation, rising interest rates and greater uncertainty about economic conditions.

“Despite differences in social, political, historical or economic influences across geographies, many of these challenges are universal. And while the necessary reforms may take time and careful consideration, policymakers must do all they can to ensure retirement schemes are supported, developed and well-regulated,” says Knox.

“There is no single or perfect answer — the best [pension] system is the one that helps individuals maintain their previous lifestyles into retirement. Governments, employers, policymakers and the pension industry should use the full array of products and policies available so individuals can retire with dignity, confidence and financial security,” says Knox. 

Margaret Franklin, the CFA Institute president and CEO, points out that in the past year, the world has gone from a “lower for longer” interest rate environment to significant rates of inflation, quadrupling of interest rates in some global markets and a rise in the cost of living for many, all of which have a significant impact on the fixed income of retirees.

“This report provides insights into how retirement plans need to adapt or are adapting to the changing environment, and also makes recommendations for a range of reforms that can be implemented to improve the long-term outcomes from our retirement income systems,” she adds. DM/BM


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