John Anderson & Blessing Utete 
Many of us are either failing to find a sound path to retire the way we want to or have yet to begin the journey of saving for life after work. The 2024 Mercer CFA Institute Global Pension Index ranked South Africa 44 out of 48 countries for retirement outcomes. Far too few people have access to retirement products and those who do too often fail to meet their goals.
Fortunately, we have many strong institutions, world-class professionals, and a relatively advanced economy to leverage. To build on this foundation and resolve pressing challenges in a fast-changing world, it is critical that we understand – and prepare for – the retirement world of the future.
Blessing Utete, Managing Executive of Old Mutual Corporate Consultants, sums up the moment we are in. “I am concerned as well as upbeat. It is deeply worrying to see how many South Africans battle to get into formal employment, and then thrive once there. Too many people are under-served by fundamental retirement planning. At the same time, we sense real energy and practical ideas that can harness this low base to create reform and real change.”
Pots of potential
Even though it forms part of a wider push towards retirement reform, the new Two-Pot Retirement System has already created a seismic shift. It has dominated not just boardroom discussions but the popular conversation in South Africa.
The formulation, drafting and implementation of the Two-Pot Retirement System represents a dynamism that many industries can aspire to. The collaborative, consultative effort involving multiple stakeholders, including government and private sector, bodes well for further innovation.
Be it artificial intelligence (AI), economic tumult or geopolitical black swan events, it is this sort of progressive partnering that will help the retirement industry to thrive.
Taking the lead
Technology will also be key to meeting the growing need for funds to be more than efficient products. As Humphrey Mkwebu, General Manager: Employee Benefits Solutions at Old Mutual Corporate, puts it, “Retirement funds need to evolve. Being ‘just a fund’ will not be enough.”
Digital engagement and contextual management through technology can improve members’ experiences and retirement saving outcomes. Mobile apps, for example, can dramatically improve day-to-day communication on claims.
Nudges, based on behavioural economics, can also help to foster small improvements in saving behaviour that add up to meaningfully improved retirement outcomes.
It also takes a village to build a comfortable retirement.
As Mkwebu puts it, “The future is about empowered members and their outcomes. Everyone else – insurers, trustees, employers, intermediaries, sponsors, regulators – exists to enable that noble goal.” Multisided platforms can do just that. These technological tools can craft a symbiotic ecosystem that provides members seamless access to the right expert at the right time.
Coming soon?
While high unemployment may be the primary reason for low participation in retirement funds, part of the difficulty is the large number of employees who simply have not enrolled in any scheme. Data suggests nearly a third of employees in the formal sector do not participate in a retirement fund. Often this is not a deliberate choice, but an omission. This informs the auto-enrolment plan proposed by the National Treasury, a further step in the retirement reform process.
Automatically signing employees up for a retirement plan has several models from around the globe to learn from. The UK introduced such a plan in 2012. It was rolled out in phases, starting with the largest employers, followed by medium-sized employers and finally small ones. Automatic enrolment depends on a few simple criteria (for example, a worker must earn at least £10 000 per year and be aged between 22 and state pension age). Employees may, however, actively opt out.
Nigeria “uses compulsory minimum contributions,” explains Stephen Walker, Head of Actuarial Consulting at Old Mutual Corporate Consultants. “Everybody must belong to an approved pension scheme, and they must contribute a minimum of 18% of their earnings (including 10% contribution from the employer).”
A model for South Africa should make use of a public-private partnership. Michelle Acton, Chief Customer Officer and Retirement Reform Executive at Old Mutual Corporate, explains the approach of the country’s largest pension fund administrator: “We believe that all earning South Africans should be in a retirement fund. This is the benefit of the National Treasury’s proposed auto-enrolment, which seeks to ensure that there is some level of minimum contribution to a retirement fund. 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.”
According to Old Mutual Corporate’s calculations, auto-enrolment would bring up to five million additional contributors into the retirement funding ecosystem.
The case for collective contributions
Another powerful development is the collective defined contribution (CDC) pension scheme. This novel structure bridges the gap between defined benefits and defined contributions. It is already being used in other countries in various forms, the UK has recently crafted legislation implementing such a scheme and the Royal Mail is now busy implementing a CDC approach. It may also work well in South Africa’s context.
With a CDC plan, employees and employers contribute a fixed amount. Then, “similar to a defined benefits (DB) plan, the contributions are paid into a collective (or pooled) fund, with the goal of providing a target retirement income for life rather than a lump sum amount at retirement, which comes with complex decisions for individual retirees,” explains Colin Haines, EMEA Chief Commercial Officer, Wealth Solutions, Aon.
Among several benefits of CDC the contributions from all participants are pooled and invested together, allowing for more flexibility in investment strategies. The upshot is that CDC schemes can make higher return-seeking investments over longer time horizons than is currently the case with closed DB or individual DC schemes.
While a CDC plan does not guarantee benefits as per a DB plan, it aims to achieve higher predictability than a standard DC plan.
For South Africa, a CDC approach is at best several years off, as there would need to be agreement from stakeholders, including the financial services sector and trade unions, Haines explains, but the opportunity exists.
These are big challenges in our retirement industry that need concerted solutions, and the future of retirement is as challenging as it is bursting with opportunity. Now is the time for the industry and stakeholders to act together and decisively.
Read more about these topics (and more!) that was recently discussed at the Old Mutual Thought Leaders Forum here or download the publication [Insights from the Forum - Old Mutual Thought Leaders Forum]
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP and Life Insurer. DM