Home-grown solutions

Does the existing pension fund concept fit in with the expectations of the majority of our country’s working population? Or are we applying First World pension constructions and retirement ages to an African context? Perhaps it is time for innovation...

If the notion of the pension fund in Africa is not addressed from a developing world perspective, it will forever be regarded as a developed world concept.

We all retire, and on retirement, whether in the First World or the Developing World, we have the same needs, with the same timing. However, a pension fund concept is even more important in a country like South Africa, which does not have the sophisticated and comprehensive social security net available in the developed world.

Inheriting the liabilities of the youth

While South Africa does offer old age grants as part of the social security system, the elderly often have to distribute that meagre grant across more than one mouth. This is due to the fact that pensioners in South Africa typically inherit the liabilities of the youth. This is as a direct result of the young in South Africa having children they cannot care for, leaving the elderly with the responsibility. In addition, due to HIV and Aids, many parents die prematurely, leaving their children in the care of the elderly. As a result, the dependency ratio of pensioners is much higher in South Africa than in the developed world.

Unique challenges

While retirement funding is a much more critical concept in South Africa than in the developed world, it is certainly a more challenging ideal to implement. This is due to a number of factors, namely: high levels of unemployment, high dependency ratios and the relatively low income levels. This is in direct contrast to the developed world, where, despite retirement funding being less crucial, there are lower dependency ratios and higher income levels, as well as a sound functioning social security net.

In addition, the unemployment rate in the developed world, on average, falls in the region of 10%, while in South Africa the unemployment rate is almost three times that.

Harnessing the structures

The economic, social and demographic situation in South Africa may present an obstacle for retirement reform. However, South Africa’s institutional and regulatory regime compares favourably to some of the best in the world, with the structure necessary for reform already existing.

There are a number of precedents to illustrate this point, one of these being the impressive turnaround of the Unemployment Insurance Fund (UIF). It was reformed in 2000 and, while there is always room for improvement, it is now one of the most successful examples of social reform in South Africa. In the longer term, the UIF will be further reengineered to address the unemployment problem through labour market intervention processes such as matching vacancies with employment demand. Rather than simply issuing unemployment handouts, it will aim to put people back into the productive market in the shortest time possible.

This reengineering will bring the country one step closer to reforming South Africa’s retirement funding. While the private sector is well placed for pre-funded pensions, it is the social security element that needs to be upgraded. This approach, in consolidation with improving the means to pay for this kind of institution, needs to be kept in mind when going into the proposed new retirement dispensation.