Retirement reform: A national priority
The retirement industry is the bedrock of South Africa’s saving pool. Addressing the many challenges in the industry is a national priority, and the benefits will extend well beyond government’s retirement reform goals.
While financial literacy is low and unemployment is disproportionately high, pension contributions remain the de facto form of savings for most South Africans. Our retirement industry is one of the most complex in the world and one of only a few where members are able to withdraw pension benefits before retirement.
Numerous challenges
These factors largely contribute to the fact most South Africans - some estimate more than 90% - simply do not make adequate provision for retirement. Retirement coverage in the formal sector is estimated at more than 50%, less than 15% in the primary sector and less than 5% among the informal sector and domestic workers. This puts an enormous burden on government, healthcare and state welfare benefits.
In addition, life expectancy in South Africa has dropped below 50, making retirement, in traditional terms, somewhat obsolete. Furthermore the “leakage” for the retirement industry has been a major contributing factor towards poor retirement provision.
While many of these factors contributed to government’s proposed retirement reforms under the National Social Savings Scheme, it appears that government will be unable to implement the scheme any time soon.
Crucial issue
As government grapples with a national framework and funding issues, the crucial question is: “How do we keep retirement reform a national priority, without further burdening government’s resources?”
The main priorities must be:
• widening the retirement net;
• ensuring members make adequate provision for retirement; and
• making the industry more relevant, considering that many working South Africans will not reach retirement age.
While it is unlikely that all these objectives can be met in the short term, government and the private sector can work to provide effective solutions.
Current solutions
There are currently numerous ways to increase retirement coverage without putting further pressure on government resources, for example:
• a pension literacy campaign aimed at low income sectors;
• including the benefits of retirement planning into Treasury’s current campaign around Retail Savings Bonds;
• more targeted messaging by the SA Savings Institute;
• introducing auto-enrolment into any pension or savings scheme;
• creating a Mzanzi-type investment vehicle for low-income earners.
These initiatives have already been tabled by the private sector and are similar to the kinds of initiatives adopted by other governments even in more developed markets like the US.
In the US, an automatic enrolment section 401k retirement annuity scheme has seen the number of companies adopting the plan increase by 8% to 59% in one year, and more employers offer investment services and tools to assist employees.
The next step
While risk benefits are becoming increasingly important in light of the country’s low life expectancy rate, the industry can improve the way it does business.
Government and the private sector can look at viable solutions that are sensitive to the needs of workers who need to access their savings when, for example, they lose their jobs. These include:
• Requiring pension funds trustees to offer preservation as the exit default, or to automatically transfer benefits to a preservation fund unless the member instructs differently;
• Relaxing the current “one withdrawal” rule for preservation funds which makes preserving benefits more attractive to workers.
To maximise benefits and reduce retirement costs, government could introduce new initiatives that require standard disclosure of costs from all funds and allow greater portability between funds.
