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Do you make up the 6% of South Africans who can afford to retire comfortably?

27 January 2012 Rowan Burger: Head of Investment Strategy at Liberty Retail South Africa
Rowan Burger: Head of Investment Strategy at Liberty Retail South Africa

Rowan Burger: Head of Investment Strategy at Liberty Retail South Africa

In the UK, twenty year olds are three times more likely to get to 100 than their grandparents. A quarter of 16 year olds are expected to make this milestone. While people are living much longer worldwide, AIDS masks the effects of improvements in living c

A twenty year old will work for forty years before reaching the age they qualify to draw a state pension, and given the analysis above, have a reasonable chance of needing to live off their savings for another forty years.

We know that South Africans presently fail to protect their standard of living in retirement by saving adequately now. What will happen in future? The recently released Vision 2030 document by the National Planning Commission (NPC) outlines the extreme need to change the culture of savings in South Africa in light of the existing and anticipated changes to working lives, ensuring that our income security is enhanced as well as promoting saving as a way of life amongst all South Africans. At the moment, a quarter of South Africans receive some form of social grant, we cannot afford to extend this any further.

Currently, many discussions are taking place amongst various bodies, including Government who are tackling the million dollar question – how do we overhaul the retirement savings structure for South Africans?

The ultimate goal in reforming the current retirement system is to ensure financial security amongst the elderly by providing a pension for all through compulsory savings and reducing the dependency on the state in old age.

Whilst the argument appears simple in form; the overhaul of our current retirement saving structure has been subject to disagreement between various bodies; resulting in the next retirement reform policy paper to be released this year.

And whilst no formal commentary has been released; there is general sentiment about what the social reform policy would mean to South Africans should it be introduced. And at the moment it appears that it is likely to have a positive impact for all South Africans as it will assist in:

 

· Increasing long-term savings in a disciplined fashion;

· Providing access to regulated simple, cost-effective retirement savings;

· Providing access to related products for those who historically haven’t had access.

However, one of the challenges outlined in the NPC Report is that in order for the proposed system to be successful it will require a larger working force and presently too few people are employed or at least declare their earnings. Nevertheless Government aims to create 11 million jobs by 2030, confident that this will go a long way in aiding the reformation of our current retirement savings structure.

The question still remains, even with an increased work force, how will retirement reform be implemented in a socially challenged society, coupled with sluggish growth within the job market compacted by volatile economic conditions?

According to Rowan Burger, Head of Investment Strategy at Liberty Retail South Africa, the NPC report offers an interesting insight into the thinking that is driving the proposed retirement reform and the mere fact that social protection forms part of the philosophy is heartening.

“The need for social protection as an integral part of any country’s social development and upliftment is well documented internationally,” explains Burger. “It is absolutely essential if our country wants to achieve any success in income equality, poverty alleviation and even crime reduction.”

However, Burger says the document should not consider solutions for secure long term employment as they have in the civil service, but focus on the needs of the currently under catered for population who are informally or temporarily employed and where the reality is that long-term job security is fast becoming a thing of the past.

The vision for 2030 is for all South Africans’ to be part of a country that provides its people with a social system that allows for social security grants, mandatory retirement savings, risk benefits such as unemployment, death and disability benefits and voluntary retirement savings.

“While substantial recognition is given in the document to the challenges of providing informal workers with formal retirement savings vehicles, it still hints at the possibility of the introduction of a dual contribution and a defined benefit retirement savings system for formal worker only. Informal workers would be catered for on an ad hoc basis with little social insurance.” Burger explains.

Burger goes on to explain that any retirement plan, whether undertaken by an individual or as part of a national scheme, needs to make allowance for the fact that the world of work is very different to what it was twenty years ago – and is likely to continue changing substantially over the next few decades.

“Given the current challenging economic environment, the notion of long-term job security will most likely be more difficult to come by hence, it is going to become increasingly taxing for the majority of employees to make regular, fixed contributions to a retirement savings scheme for a lengthy period resulting in dire implications for any retirement plan,” he points out.

Burger adds further that the challenge goes beyond finding a compulsory retirement savings solution that suits the nature of informal employment, it also needs to be cognisant of the fact that the very concept of completely stopping work at retirement age is fast becoming a foreign one, as an increasing number of people realise that they will need to retain employment of some sort after retirement age in order to make ends meet and face a far longer period in retirement than previous generations have.

“The result of irregular payments into a retirement scheme makes the proposed defined benefit savings structure an unsustainable option for the national retirement scheme,” he emphasises, “and simply tacking on a separate savings arrangement for informal employees will only serve to introduce higher risk into the overall scheme by encouraging people to seek out employment that enhances their benefit entitlements, usually to the detriment of the whole scheme.”

“Possibly the most important consideration of any national retirement scheme eventually proposed by government is that it must offer consistent treatment for all,” he says, “and the best way to achieve this would almost certainly be through a single, defined contribution system that covers all informally and formally employed workers by offering sufficient flexibility to allow for the likelihood of irregular income and payments and the continuation of the strong social insurance safety net the social grants system provides.”

“The treatment of the nation’s retirement savings is obviously a hugely emotive issue,” concluded Burger, “and the nature of employment in South Africa is also a highly politicised issue.”

“Hopefully, rational thought, foresight, and the lessons of an inflexible and now crumbling European retirement system, are applied when constructing this country’s retirement reform proposals to ensure that the dynamic employment circumstances and changing retirement needs of all South Africans are considered,” concludes Burger.

Quick Polls

QUESTION

The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025. What do you think about their ongoing efforts?

ANSWER

But what about the BRICS?
Compliance burden remains, grey-list or not.
End-2025 exit is too optimistic.
Grey-list is the new normal.
Too little, too late.
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