NATIONAL NEWS - South Africa can improve its pension system by introducing a minimum level of compulsory contributions to retirement savings vehicles or increasing the level of preservation when members change jobs.
This is according to the 10th Annual Melbourne Mercer Global Pension Index, which benchmarks the retirement income systems of 34 countries against roughly 40 indicators.
While South Africa scored relatively well with regard to the integrity of its retirement income system, the research raises questions about the adequacy and sustainability thereof and gives the country an overall score of 52.7 (C grading). This puts its performance on par with nations like the US, Brazil, Spain, Italy and Indonesia. The only two countries to receive an A grade in 2018 were the Netherlands with a score of 80.3 and Denmark (80.2).
South Africa has been on a gradual yet rocky road with regard to retirement reform, as many pensioners struggle to make ends meet. New regulations will require retirement funds to implement a default investment, preservation and annuity strategy by 1 March 2019, which should lead to better retirement outcomes for some members, but the country’s high unemployment and low economic growth rate have hindered reform efforts and attempts to introduce compulsory annuitisation in the provident fund space have effectively stalled.
“South Africa’s pension system is well regulated and demonstrates overall good governance, which impacts the level of confidence that South Africans have in the system,” says Nicolette Hendricks, CEO of Mercer South Africa. “Considering that the primary objective of any pension system is to provide adequate retirement income, ours falls short when looking at the adequacy of benefits and sustainability of the existing retirement income system.”
Substantial government debt, slow economic growth and no minimum level of mandatory contribution levels designed to provide adequate retirement income are some of the risks and shortcomings observed. It’s equally important to note that home ownership represents an important feature of financial security in retirement, she adds.
Dr David Knox, senior partner at Mercer Australia and author of the study, says the natural starting place for a world class pension system is ensuring the right balance between adequacy and sustainability.
“It’s a challenge that policymakers are grappling with,” he says. “For example, a system providing very generous benefits in the short term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”
To improve its overall score, the researchers recommend that South Africa increase the minimum level of support for the poorest pensioners and increase the coverage of employees in occupational pension schemes (thereby increasing the level of contributions and assets).
They also recommend that South Africa introduce a requirement that part of the retirement benefit from provident fund arrangements be taken as an income in retirement (this already applies to pension funds and retirement annuities). The introduction of compulsory annuitisation for provident funds was previously postponed by another year to March 1, 2019 to allow for further consultation.
Hendricks says every country has its own unique economic, social and political circumstances but can still take steps to improve their pension system. “In the long term, there is no perfect system, but the principles of ‘best practice’ are clear.”
She adds that pension systems should be looking at a range of reforms that can be implemented to improve the long-term outcomes, such as encouraging higher levels of saving, reducing the leakage from the retirement savings system prior to retirement when changing jobs, improving governance, and introducing greater transparency to improve the confidence of members.
David Anderson, president of international at Mercer, says that as people are increasingly living longer, it is positive to see governments take steps to reform their pension systems.
