South Africa's pension system gets a C-grade. Where is it going wrong?

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The 2021 Mercer CFA Institute Global Pension Index shows that SA's pension system is among the weakest. The country's pension system is ranked number 31 out of 43 countries.
Photo: Getty Images
The 2021 Mercer CFA Institute Global Pension Index shows that SA's pension system is among the weakest. The country's pension system is ranked number 31 out of 43 countries. Photo: Getty Images
  • The 2021 Mercer CFA Institute Global Pension Index shows that SA's pension system is among the weakest.
  • And that's not based only on retirement savings, but homeownership, debts and other savings that households have.
  • SA has many factors working against it, from high unemployment to high household indebtedness and people constantly taking their retirement savings in cash.

South Africa's pension system is a C-grade. That's according to the 2021 Global Pension Index Report produced by Mercer and the CFA Institute, which ranked the country's pension system number 31 out of 43 countries.

The index analyses 43 pension systems and covers almost two-thirds of the world's population. It does not limit its research only to occupational pensions.

It also looks at things like household savings outside of formal retirement funds, levels of household debt and homeownership since people who own their homes don't have to worry about paying rent or mortgage at retirement.

South Africa scored 53.6 out of possible 100 points. It did particularly bad in terms of sustainability and adequacy of pensions in the country, scoring below 50% in those two areas. However, the 53.6 points presented a slight improvement from 2020, thanks to the annuitisation of provident fund benefits, which began in March this year.

According to the report, Iceland, the Netherlands and Denmark have the best systems to help people live comfortably after retirement. They all scored above 80 out of 100 index points.

While South Africa's performance is nothing to brag about, it fares relatively better than countries like Thailand, India and Argentina – and even the more developed Italy and Japan.

What are other countries doing right that SA isn't?

The European countries leading the pack don't have the ticking time bomb of youth unemployment that SA faces.

The World Bank data puts the unemployment rate in the Netherlands at only 3.8% in 2020, 5.5% in Iceland and 5.6% in Denmark. On the other hand, South Africa's unemployment rate was 34.4% in the second quarter of 2021, and youth unemployment stood at 64.4% for the 15- to 24-year-olds and 42.9% for those aged between 25 and 34.

Because more people have jobs in the leading European countries, they save more. Iceland has a higher household savings rate, outside pensions, and a higher labour force participation rate at older ages, too, said Dr David Knox, a senior partner at Mercer and lead author of the study.

Also, these countries are better at covering self-employed, gig economy workers and those working in the informal sector in their retirement savings systems or through other savings outside of the pension system.

"This is relevant for South Africa, where you have limited coverage in voluntary pension schemes. Let's try and increase coverage," said Knox.

Knox said other countries are also increasing their retirement and state pension ages to keep people in the workforce for a little longer so that they have fewer years spent in retirement and a little more time to save. 

The question is whether that solution can work in a country like SA, where youth unemployment is so high.

Currently, there isn't a legislated retirement age in SA. Each company decides what the retirement age should be for its staff. But the state Old Person's Grant kicks in at 60 years for those who qualify.

Knox believes that retiring people early or at 60 won't necessarily solve SA's youth unemployment problems. But letting people work till much later in their sixties might help reduce the number of workers who become the state's burden once they retire.

"The balance between the state pension age and unemployed younger workers is an interesting one. But I think it's a juxtaposition. It doesn't exist as strongly as some people think," he said.

Knox pointed out that most people in their sixties can't do the type of jobs that 20-year-old workers do.

Preventing leakage of retirement savings in a two-bucket system world

In addition, countries with high-scoring pension system are better at preventing or reducing the leakage of retirement savings from the system.

Knox said SA, just like richer countries, including the US, has significant system leakage. When people change jobs, they take their money in cash in most instances.

"If we're saving for retirement, let's make sure that money is used for retirement," said Knox.

However, he said some withdrawals are understandable because people lose jobs, fall sick or face significant financial stresses. For those reasons, Knox said he thinks the proposed two-bucket system in SA, where workers get an emergency savings bucket to tap into should they need to, "has a considerable merit".

Singapore is one of the countries in the index that has that system in place already. Knox said Singapore's Central Provident Fund has three or four different pots for each member, but contribution rates are much higher. However, members often don't use the general savings pot until retirement.

"My expectation would be that emergency savings pot would not be fully used during working years. But people would have the confidence that it's there if they need it," said Knox.

He said SA could put in place rules like the minimum and maximum amounts to withdraw so that people don't constantly withdraw money for regular expenditures and monthly groceries.  

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