South Africa’s pension system ranked 34th out of 44 retirement systems reviewed in the 14th annual Mercer CFA Institute Global Pension Index (MCGPI).
Globally, Iceland was top, followed by the Netherlands, while Thailand ranked last. This year’s MCGPI also features Portugal as a new addition.
The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65% of the world’s population.
It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits.
The SA retirement income system was benchmarked against global peers across three key areas of focus: adequacy, sustainability, and integrity.
SA’s overall index value improved from 53.6 in 2021 to 54.7 in 2022 due to improvements in its sustainability and integrity sub-indices. It scored 44.2 for adequacy vs 53.6 in 2021, 49.7 for sustainability vs 44.3 in 2021 and 78.4 for integrity vs 78.5 in 2021.The score for South Africa reflects a slight improvement despite the global and local challenges.
South Africa has over the years introduced changes to the retirement fund landscape, such as having the same tax treatment across retirement products, default regulations giving members access to wholesale priced retail solutions and making it compulsory to buy a pension for sustainable income of members in retirement
Legislation to enact the “two-pot system” is currently awaited from the regulator, the [name of regulator]. It is anticipated that this will further enhance the adequacy and integrity of the retirement system in South Africa.
While there is still work to be done in providing benefits and cover for members who are not part of occupational pension schemes, the report proposals tie in with imperatives that are currently the focus of government and industry, such as increased participation (coverage) in private pensions introducing a minimum level of contributions, increased level of support for the poorest and reducing leakage (e.g. withdrawals) from the retirement savings system before retirement.
The top three systems, all receiving an A, were sustainable and well-governed systems, providing strong benefits to individuals. In comparison, South Africa received a C, indicating that the system has some good features but also has major risks, shortcomings — or both — that should be addressed.
Belinda Sullivan, head of corporate consulting strategy at Alexforbes, Mercer’s strategic partner in Africa, says that, “the Index benchmarking and insights focus on the key theme of the shift from defined benefit to defined contribution funds. South Africa has a relatively mature defined contribution environment with this shift having started more than 30 years ago. However, despite the opportunity to save in the private sector, there have been insufficient measures in place to ensure that more individuals are covered by a retirement savings arrangement and that members keep these accumulated benefits for retirement.
“As a result, they become reliant on other sources of income or support from family, government or both. Government should consider removing the means test of the State Old Age Pension to ensure a minimum safety net and remove the current disincentive to save as a result of the means test. Employers who do not have retirement savings plans in place can also make a meaningful difference to their employees (who are likely not to have any savings arrangements in place) as research indicates that individuals are 15 times more likely to save via employer schemes rather than on their own.
She added that, “The two-pot system proposed by National Treasury will also make a significant difference in terms of improving the amounts preserved by individuals. Lastly, access to advice is key for members to improve their outcomes and ensure the sustainability of their income throughout their working lives and in retirement.”
Senior partner at Mercer and lead author of the study, Dr David Knox, highlighted the importance of strong retirement schemes considering growing external uncertainty.
“Individuals have been assuming more responsibility for their retirement savings for some time; amidst high levels of inflation, rising interest rates and greater uncertainty about economic conditions, they are doing so in an increasingly complex and volatile environment. Despite differences in social, political, historical or economic influences across geographies, many of these challenges are universal. And while the necessary reforms may take time and careful consideration, policymakers must do all they can to ensure retirement schemes are supported, developed and well-regulated,” said Knox.
“As employers continue to step away from financial security, which has been offered in DB plans, individuals bear the risks and opportunities before and after retirement. Unlike DB plans where an individual receives regular income payments for life on retiring, typically DC plans provide individuals with a lump sum benefit at retirement. Additionally, many governments are considering reducing their level of financial support during retirement to ensure the country’s financial sustainability over the longer term.
He warned that as a result many individuals will no longer be able to rely on significant financial support from their previous employers or the government during their retirement years.
“Therefore, it is essential individuals make the best financial decisions at retirement to maximise the value of their available defined contribution (DC) pension assets. Just as diversification is a key part to any investment scheme, individuals may also seek to diversify their retirement savings between regular income, appropriate protection and access to capital, as well as different sources of financial support, including government, private pensions and individual savings.
“It is critical that we understand whether or not the retirement income systems around the world will be able to meet the needs and expectations of their communities for decades to come,” he said.
“There is no single or perfect answer – the best system is the one that helps individuals maintain their previous lifestyles into retirement. Governments, employers, policymakers, and the pension industry should use the full array of products and policies available so individuals can retire with dignity, confidence and financial security.”
CFA Institute President and CEO, Marg Franklin, underscores the dynamic environment of the investment industry. “Since the inception of the Mercer CFA Institute Global Pension Index, the investment management and pension industry at large have faced extraordinary challenges. New financial products and strategies will be required to deliver adequate returns for beneficiaries.
“This past year, we’ve gone from a ‘lower for longer’ interest-rate environment to significant rates of inflation, quadrupling of interest rates in some global markets and a rise in the cost of living for many, all of which have a significant impact on the fixed income of retirees,” said Franklin.
“At CFA Institute, we believe financial professionals can serve as a force for good in society to support individuals through this complex time. This report provides insights into how retirement plans need to adapt or are adapting to the changing environment, and also makes recommendations for a range of reforms that can be implemented to improve the long-term outcomes from our retirement income systems,” she added.
Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7).
The Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity. For each sub-index, the systems with the highest values were Iceland for adequacy (85.8) and sustainability (83.8), and Finland for integrity (93.3). The systems with the lowest values across the sub-indices were India for adequacy (37.6), Austria for sustainability (22.7), and the Philippines for integrity (30.0).
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