South Africa's pension fund system ranks 34th out of 44 countries in the 2022 Mercer CFA Global Pension Index. Given this, how will proposed pension fund system changes affect retirement funds? Importantly, what can be done today to improve South African retirement outcomes?
Although South Africa's retirement system ranking is bad, with the adequacy and sustainability of retirement benefits as weak links, the issue is multifaceted.
Understanding that South Africa's retirement system is not isolated is crucial.
We are trying to tackle problems in a highly unequal, jobless society. Unemployment must be reduced before we can reform pension funds. More jobs mean more savings.
Prioritize preservation for system participants.
Many retirees have limited money because they didn't save enough, not because they didn't participate. Pre-retirement payouts are a threat to the system. Some also worry about contribution rates. How much to save for retirement is often unknown. Even if they never withdraw, they will have too little in retirement.
Saving for retirement takes decades, which is another issue. Your system is intricate, and any modification may have unforeseen implications for investor behavior that take years to play out.
If it “delivers on its intention”, the “two-pot” retirement scheme proposed for the first half of 2025 will improve behavior. The new system will split all new retirement fund contributions into two parts: two-thirds to a retirement component, which must be preserved until retirement, and one-third to a savings component, allowing one withdrawal per year before retirement.
The two-pot system may not give investors more money, as many expect. Because people may have emergencies and need to access some assets, the system will make a part available instead of having members resign and lose all their funds.
The two-pot arrangement limits retirement savings access. If executed correctly, the notion will advance us. As with everything, the devil is in the details, including the law.
Rushing legislation around the implementation date is risky.
To maintain faith in the system, the sector needs time to make administrative changes properly. If you rush legislation and changes without paying people what they anticipate, it can do more harm than good.
Increasing retirement savings incentives will also change behavior.
Retirement annuities and tax-free investment accounts have substantial tax incentives, but only for the tax base.
The South African Revenue Service (SARs) reported a 4.53% growth in personal income taxpayers in April, bringing the active taxpayer base to a little under 26 million. However, South Africa has little under 60 million people.
Statistics South Africa reports that 73% of elderly South Africans receive old-age grants.
Seniors 60 and over get the Over Person's Grant, often known as the state old-age pension, monthly. People with monthly incomes below a specific threshold qualify for this stipend based on the means test. I think the test should be revised because it may discourage retirement savings.
Pension savings income does not qualify for the Older Person's Grant due to the means test. We should exclude pensions from the means test to reduce the incentive to deplete pension resources.
The country's retirement system offers hope, which encourages me.
Overall, retirement fund governance is good. Many knowledgeable and well-meaning people manage pensioners' savings. We have a good savings and investment industry with difficulties and opportunities.
