Does the FSCA know something that we don’t?
In December 2021, National Treasury proposed auto-enrolment to improve retirement savings for formal employees. The purpose was to increase retirement fund coverage and provide risk cover for workers, thereby addressing a critical gap: many employees lack employer-sponsored retirement benefits and do not have alternative savings plans. The proposal was to extend coverage to all employees in the formal sector and, eventually, to informal workers.
The last official mention of auto-enrolment was in the 2023 Budget speech. The finance minister stated that National Treasury would finalise policy proposals that year to broaden retirement fund participation for formal and informal workers, while being mindful of their disposable income. The plan also included exploring a voluntary, flexible savings scheme tailored for informal workers.
Despite these intentions, progress on auto-enrolment seems to have stalled, overshadowed by the implementation of the two-pot retirement system and efforts to finalise the Conduct of Financial Institutions (COFI) Bill. With the two-pot system now in place and the COFI Bill nearing completion, could National Treasury be refocusing on auto-enrolment?
The FSCA appears to believe this might be the case. Speaking in a pre-recorded presentation for the 2024 EBnet Evolutionaries Conference, Zareena Camroodien, the head of the FSCA’s Retirement Funds Supervision: Fund Governance and Trustees Department, highlighted the government’s push to extend retirement fund coverage. After tackling the two-pot system and the COFI Bill, she noted, expanding retirement coverage is “another issue in the revolutionary journey”.
Addressing South Africa’s retirement savings gap
In December 2021, when National Treasury published Encouraging South African Households to Save More for Retirement, it was estimated that 30% of formal sector workers did not participate in a retirement fund. By 2022, the Quarterly Labour Force Survey reported that out of about 13 million employed individuals, 5.8 million – more than 40% – were not contributing to any retirement plan. It is likely that the figure is higher today.
This gap is attributed to the voluntary nature of South Africa’s retirement system, which does not require employers to set up a retirement fund unless mandated by sector agreements. Employees are not required to join a fund unless it is a condition of employment.
Although many large companies offer occupational or umbrella funds, millions of “vulnerable workers” – including those at small firms, part-time employees, seasonal workers, and independent contractors – are left without coverage.
“And we’re not even talking about the informal sector where there is no coverage of informal sector workers,” said Camroodien.
She noted that this challenge is not unique to South Africa but is widespread across the African continent, parts of Asia, and potentially in Latin American countries, particularly in underdeveloped or emerging economies.
“And that is also because retirement savings are generally built around salaried or wage-based employees, or formally employed who make regular and fixed contributions.”
In South Africa, there is consideration for establishing a mandatory national retirement fund, the National Social Security Fund.
“But again, the mandatory arrangements focus more on the needs of workers with jobs in the formal economy.”
Camroodien noted that auto-enrolment in other jurisdictions has worked quite well.
“And it may work very well in South Africa for the formal salaried employees with the presence of an employer.”
It’s against this backdrop that the government proposes introducing auto-enrolment, which, Camroodien said, the FSCA supports, because it will cover a broader spectrum of all formal employees.
“In fact, it will be a quick win, because, we already have quite a developed formal sector and quite a developed retirement fund sector as well, and that would thereby increase and improve the retirement coverage in South Africa, and hopefully also provide risk cover for such employees, enabling workers to build a nest egg for retirement.”
Expanding coverage to informal workers – lessons from other countries
Camroodien said the next step would involve extending coverage to informal sector workers, noting “this would generally be through a more voluntary system backed by some sort of incentives and leveraging of fintech and possibly a default fund”.
She acknowledged the challenges in covering informal, seasonal, or low-income workers because of their unpredictable contributions but emphasised that solutions exist.
“Even on the continent, this has been and is in the process of being addressed,” she said.
A notable example is Rwanda’s introduction of Ejo Heza in December 2018 under the Long-term Saving Scheme Law. Ejo Heza, which means “a bright tomorrow”, is a fully funded, long-term savings scheme managed by the Rwandan Social Security Board. The programme allows all Rwandan citizens to build micro-savings in a secure, regulated environment. It leverages Rwanda’s digital financial infrastructure to provide easy access to quality investment options, even for those with low, irregular incomes and limited financial literacy.
“Ejo Heza in Rwanda has addressed the issue of informal sector workers quite effectively with their micro pensions leveraging on technology. They rely on fintech, and it’s been quite successful in Rwanda.”
Camroodien also pointed to other countries making strides in this area. “In Kenya, Mombo (a mobile-only savings and credit co-operative society) provides some form of micro pensions. There are also micro pensions, as far as I’m aware, in Nigeria and jurisdictions such as Ghana. So, we are actually lagging when it comes to the provision, or any provision, for informal sector workers.”
Auto-enrolment vs mandatory coverage
Camroodien noted that if auto-enrolment is adopted, it should ideally come with robust tax incentives.
“For example, there are matching contributions in Rwanda. That’s one way which has been quite a strong incentive for people to save. But there are various things that we can look at – fintech, a default fund – that could provide a practical solution.”
Another possibility being explored is mandatory coverage. Camroodien detailed the distinction: with auto-enrolment, employers have the option to opt out, whereas mandatory coverage leaves no such choice.
“These are some of the things that are being considered, even though, I think the appetite by government, they’re more inclined to auto-enrolment, because that’s sort of a softer approach… the first step in the right direction, as opposed to just telling all employers to belong to funds and to contribute. So, the view is that it ought to be auto-enrolment as a first step.”
Mandatory coverage would mean all employers, starting with the formal sector, would be legally required to deduct contributions for their employees to an occupational or approved fund.
Camroodien emphasised the need for active engagement with this potential shift, noting that the paper is pivotal in determining “the next evolutionary process” for whether South Africa adopts auto-enrolment or moves toward mandatory coverage
“And that’s why it’s very important for the industry to interact with this particular paper to the extent that they have not already done so, because, of course, increasing coverage for workers and formal sector workers as a first step is really important in ensuring that workers have a dignified retirement and that we do not become a burden on the state.”