South Africa’s retirement system ranked 34th out of 44 pension systems covered in the 14th annual Mercer CFA Institute Global Pension Index (MCGPI).
The MCGPI is a comprehensive study of 44 pension systems, accounting for 65% of the world’s population. It benchmarks retirement income systems, highlighting some shortcomings in each system, and suggests possible areas of reform that would help to provide more adequate and sustainable retirement benefits.
The overall index value for each system represents the weighted average of the three sub-indices. The weightings used are 40% for adequacy, 35% for sustainability, and 25% for integrity. These weightings have remained unchanged since the first index was published in 2009.
South Africa’s overall index value improved from 53.6 in 2021 to 54.7 in 2022 because of improvements in its sustainability and integrity sub-indices. It scored 44.2 for adequacy versus 53.6 in 2021, 49.7 for sustainability versus 44.3 in 2021, and 78.4 for integrity versus 78.5 in 2021.
Despite the improvement in its overall score, South Africa continues to slide down the rankings. It was in 27th place in 2020, when there were 39 countries in the index. In 2021, it was ranked 31st among 43 countries. This year’s MCGPI covered 44 countries, with the addition of Portugal.
Click here to download the MCGPI for 2022.
The country’s score of 54.7 meant its retirement system received a “C” grade (score of between 50 and 60). Other countries given a “C” grade were Saudi Arabia, Poland, Mexico, Brazil, Peru, Italy, Austria, China, Japan, Taiwan, and South Korea.
A country graded “C” or “C+” (score of 60 to 65) means its retirement system has some good features, but it also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.
The report said South Africa’s overall score could be improved by:
- Increasing the minimum level of support for the poorest individuals;
- Increasing the coverage of employees in occupational pension schemes, thereby increasing the level of contributions and assets;
- Introducing a minimum level of mandatory contributions into a retirement savings fund; and
- Introducing preservation requirements, preventing members from withdrawing funds from occupational pension schemes prior to retirement.
The top three systems in the world – those of Iceland, the Netherlands and Denmark – received an “A” grade (score of more than 80), indicating they were sustainable, well governed and provided strong benefits to individuals.
Coverage needs to improve
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 a sustainable income.
Belinda Sullivan, the head of corporate consulting strategy at Alexforbes, Mercer’s strategic partner in Africa, said the index’s benchmarking and insights focus on the key theme of the shift from defined benefit (DB) to defined contribution (DC) funds. South Africa has a relatively mature DC environment, with this shift having started more than 30 years ago.
Despite the opportunity to save in the private sector, insufficient measures are in place to ensure that more individuals are covered by a retirement savings arrangement and that members preserve their accumulated benefits for retirement. As a result, they become reliant on other sources of income or on support from family and the government, or both.
Sullivan said the government should consider removing the means test of the state old-age grant, to ensure a minimum safety net and remove the current disincentive to save.
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, as research indicates that individuals are 15 times more likely to save via employer schemes rather than on their own, she said.
The two-pot retirement system will also make a significant difference in terms of improving the amounts preserved by individuals.
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.
Individuals are increasingly carrying the risks
Dr David Knox, senior partner at Mercer and the lead author of the study, highlighted the importance of strong retirement schemes in the face of growing financial uncertainty.
“Individuals have been assuming more responsibility for their retirement savings for some time. Amid 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,” Knox said.
As employers continue to step away from providing financial security in the form of DB plans, individuals bear the risks and opportunities before and after retirement. Additionally, many governments are considering reducing their level of financial support during retirement to ensure the country’s financial sustainability over the long term.
The result is that 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 that individuals make the best financial decisions at retirement to maximise the value of their available DC pension assets, Knox said.
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 the retirement income systems around the world will be able to meet the needs and expectations of their communities for decades to come. 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,” Knox said.
