Retirement savings net needs to be cast wider
South Africa has a voluntary, tax-incentivised retirement-savings system. Employers have a choice to enrol their employees in the system, and employees decide their level of savings. A measure of the success of the system would also be the extent to which the working population is covered and whether the benefits delivered are adequate.
Based on the 2018 National Treasury tax statistics, there are only 4.7 million in the system out of about 16.5 million workers. Contribution levels average 11percent of taxable remuneration, dropping to only 2 percent for the top-earning category. This clearly indicates that the current system misses its mark in terms of coverage and delivery of outcomes. (It is broadly accepted that a retirement-savings level of 15 percent of salary appropriately invested for 40 years will deliver an adequate income in retirement.)
Instead of further focus on incremental cost efficiencies that retirement funds could achieve, it is time to take a broader view of how to solve our problems:
* The state old-age grant is generous by international standards, and, as it is means-tested, it is a disincentive for low-income workers to participate and preserve savings.
* Much of our workforce is informal or part-time, which means the predetermined regular contributions required by the Pension Funds Act excludes them from meaningful participation. (We have only 9 million permanent full-time employees.)
* Although there is a tax incentive for higher-paid workers, those below the threshold have no incentive to tie their savings up until they are 55.
* Threats of prescribed assets and other investment restrictions have resulted in higher-paid workers preferring to save outside the system where they can control their savings.
* The ability to encash benefits in full when changing jobs leads to more than 90 percent of members who change jobs doing so, resulting in savings terms being nowhere near 40 years, which results in insufficient retirement benefits.
* With the current poor savings levels, lack of skills in the economy and improvements in life expectancy, increasing the retirement age to at least 65 is essential, following international examples.
* Contribution reconciliations and death benefit distributions remain administratively intensive activities, and these benefits to members should be better interrogated and debated.
* Disclosures of costs are important but need to be balanced by an assessment of the value created.
The benefit of a significant pool of assets to support the economy and transform the lives of ordinary South Africans has become clear over recent years.
Much has been achieved over the past decade to achieve better retirement outcomes. However, the reality is that our system will remain sub-optimal without a broader focus and a few more bold reforms.
Rowan Burger is the head of client strategy for Momentum Investments.