Two-bucket system only part of the solution to increasing pensions at retirement

Two-bucket system only part of the solution to increasing pensions at retirement, says Alexander Forbes

Alexander Forbes says it supports National Treasury’s proposed “two-bucket” system, as its latest Member Insights highlighted non-preservation as the main reason only 6% of fund members can expect to retire with a replacement ratio of more than 75%.

The average fund member can expect a replacement ratio of 40.51%, while the actual ratio in 2020 was 31.47% (assuming the member bought a with-profit annuity at retirement), the 16th Member Insights found.

John Anderson, the executive of investments, products and enablement at Alexander Forbes, said its modelling of the two-bucket system, which assumes fund members can access up to 30% of their benefits prior to retirement, shows that members can expect a pension that is 2 to 2.5 times higher. Currently, the average replacement ratio was 28% to 31%, whereas the two-bucket system would take it to about 61%.

The two graphs below provide a breakdown of the net replacement ratios of members by economic sector.

Addressing low preservation rates

Although a properly designed two-bucket system would allow members to deal with short-term financial emergencies – while improving preservation – Anderson said it would not in itself solve the problems of low preservation and low replacement ratios.

Employers and funds need to implement sustained interventions throughout members’ working lives that will educate them about their retirement benefits and, more importantly, counsel them before they make decisions about withdrawals, both before and at retirement.

Anderson said it was “a myth” that poor preservation rates were solely because consumers were indebted. Alexander Forbes’s research indicated that other factors were at play, such as member apathy and a lack of understanding about the implications of withdrawals. Some members, for example, withdrew their entire fund benefit when they could have taken a much lower amount to settle their debt.

The report based its conclusions on an analysis of the (actual) behaviour of almost one million fund members, belonging to just over 2 400 employer clients administered by Alexander Forbes, from January to December last year.

The average income of the members was R19 327 a month, and the average household income was R28 635. The average member age was 40 years. The split between male (51%) and female fund members was almost equal.

Some of the key findings from this year’s Member Insights are:

Preservation rates

Contrary to what might have been expected in the year of Covid, preservation by members who resigned, or who were retrenched or dismissed by their employer increased from 8.8% in 2019 to 9.6% in 2020. However, this is still below 11.5% in 2012. Similarly, while the proportion of assets preserved fell only slightly from 48.4% in 2019 to 48.3% last year, this is down from 50.6% in 2012.


Further evidence that, overall, Covid did not have the effect on members one might expect is the slight reduction in the average contribution rate from 14.18% in 2019 to 14.1% last year.

About 30% of funds (19.6% umbrella; 11.3% stand-alone) implemented contribution holidays or reduced contributions last year. Only 5% of funds (2.4% umbrella; 3% standalone) still have these relief mechanisms in place.

The net contribution after the deduction of risk and administration expenses increased from 12.3% in 2019 to 12.9% last year.

“Overall, net contribution rates are still insufficient, in general, to achieve an ideal replacement ratio of 75% after 35 years of saving,” the report said.

Alexander Forbes said it expected the net contribution rate to drop significantly in 2021 because of the impact the pandemic has had on death, disability and funeral premium rates.

Risk benefits and administration

The percentage of contributions used to pay administration costs increased slightly from 1% in 2019 to 1.2% in 2020. The percentage of contributions used to fund disability and death benefits remained at 1.3% and 1%, respectively.

Gender gap remains

The average replacement ratio for women is 26.56%, compared with 35.3% for men. One of the reasons for the lower replacement ratio is that women contribute less to retirement funds, which, in turn, is because women, on average, earn less than men.

Although South Africa has made progress in closing the gender pay gap, Member Insights found it was still high: on average, a woman earns 83 cents for every R1 earned by a man. The gap is more pronounced among higher-income earners (R960 000 or more a year), no doubt because women occupy only 17% of senior positions.

According to Member Insights, some 39% of members are likely to be single mothers, and numerous studies have indicated that single mothers are likely to experience greater levels of financial stress than their married counterparts. However, the data indicates that, in general, single mothers have better decision-making and financial discipline than other members.

Millennials in worst shape

The contributions members make early in their working lives will make the most difference to their retirement outcome. However, Member Insights found that Covid-19 has taken the biggest financial toll on younger adults, particularly Early Millennials (those aged 18 to 35). They have been the hardest hit by retrenchments, while of the 7% of members with a high risk of defaulting on loans (based on their XDS Presage credit rating score), 6% were Early Millennials. This generation had, by far, the highest proportion of loans in default (14.11%), compared with other generations.

It seems the retirement-funding industry is on-board with two-bucket system. It’s likely that National Treasury will release further details about the system in the Medium-Term Budget Policy Statement.

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