Limited coverage and low preservation are the main reasons South Africa’s pension system once again got a C grade in this year’s Mercer CFA Institute Global Pension Index (MCGPI). The country’s overall score improved slightly this year, to 52.6 from 52.3 in 2020, but it was below the global average of 61 points.
Our pension system was ranked at only 31st out of 43.
A C grade means a country’s pension system has some good features, but also has major risks and/or shortcomings that should be addressed.
The MCGPI is a study of global pension systems, accounting for 65% of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.
The top three systems in the world – those of Iceland, the Netherlands and Norway – received an A grade, indicating they were sustainable, well governed and provided strong benefits to individuals.
The MCGPI uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 50 indicators.
The overall index value for each system represents the weighted average of the three sub-indices. The weightings are 40% for the adequacy sub-index, 35% for the sustainability sub-index and 25% for the integrity sub-index.
South Africa scored 44.3 (2020: 43) for adequacy, 46.5 (46.7) for sustainability and 78.5 (78.3) for integrity.
|Mercer CFA Institute Global Pension Index for 2021|
|Pension system||Overall index value||Sub-index values|
|New Zealand (15)||67.4||61.8||62.5||83.2|
|Hong Kong SAR (18)||61.8||55.1||51.1||87.7|
|Saudi Arabia (26)||58.1||61.7||50.9||62.5|
|South Africa (31)||53.6||44.3||46.5||78.5|
The country’s improved score for adequacy is mainly because members of provident funds who were younger than 55 on 1 March 2021 are now required to annuitise at least two-thirds of their savings at retirement (unless their savings are less than R247 500), said Vickie Lange, the head of Best Practice at Alexander Forbes (Mercer’s strategic partner in Africa).
The country’s scores for adequacy and sustainability might seem shockingly low from the perspective of those who participate in the regulated retirement-funding system. However, it should be kept in mind that the index looks at how a country’s entire pension system fares compared with the “five pillars” recommended by the World Bank. These are:
- Zero Pillar: A non-contributory basic pension from public finances that may be universal or means-tested.
- First Pillar: A mandated public pension plan that is publicly managed with contributions linked to earnings.
- Second Pillar: Mandated defined contribution, fully funded occupational or personal pension plans with financial assets.
- Third Pillar: Voluntary and fully funded occupational or personal pension plans with financial assets.
- Fourth Pillar: A voluntary system outside the pension system with access to a range of financial and non-financial assets and informal support such as family, health care and housing.
More coverage, less leakage
Apart from the fact that the state’s old-age grant was minimal, Lange said the two main reasons for the country’s low adequacy and sustainability scores were limited coverage and low preservation (or leakage).
As the report recommended, Lange said the country should aim to make membership of a retirement fund compulsory for at least those in formal employment. This would increase the level of contributions and the assets in the system. Once this was in place, the next step would be to address another of the report’s recommendations: introducing a minimum level of mandatory contributions. This would be a bigger challenge, considering that many South Africans were low-income earners and have high levels of debt.
In terms of another recommendation, reducing leakage, Lange said it was not realistic for a developing country such as South Africa to enforce 100% preservation.
National Treasury’s “two-bucket” proposal was an attempt to design a system that would allow people to use their savings to deal with financial emergencies while preventing fund members from cashing out all their savings before retirement.
Lange said the challenge lay in determining the correct balance between accessibility and preservation.
She said the survey was not all doom and gloom. The country’s high score on the integrity index underlined that its asset managers, product providers, retirement funds and regulatory framework were world-class. This means the country has a solid foundation on which to build its pension system.
Closing the gender pension gap
This year’s report included a special chapter on the gender pension gap, which bedevils every retirement income system.
Dr David Knox, senior partner at Mercer and the lead author of the study, said the causes of the gender pension gap were mixed and varied. “Every country and region have employment-related, pension design and socio-cultural issues contributing to women being far more disadvantaged than men when it comes to retirement income.”
Although the oft-repeated socio-economic factors are the major contributors to the gap, the study found that pension design flaws are aggravating the problem. These include the non-mandatory accrual of pension benefits during parental leave, the absence of pension credits while caring for young children or elderly parents in most systems, and the lack of indexation of pensions during retirement, which have a larger impact on women because of their longer life expectancy.
“There are a number of actions that pension industries can take. As a start, they must remove eligibility restrictions for individuals to join employment-related pension arrangements. Regardless of how much you earn, how much you work or how long you’ve been working for, every individual should have the ability to participate in a pension scheme that provides adequate benefits.
“Pension funds can also introduce credits for those caring for the young and old. Carers provide a valuable service to the community and shouldn’t be penalised in their retirement years for taking time out of the formal workforce,” he said.
Knox raised an interesting point: women tend to be “turned off” by jargon, and the industry needs to rethink how it words its marketing campaigns.