While the two-pot system is a good intervention, ultimately the success of the country’s pension system depends on whether SA’s GDP can recover.
By Wilma de Bruin
South Africa’s economic future largely hinges on the health of its retirement savings, and shifts in the world of work, experts believe
Speaking at the Old Mutual Thought Leaders Forum in Sandton, policymakers and industry leaders debated what obstacles were preventing the evident ‘green shoots’ in the country’s economy from taking root.
The new two-pot system, implemented last September, was a pivotal move towards providing workers with greater long-term security, since it mandated that pension fund members would have to preserve two-thirds of their savings for retirement.
But participants at the event warned, for the pension system to remain strong, much hinges on how funds are designed, what the rules on defaults are, the extent of the education given to members about changes, and the level of access members are given to vested benefits.
The idea of auto-enrollment – which would require employers to automatically enroll staff in a pension scheme – was identified as a critical reform to overcome apathy.
Equally, with 66% of South Africa’s pension funds worth less than R500m, consolidation of funds is expected to enhance scale, governance, costs and advance transformation.
Not that companies have it easy either. Employers are battling to juggle the imperatives for transformation, incorporating artificial intelligence in their businesses, all while trying to strengthen the retirement outcomes for their staff.
Ultimately, however, the success of the retirement industry is still hostage to whether South Africa’s economic growth recovers after a decade in which GDP growth averaged less than 1% per year.
In his keynote address, Adrian Saville, a professor at the Gordon Institute of Business Science, said the rapid shifts in markets, geopolitics and technology make it impossible to predict the future.
“Instead, we should ask ourselves whether we are fit to work in those changed circumstances, knowing that the circumstances, once changed, will continue to change,” he said.
According to Saville, a study over the last 25 years of the performance of 2 500 of the world’s largest companies showed that economic growth is the single biggest driver of business performance and bottom-line earnings growth.
Saville’s own study in 2009 of the performance of 160 countries was captured in a ‘six pack’ of ingredients for economic growth, transformation and transition. “Each of them matters,” he said. These are:
- An elevated savings and investment rate: not a single country has transformed without elevating its saving rate. South Africa, with savings languishing at less than 15% of GDP, is far below the 25% level needed to affect change.
- Financial inclusion and compulsory savings mechanisms: This includes efforts on financial literacy, to ensure investments are inclusive.
- Demography: As a country’s growth outcome depend on investment in the early years, South Africa needs to do more to leverage its youthful population.
- Education and healthcare: Saville said that actions taken in the first 1,000 days of a child’s life – like providing children with folic acid and Vitamin A – have the greatest ability to transform their lives.
- Openness: Countries that avoid isolationism do better. “There is no country that has transformed by building walls. Every country that has transformed, has been connected,” Saville said.
- Policies and institutions: As Saville says, “policies without institutions are wonderful words – they’re like those words ‘I love you’. Don’t tell me, show me.”
Leveraging an endowment
South Africa, contrary to the views of many doomsayers, actually has an enviable global position, Saville said. This includes its sophisticated economy, deep capital markets, robust financial institutions, its rule of law, effective courts and functional media.
High commodity prices – in particular gold and, of late, platinum – are also an opportunity for South Africa, which has rich endowments of minerals.
“There are few better places that the great creator has gifted more than South Africa, “ Saville said. “I also suspect that commodity prices will stay elevated for a long time because recently, the BRICS+ overtook the G7 in terms of share of world GDP, and every one of those countries is coming off a low base and need commodities.”
Despite this, South Africa ranks below the global average on Saville’s ‘six pack’ ranking when it comes to savings, financial inclusion, policy execution, engagement programmes and pension fund member education.
This illustrates that to square up to the countries with the greatest potential, much work lies ahead for South Africa.
