Old Mutual’s Michelle Acton applauds South Africa’s retirement industry reform successes while looking at what still needs to be done.
If you are someone who enjoys instant gratification and likes to see the results of hard work almost immediately, then working in the retirement fund industry is not for you.
Changes in this space take time to implement, and you must exercise a high degree of patience to see results. I often talk about “The world in 20 years’ time” as the realistic timeframe to work with.
In the retirement reform context in SA, looking through the lens of the recent 2023 Budget speech, you really need to rewind between 10 and 15 years to get a handle on things. This will show there are some incredible changes coming through, even if, to some, they seem extremely slow.
The successes, for example, include an increase in the focus of governance in retirement funds, a drive to reduce costs, and the shift to umbrella funds and consolidation, all of which support better — and more sustainable — member retirement outcomes.
In 2016 we saw the alignment of the tax deductibility of contributions for all retirement funding vehicles, with 27.5% of taxable income the new number. This made it a whole lot cleaner for members. Then in 2021, we saw provident funds being aligned with pension funds as regards annuitisation at retirement, with the compulsory one-third and two-thirds split at retirement.
Now, with the new two-pot system imminent, we will align withdrawal preservation across funds and help members by establishing an “emergency savings” pot.
So, with all these changes, what will the world look like in 20 years’ time for a pension fund member saving for retirement? The answer, I believe, is much better — thanks to lower costs, increased governance, compulsory preservation, and increased tax deductibility.
Imagining 2043
While all these changes I’ve listed above go a long way for retirement fund members, the next step is to get more income earners into retirement funds and ensure that they are contributing sufficiently.
This is vital, since statistics released by National Treasury in late 2021 show that only about 6.8 million South Africans are contributing to retirement funds (and this could include duplication) out of an estimated 14 million people employed.
This means that less than half of all employed South Africans are saving for retirement. In a country where there is a limited safety net in the shape of the old age state grant, it is important that all employed people should be a member of a retirement fund.
The real question is: how do we achieve this?
Well, we are seeing moves in the right direction. In finance minister Enoch Godongwana’s 2023 budget speech, for example, he referred to proposals being released later this year that will see people auto-enrolled.
Of course, that’s easier said than done — South Africa is a developing country where many smaller struggling employers are simply not able to pay contributions. But, if done properly and realistically, this proposal could ultimately increase the number of people saving for their retirement. This, in the end, is a crucial component in the long-term journey of retirement reform.
But for this to be successful, there would need to be some level of “minimum contributions”, a gradual process of implementation and phasing-in of the rules, and some focus on what the “future retirement fund” would look like.
So, where would this put us in 20 years’ time? In a perfect world, it would result in all employed South Africans saving for their retirement in retirement funds. Due to the increase in coverage, it would most likely result in even further reduction in fees, and ultimately, better retirement outcomes for members.
And if that happens, there is also space for social security reform, since those changes would be complementary.
We cannot use the retirement industry to solve all the country’s problems, as this is not sustainable. But if the retirement industry is used optimally, then the social security system could focus on providing a retirement income safety net for people in the lower income brackets. Whatever is implemented must be affordable, sustainable, and implementable.
So, while implementation challenges do remain, the country’s retirement industry is undoubtedly stronger today than in the past. And it will be even stronger for future generations if we can lock down the reforms announced in Godongwana’s Budget speech.
*Michelle Acton is a retirement reform executive at Old Mutual.
