South Africa rose one place in a global pension index following the two-pot reforms, but Alexforbes cautions that much more is needed to make the system genuinely ‘sustainable’
By Rob Rose
Just how strong is South Africa’s pension system, now that we have a year of the two-pot system under our belt?
“We’re in the middle of the pack relative to the rest of the world,” says Belinda Sullivan, head of corporate consulting at Alexforbes. “South Africa’s pension landscape has improved a lot compared to before the two-pot system, but there are still some serious questions over how sustainable it is, given that these improvements only impact those individuals participating in retirement funds.”
This is somewhat of a bracing assessment, given the sophistication of South Africa’s system, the quality of its advisers and administrators, and the effort the National Treasury has poured into shoring it up.
But the vulnerabilities are clear from the annual Mercer Pensions Index, which examines 52 pension systems worldwide, covering about 65% of the globe’s population.
Only five countries are “A” grade – the Netherlands, Iceland, Denmark, Singapore, and Israel. Five more are considered “B” grade, including the UK, Canada and France, while six are “C+”, including the US, United Arab Emirates and Spain.
The largest category consists of 16 countries ranked “C” – a list that includes South Africa, China, Japan and Brazil. This is defined as a system that has “some good features, but also has major risks or shortcomings that should be addressed”.
Four countries are ranked “D”, including India and Argentina, while no countries are ranked as “E”, classed as a “poor system”. (This might reflect selection bias, however, since countries with terrible systems are probably not worth researching.)
Still, the good news for South Africa is that while it might still be short of a distinction, it was one of only eight pension systems to improve over the past year. In 2024’s report, South Africa was ranked “D”.
So, what’s holding South Africa’s system back?
“There are a couple of vulnerable areas,” says Sullivan. “Occupational pension schemes aren’t compulsory, so not everyone is captured in the net of saving for retirement. And nationally, our savings rate is low, while the state old age pension is based on a means test, so not everyone who needs it will get it.”
Build a savings net
South Africa’s domestic savings rate sits at roughly 16% of GDP – far below the global average of 26%, according to World Bank data. This comes as households battle to keep up in a moribund economy where unemployment has hovered around 30% for the past six years. Household savings as a proportion of disposable income shrank by 1% in the second quarter, compared with more than 15% in the euro area.
It’s this weak savings culture, coupled with high household debt levels, patchy coverage and limited state support, that helps explain South Africa’s middling performance in the Mercer Pension Index. The index assesses retirement systems according to three factors: integrity (where South Africa scores a B+), adequacy (a disappointing “D”) and sustainability (where the country also scores a “D”).
Sullivan says South Africa’s integrity score is boosted by world-class governance in the private sector, while the fragility of the economy and the inability to provide for the majority of its 62-million people weigh on its other metrics.
In many ways, this is the inverse of what happened elsewhere. Other countries built strong public systems first, layering private schemes on top. South Africa, by contrast, has a world-class private pension industry propping up a teetering state social-benefit system – one that already supports more than 28-million people on welfare.
“If we really want to improve our sustainability score, the country needs to do better in ensuring we provide retirement benefits for all workers, and build a foundational savings net,” Sullivan tells Today’s Trustee. “We don’t cater for the balance of employees, just those lucky enough to have an employer looking after their retirement needs.”
This sentiment was reflected in Mercer’s report, which spelt out how South Africa’s score could be increased were it to do four specific things.
First, increase the minimum support for the poorest elderly citizens; second, improve coverage for employees in occupational schemes; third, introduce a minimum level of mandatory contributions; and fourth, increase labour-force participation at older ages.
Still, it lauded the two-pot system, saying it “helps South Africans balance immediate financial needs with long-term savings goals, which can result in improved outcomes, as cash benefit access will be restricted to legacy benefits”.
Spectre of prescribed assets
“In South Africa, our pension system is an oasis,” says Sullivan. “Our overall retirement savings level sits above R5.2-trillion, which is a massive amount of money.”
But it is precisely because this pool of funding is so immense that politicians have repeatedly looked to South Africa’s pension industry as a potential pool of capital to finance the country’s national goals. In particular, the African National Congress (ANC) has repeatedly raised the possibility of mandating that a certain percentage of retirement funds be “prescribed” for investment in either infrastructure or state-owned entities.
This idea of forced conscription makes the industry deeply uncomfortable, since trustees have a fiduciary responsibility to safeguard retirement savings – not plough this money into projects that are good for the government, but not necessarily pensioners. In the end, an uncomfortable stalemate ensued, with the government opting not to force the issue.
The UK has recently introduced a form of prescribed assets.
Sullivan says the approach in South Africa, however, has been to “create an environment” that delivers for everyone “without any party needing to forego upside or being compelled to invest in either infrastructure or state-owned entities.”
The Mercer report, however, says that similar discussions of “repurposing” retirement funds to assist national economies are occurring more frequently globally.
“In Finland, recent public discussion has suggested that more funds should be invested to support the Finnish economy and, for example, to fund startup companies. Similarly, in Israel, questions have been raised as to why pension funds invest in infrastructure offshore rather than in Israel,” it said.
But it adds that there is “no single or simple answer as to how to determine the right balance between acting in members’ best interests and the needs of the national economy”.
Sullivan says in South Africa, this issue is more fraught, complicated by the levels of distrust, and the desire not to compromise vital instruments of retirement savings.
“There is $63-trillion in retirement savings across the world, so you can see why governments are talking of tapping this huge resource,” she says. “But if this were to happen, it would have to be done responsibly.”
