We could all retire better if …

More South Africans could retire with dignity on a reasonable pension, if it were compulsory to enrol on a retirement fund, contribute a minimum amount, and retire at a later age. This was the key message at the recent Institute of Retirement Funds Africa conference held in Cape Town.

The conference also heard why funds should be investing to grow the economy, create jobs and sustain our environment.

Auto-enrolment

One solution to the problem of not saving enough discussed at the conference was auto-enrolment – making it compulsory for all those who are formally employed to belong to a retirement fund.

Currently 70 percent of working South Africans are formally employed but only two thirds of them are contributing to a retirement fund, Zareena Camroodien from the African Pension Supervisory Authority (APSA), told the conference.

Michelle Acton, the executive for retirement reform at Old Mutual, said Australia had similar levels of retirement fund membership to South Africa 35 years ago. After union and government negotiations, Australia’s retirement or superannuation system began with compulsory contributions through the tax system. Contributions started at three percent of income in 1992 and recently reached a compulsory contribution rate of 12 percent of income, Acton said.

Australia also introduced a minimum age and salary for contributions, but both limits have now been scrapped, which means even teenagers working as waiters or waitresses on the weekend are part of the superannuation system. This has created a savings culture, Acton said.

Micro-pensions

Millions of informal sector workers, who are currently excluded from the retirement savings system, could be encouraged to save for a dignified retirement in micro-pension schemes, Camroodien said.

Rwanda has used technology to successfully introduce a government-sponsored micro-pension scheme, she said.

The Ejo Heza (a bright tomorrow) savings scheme was introduced late in 2018 and three million of Rwanda’s 14 million people, representing half of those who are employed, joined the scheme in the first four years.  About 2.4 million Rwandans are contributing constantly despite many having irregular incomes, Camroodien said

The Rwandan Social Security Board administers the scheme that uses digital biometrics-based ID to enable every Rwandan to accumulate micro-savings in a secure and well-regulated fund that includes life insurance, she said.

Mandatory contribution levels

Retirement fund members often mistakenly believe that belonging to a retirement fund is enough to ensure a comfortable retirement. But members also have to contribute enough for long enough and to preserve their savings until retirement, Danie van Zyl, the head of smoothed bonus at Sanlam, told the conference.

Very few South Africans have saved enough for a comfortable retirement because members could, until last year, withdraw all their savings when they left a job. Acton said South Africans are changing jobs between seven and 13 times over their lifetimes.

As a result, some reach retirement with as little as four percent of their final salaries, the conference heard.

The two-pot retirement system introduced last year will force most members to save at least two thirds of contributions which will make a massive difference, but will not necessarily ensure each member has a good income in retirement, speakers said.

Van Zyl said the move from defined benefit retirement funds to defined contribution funds, has shifted decisions about how much to save and where to save from trustees, supported by consultants and actuaries, to ordinary members.

For some members, this responsibility is overwhelming, Van Zyl said. Default investment portfolios that funds have been obliged since 2017 to provide are helping.

But Van Zyl says minimum contribution rates, which can be scaled up over time to ensure members save enough to reach a comfortable retirement, are also required.

Retirement age

Van Zyl also suggested that retirement ages be reconsidered. Sanlam’s annual Benchmark survey shows that the average retirement age has been 64 for the past 10 years, he said.

However, only four in 10 funds believe this retirement age is appropriate for members who want to maintain their living standards in retirement and 58 percent of members believe they are not on track to accumulate enough capital for retirement, Van Zyl said.

He says if retirement ages are increased three factors make a big difference:

• Members contribute more over a longer working life;
• Members save for longer and enjoy more compounded growth; and
• Members have fewer pension pay cheques for which they need to save.

Many Organisation for Economic Co-operation and Development (OECD) countries are increasing retirement ages, but members often resist such increases, he said.

Investing to break a vicious cycle

South Africa is currently in a vicious cycle where retirement fund members cannot afford to increase their contribution rates because of high unemployment and low economic growth, Solly Tsie, head of investment strategy at Sanlam Corporate, said.

The country’s low savings and investment levels in turn keep economic growth low which means employment stays low.

However, South Africa has R5.8 trillion of retirement fund savings and some of this could be invested for impact in order to turn the vicious cycle into a virtuous circle, Tsie said.

While Regulation 28 of the Pension Funds Act obliges trustees to invest retirement savings in members’ best interests, it also says trustees should channel investments to achieve economic development and growth, Tsie said.

Recent changes to regulation 28 have increased investment limits for private equity and infrastructure investments in an attempt to nudge funds to invest more into these asset classes for the benefit of the economy, he added.

Internationally funds are investing much more for impact than South African funds. The average pension fund in South Africa has investment into alternative asset classes (private markets, hedge funds and the like) of just under three percent and a tiny 0.1% is allocated to private equity while large funds internationally have 39 to 40 percent in alternatives and 17 to 39 percent in private equity, Tsie said.

The Benchmark Survey shows that South African trustees and fund members want to support investments that enhance education, skills development, health, job creation and economic growth, Tsie said.

We should not wait for the government to intervene and prescribe how funds should invest their assets. During the previous period of prescribed assets there was a big opportunity cost - a loss of 6.7 percent in annual returns, Tsie added.

Instead funds should reframe their fiduciary duty to include financial security, social cohesion and intergenerational equity, so that South Africans get to see the impact their retirement savings have on the economy and to retire with confidence, Tsie said.

Making funds work better

The regulator of retirement funds, the Financial Sector Conduct Authority (FSCA), is in the meantime introducing measures to improve the way retirement funds serve their members.

Camroodien, who is also the head of fund governance and trustee supervision at the FSCA, said the regulator recently published a conduct standard for retirement fund administrators. This will ensure that administrators:

• Meet standards of honesty, integrity, competence and good standing;
• Have conflict of interest policies;
• Have comprehensive service level agreements;
• Have a formal complaints system; and
• Maintain proper records and manage members’ data.

The enactment of the Conduct of Financial Institutions Bill is imminent and will bring employers under the FSCA’s jurisdiction. The FSCA hopes this will assist it in taking regulatory action against some 7700 employers who had failed to pay contributions to retirement funds for members at the end of 2023.

Trustee skills are also being improved as trustees are required by a FSCA conduct standard to complete the regulator’s trustee training toolkit. About 20% of trustees of active funds have not completed this training and the regulator is set to take action against those who have not applied for exemptions.

Camroodien said the FSCA also has retirement fund expenses on its agenda but has not yet decided how to tackle this.