Assessing SA’s pension reforms against global trends

Not saving enough for retirement is a worldwide problem. Countries around the world have introduced substantial changes to their pension fund systems in efforts to address low retirement savings rates. 

At the same time, the Covid-19 pandemic has created a need for short-term relief from economic hardship through dipping into long-term savings, and some social security systems are projecting deficits to occur sooner than pre-Covid-19 estimates.

In 2021, several interventions were implemented globally. Some of the highlights include:

• The US proposed changes to the way employers contribute to retirement plans for employees with student loans. It also wants to increase “catch-up contribution” legislation limits.
• The UK is gradually increasing its state pension age. The aim is for the state pension age to rise to 68 between 2037 and 2039.
• Norway proposed plans to expand mandatory occupational pension coverage to more private sector workers.
• Malaysia introduced an early withdrawal option under its provident fund programme.
• Australia increased the minimum employer contribution rate under its mandatory occupational pension programme.

These changes acknowledge that people are not saving enough for retirement, and SA’s own pension fund system is not exempt from global trends and the challenge of low retirement savings rates. Analysis Liberty conducted into the behaviour of retirement fund members under its administration showed only 6% of members preserve their retirement savings when leaving employers.

Like its global counterparts, SA has set out to reform the retirement savings landscape with the default regulations in 2019 and, more recently, the T-day legislation to align the tax and benefit payment treatment of different retirement saving vehicles, namely pension and provident funds. More changes are coming down the line. In summary:

Proposed changes to regulation 28

Regulation 28 of the Pension Funds Act determines the type and limits of the different asset classes in which a retirement fund can invest. This regulation has been updated many times over the past decade with the aim of improving retirement outcomes for retiring members.

To protect members’ retirement interests and exposure to complex investment risk, discussions are taking place to refine the use of hedge funds, securities lending and derivatives as part of a retirement fund’s investible universe.

To remain relevant to global developments, consultation papers have been published. These include the use of cryptocurrencies in a retirement fund’s investment strategy. Then there is the highly debated proposal on expanding limits for the infrastructure asset class which will use retirement funding as a potential source to promote infrastructure investment in SA.

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Benefit projection draft conduct standard

At present, there is no standard to ensure consistency on how retirement benefit projections are communicated to retirement fund members. There are now concerns regarding members’ understanding of their benefit projections. The proposed conduct standard aims to educate members to have realistic future expectations of their retirement savings.

This is done by detailing when benefit projections should be provided, what disclaimers to include, quantifying the projected lump sum and estimated retirement pensions, explaining the relevant risks and assumptions, and outlining the possible variation in the projections using different scenarios.

Consider someone aged 30 with accumulated retirement savings of R1m and monthly contributions of R5,000 towards their retirement. Referring to figure 1, most benefit projections only show a single best estimate outcome (R11.7m in this example) based on the most realistic set of assumptions.

But the underlying set of assumptions can turn out worse (or more conservative), or better (or more optimistic) than expected. Under these “additional scenarios”, we expect the member’s projections to decrease to R7m or increase to R19.9m respectively. This example highlights the need for members to continuously monitor their retirement savings levels and ensure that their expectations are better managed leading up to their retirement.

Default living annuity drawdown standard

Almost 90% of Liberty-administered retirement fund members annuitised their savings at retirement and purchased a living annuity during the past 15 years. In line with the industry norm, this implies that most pensioners run the risk of their chosen drawdown being unsustainably high, causing them to deplete their savings too soon and receive no income in later years.

To mitigate this risk, the Financial Sector Conduct Authority is expected to publish a standard, detailing the maximum allowable living annuity drawdown rates for retirement funds with a default living annuity option under regulation 39 of the Pension Funds Act. This standard will guide a trustee board on how to derive and continuously monitor conservative and sustainable recommended living annuity drawdown rates for their fund’s membership.

The promulgation of most of the above pending conduct standards is expected later in 2021. These changes must be viewed with other proposed social and retirement reform initiatives, such as changes in minimum social grants and early withdrawal of retirement savings, to form a holistic view as to how SA intends to address its challenges. The trade-offs between the need for short-term financial relief and support vs a sustainable retirement income will remain a complex balancing act.

This article was paid for by Liberty.