SA’s pensioners on average receive the lowest income of all countries that  have a functioning pension system, according to the 2018 Mercer Melbourne Global Pension Index. 

Mercer, the global consulting firm whose index measures the retirement income systems for 34 countries, says SA’s system is not sustainable because it does not cover enough people or pay a decent income. 

The average net pension replacement rate — which measures the percentage of income that a working individual will get when they retire — sits at just 17% of their current earnings. SA is the worst performer on this indicator. 

Mercer  recommends that to build a world-class pension system, countries must “ensure the right balance between adequacy and sustainability”.

So what could the solution be for a country like SA that does not have enough of both? Mercer says its researchers recommend that, among other things, the country introduces a minimum level of mandatory retirement contributions or increase the level of preservation of benefits when people change jobs.

There are already moves afoot to prevent provident fund members withdrawing all their savings in cash at retirement. 

The Treasury’s retirement reform regulation will come into effect on March 1 2019, to ensure that provident fund members preserve their cash at retirement. 

 However, given the increasing unemployment rate and contracting economic activity, is SA ready for mandatory retirement contributions?

“Ideally, the best time to introduce mandatory contributions is when there is strong economic growth. However, when this is not occurring, it comes down to a judgment call by government as to what is most important and what the right balance is between the short term and the longer term,” says Mercer SA CEO Nicolette Hendricks.

The other challenge when looking at setting a minimum level of mandatory retirement contributions is that of the more than 56.2-million people in SA , only 16.1-million are formally employed. Of this, less than half  (48.2%) had access to retirement benefits in 2017, Sanlam’s 2018 Retirement Benchmark Survey shows.

So how do you improve a country’s pension system with a solution that targets less than half of the workforce?

Mercer recommends increasing the minimum level of support for the poorest aged individuals. The country’s retirement industry, on the other hand, has suggested that mandatory membership, or auto-enrollment, of employed people to retirement funds could be a game changer for the country’s pension system if accompanied by prescribed maximum fees.

The Treasury’s retirement reform discussion paper revealed a few years ago that the average fee paid by people saving in defined contribution retirement funds offered by commercial players was 2.5% a year. A lot has changed since, with players like 10X and Sygnia promising less than 1% in fees.

It is therefore strange that Mercer’s report did not tackle the issue of fees in SA when it made recommendations on how to make the country’s pension system sustainable in the long term.

The firm said comparing fees across different countries’ systems would have been difficult as obtaining comparable objective data of each system is virtually impossible. So, as a proxy for fees, it used the last questions in the integrity subindex to consider the various types of funds in each system. “SA scored 7.4 for this question, which was broadly in the middle of the pack,” said Hendricks.

 However, one cannot look at costs without considering investment returns as investment companies often defend high fees by advancing evidence of their good performance. As a proxy for real investment returns, Mercer considered the level of growth assets held within each country’s pension system. Here, Hendricks said “SA scores full marks, a very good indicator”.

Mercer’s 2018 index showed a slight improvement in SA’s overall standing, rising from 48.9 in 2017 to 52.7 this year. This rating fell within the range of comparable developing countries, including Brazil, Indonesia and Malaysia as well as some developed nations like the US, Austria, Spain and Italy.

But this improvement was not because of improved savings. Instead, Mercer broadened its criteria for measuring adequacy of the pension system this year and included household debt as one of the determinants of adequacy.

While many of the studies that look at the adequacy of retirement incomes only consider the savings levels, Mercer has a different view. It looks at government debt, economic growth, tax treatments to encourage saving for retirement, home ownership as of late and household debt as additional factors that affect countries’ pension systems.

SA, says Hendricks, scores poorly when only the level of household savings is considered.  So how is the inclusion of household debt contributing to an improvement in the country’s pension system?

Mercer’s take is that because the level of household debt represents financial liabilities that must be paid by households in the future using accumulated benefits from the pension system, higher household debt therefore reduces the adequacy of the remaining pension benefits.