KHAYA SITHOLE: Age is the next frontier in retirement fund reform

Pension fund reforms across the globe are one of the most contentious and controversial public policy initiatives any government can pursue. Participation in a retirement fund system is premised on the need to ensure an income security net in retirement age for the workforce and a manageable social and public services burden for the state.

A deeper retirement savings pot across the board for the previously employed reduces the reliance and dependence on state facilities in old age. Governments, therefore, have a material interest in promoting a culture of savings for working citizens.

As custodians of big policy decisions, governments have to ensure the national retirement savings model caters to the intersectional dimensions of persuading preservation, discouraging premature exits, creating incentives for saving, and mapping the average life expectancy of society at large to work out the time lag between retirement and expected demise.

In instances where the time lag keeps growing — as one would expect in an age of better healthcare translating to increased life expectancy — governments have to engage with the difficult question of whether the general retirement age remains appropriate. In the case of France, the government recently took the view that the future viability of its single fund pension system required the amendment of the pension age from 62 to 64. Not surprisingly, this encountered stiff resistance as those who had been part of the system felt the rules of engagement were being changed without their consent. 

The problem with retirement savings systems is that they have to serve beneficiaries who live in a world subject to exogenous factors that affect the value of their pensions. Preserving the value of pensions necessitates considering inflationary increases responsive to the inflation pressures of the day. This ensures that pension beneficiaries are not subject to a continuous decline in the value of the pensions they receive.  

However, when underlying values of the pension pots do not grow at a similar rate, the risk of underfunding looms large and has to be managed proactively. Between maintaining pension values at static levels, increasing contributions from a workforce or extending pension age to later years, each government has to work out what works best for its citizens.

In the French example the retirement age was moved from 60 to 62 in 2010, and now to the new mark of 64. Across all changes resistance was to be expected as no-one wants to have to make personal concessions and sacrifices to address universal problems. While the reforms represented a major political gamble for President Emmanuel Macron’s government, the ultimate net benefit will be a more viable pension system for the nation at large. 

SA’s recent pension reforms are aimed at addressing similarly critical issues relating to post-retirement age income security. Rather than allowing citizens to transact in and out of the system as and when they see fit — often with dire consequences for accumulated savings and retirement-age income security — the state has ushered in reforms that are as unpopular as they are important.

In the current model SA workers are able to access their pensions through retrenchment, resignation or retirement. In the first two instances the time lag between exit and end of life may be so wide that an income deficit inevitably materialises, especially when resignation taxes remain as high as they are.

By forcing the bulk of accumulated savings to be locked away until retirement age the government has at least created a new common baseline for mass access to savings that in theory reduces the financing deficit risk across the board. Whether the retirement age itself is appropriate in light of increased life expectancies and extended working lives is the next question policymakers need to consider. 

• Sithole (@coruscakhaya) is an accountant, academic and activist.