Old Mutual, SA’s largest insurer by assets, is pushing for an overhaul of the country’s pension regime, calling on authorities to follow the UK’s route in ensuring better retirement outcomes for retirees.
Industry data shows that only 6% of retirement fund members are on course to retire comfortably.
Fred van der Vyver, head of corporate savings and income at Old Mutual, said it was time for SA to transition to collective defined contribution (CDC) schemes to protect South Africans’ retirement security.
He argued that the current dominant system in the market, the defined contribution pension system, is “fundamentally unfit” for today’s world.
CDC schemes were formally introduced in the UK via the Pension Schemes Act 2021. The schemes offer an additional option to the UK pension landscape, which many believe will help people achieve a better retirement.
Under the CDC scheme, which is seen as a bridge between defined benefits (DB) and defined contribution, fund members and employers make fixed contributions into a collective fund, and these schemes then pool together funds with other members.
“CDC offers a more predictable outcome,” Van der Vyver said. “It ensures that your income in retirement better reflects your lifetime of contributions — not the mood of the market when you exit the workforce.”
According to data from Old Mutual, CDC schemes have the potential to deliver up to 30% higher retirement incomes than standard defined contribution arrangements. The retirement outcomes under the CDC schemes will depend on, among other things, the fund design, investment performance and governance.
Old Mutual’s OnTrack research shows only 20% of retirement fund members are contributing at the recommended rate of 15% or higher.
This is down from 22% in 2022, and what is more concerning is that only 6% of retirement fund members are on course to a secure retirement, a state of affairs that calls for the industry to do more to educate members on the benefits of saving, and ensuring the industry is geared to deliver returns for members.
SA also ranks poorly on the Mercer CFA Institute Global Pension Index 2023. It rated the country’s pension system 38th out of 47 pension systems worldwide, faring particularly poorly on adequacy, which flags that a system is insufficiently supportive of the needs of fund members and broader society.
In a bid to try to improve pension outcomes, SA last year implemented the two-pot retirement system — the largest retirement industry reform in 60 years.
Van der Vyver said further reforms were needed, and that an overhaul was urgent.
“The longer we delay structural changes to deliver more consistent outcomes, the more we undermine public trust in retirement saving. We must build a system that rewards long-term commitment and protects people from forces they can’t control. The current model simply doesn’t yet deliver that,” he said.
“We’ve already demonstrated, through reforms like the
two-pot system, that when there’s political will and industry
co-operation, complex change is possible.”
Another mooted reform is introducing an auto-enrolment system. Automatic enrolment is when an employee who meets certain requirements is made a member of a workplace pension scheme without needing to ask to be part of it.
The National Treasury says about 30% of workers in the country’s formal sector are not participating in a retirement fund.
Old Mutual estimates that implementing auto-enrolment in SA could add up to 5-million extra contributors to the retirement system.
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