South Africa’s underperforming pension system is a complex challenge that requires a multifaceted approach.
“Although there is no one-size-fits-all solution, reducing fees, diversifying investments and adopting sustainable investment strategies will help pension funds to deliver better returns for their clients in the coming years,” says Rudolph Janse van Rensburg, portfolio analyst at Everest Wealth.
The international asset manager Allianz Group found in its 2023 Global Pension Report that South Africa’s pension system fails to compete on a global level. In the analysis of the pension systems of 75 countries and the sustainability and adequacy of these systems, it was found that South Africa’s pension system needs further reforms.
According to the report, South Africa has some of the poorest pensioners. Janse van Rensburg says this leads to growing concern for both retirees and active workers.
“One of the main reasons for the underperformance is the country’s struggling economy. South Africa has been hit hard by a combination of high unemployment rates, minimal growth and political instability. These factors have made it extremely difficult for pension funds to generate consistent returns.”
Another reason for the underperformance is due to fees charged by some pension fund managers, which have a worrying effect on returns. “In some cases, the managers can take up to 3% of total assets under management, which over the long term has an exponentially greater impact on the investment’s returns.”
Allianz Group’s report points out that South Africa spends less than 2% of its GDP on old-age benefits. Other problems include low coverage, the low benefit level and the lack of retirement savings, which jeopardize the adequacy of the system. According to the report, South Africa has two major advantages, namely that there is financial leeway as public spending for the elderly is very low and the population remains relatively young. The sooner reforms are implemented the better, the report says.
“South Africa will have to take the bull by the horns. The two policies proposed are that pension funds’ fees should be reduced or to improve their investment strategies. Alternative asset classes such as private equity, real estate and infrastructure have been suggested by market experts. This type of investment can potentially serve as an alternative solution where constant and higher returns can be earned.”
The report believes that South Africa can make its retirement system more sustainable by improving the overall financial provision for retirement.