Pension reform and old age grants in South Africa

The absence of a mandatory tier of the South African contributory system makes it unique from an international perspective. Furthermore, the absence of any form of state provision (or delivery) of an earnings-related retirement system is unusual. Consequently, South Africa is facing the challenge of reform to its retirement system from the opposite end of the spectrum from many developed and developing countries, which have all sought to introduce different levels of private involvement and funding. South Africa, by contrast, has to consider how to introduce structural changes to the retirement system through government intervention.

This paper describes pension systems currently in place and provides the following observations:

• Income protection to prevent poverty where savings will prove inadequate. South Africa provides a targeted, means tested, system of minimum income support to people who will have inadequate savings in retirement. This system is potentially adequate at present but may be improved in the following areas:
  • The means-test approach to targeting could be reviewed in favour of a ‘tax clawback’  approach through the application of a universal benefit
  • The value of the grant needs to be indexed to some minimum identified package of goods and services required for effective participation in society
    

• Income protection to prevent poverty due to death or disability of a breadwinner: for non-contributors to private retirement funds this risk is entirely faced by the relevant families. This protection can only be extended through improved low-income access to retirement arrangements
  

•  third-party protection from the potential voluntary non-participation of breadwinners in retirement arrangements: The only approach configured into the existing system of retirement that attempts to meet this objective is an incentive to participate in a retirement fund, provided by way of the tax system.
  
  • the idea that tax subsidies in any way encourage increased levels of saving is controversial and not the preferred mechanism for obtaining high levels of participation in the contributory earnings-related retirement arrangements
  • the adequacy of coverage provided through voluntary private provision is questionable. Indications are that there is a substantial decline in incomes
  • superficial assessments of coverage based on numbers of contributors cannot be relied upon for evaluating the quality of coverage in the private contributory retirement system in South Africa
  • the analysis in this paper questions even the coverage numbers, with the lifetime participation of many employees likely to be inconsistent. The only reasonable conclusion possible from the available information is that the objective of effective participation is not accomplished in South Africa
    

• presently subsidies are provided for the discretionary savings of high income groups who would in any case make these savings. This intervention should be reviewed
• the full retirement framework should, without exception, be subject to adequate regulation oversight and governance
• the existing regulator and regulatory framework is weak at present. Not only are there significant difficulties in meeting the regulatory needs of private retirement arrangements, but the oversight of public and quasi public funds is questionable
• consumers remain disempowered by the current framework. Transparency is poor, with the value for money of products on the market opaque. Recourse in cases of abuse, although it exists, is unlikely to prevent the abuse of members and beneficiaries