SA pension system fails to compete on global level – report

South Africa’s pension system scored below average in a global study looking at the viability of 75 pension systems around the world, receiving a total score of 4.2 – out of a possible seven for the worst pension system – in comparison to the unweighted global average of 3.6.

The second edition of the Allianz Global Pension Report for 2023, released on Wednesday, notes that the country’s low ranking is an indication that the South African pension system is in “strong need [of] further reforms”.

The Allianz Pension Index (API) is anchored on the analysis of three pillars – country demographics and basic conditions, sustainability, and adequacy of the respective pension system. South Africa ranked unfavourably in all three pillars.

Unlike the best pension systems in the world – those in Denmark, The Netherlands and Sweden – which all scored below or around three points for each of three pillars, South Africa scored around four points.

“Problems include the low coverage, the low benefit level and the lack of retirement savings, imperilling the adequacy of the system,” the report said.

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According to the report, despite more than 80% of the South African population having access to financial services, just above 20% save for old age.

This low savings trend is reported across emerging markets.

It is believed to be supported by the lack of financial means and incentive to save for retirement as the African population remains significantly young.

“Given the dominance of informal labour, many workers are not able to fulfil the minimum contribution period requirements, leaving them with lump-sum payments at retirement that are not sufficient to guarantee a decent living standard in old age,” the report notes.

Africa still has the lowest life expectancy compared to other regions, with the life expectancy for 2023 sitting at 63 years. The report expects this to increase to 68.3 years by 2030, still significantly lower than Asia (79.5), Latin America (80.6), Europe (83.8) North America (84), and Australia/New Zealand (87).

Increase contributions

Despite painting a bleak picture of the local pension system, the report highlights crucial reforms that could improve life after work for the country’s pensioners.

The report finds that South Africa can make its retirement system more sustainable by improving overall financial provisions for retirement. Unlike its European counterparts, which are already close to their ceiling, South Africa and other players on the continent still have financial wiggle room to contribute more towards retirement.

According to the research, South Africa and Nigeria – the continent’s most industrialised and largest economies respectively – spend less than 2% of their respective GDPs on old age benefits.

Europe’s top scorers Italy, Greece and France – which have among the oldest populations in the world – spend between 14% and 16% of their GDPs on old age benefits.

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“The South African pension system scores slightly better in terms of sustainability, mainly thanks to low contribution rates (which could ease future reforms),” says Allianz chief economist Ludovic Subran.

He adds that South Africa has two big advantages …

It has financial leeway as public spending for the elderly is very low, and it will remain a ‘young’ country – the old-age dependency ratio is expected to rise to 16.3% by 2050.

“South Africa is set to be among the countries with the youngest population worldwide.” says Subran.

“Nonetheless, the sooner reforms are enacted the better.”

Listen to Boitumelo Ntsoko’s interview with Suzean Haumann of Brenthurst Wealth about strategies for generating income as well as tips on ensuring your money lasts throughout your retirement years in this Money Rules podcast (or read the transcript here):