Edition: September / November 2017
Pensions and politics are in an uneasy mix the world over,
Kobus Hanekom* has found.
I recently participated in a panel discussion of the International Pension & Employee Benefit Lawyers
Association in Prague under the topic: “Pensions
Crises: Many jurisdictions report that significant
percentages of their populations are unable to retire
with the level of dignity they would have liked and that
future prospects for many fund members appear to be
High-level participants agreed on certain conclusions:
The jurisdiction with the best results has
- A significant contributory state old-age pension,
supplemented by occupational pensions arranged on
a group basis;
- Strict rules to enforce financial disciplines and avoid
- Significant economies of scale with limited
Jurisdictions with poorer results have
- Less significant (contributory) state old-age
pensions, supplemented by occupational pensions
arranged on a group basis;
- Fewer rules to enforce financial discipline and avoid
- Smaller economies of scale with more individual
choice and retail options at retail prices.
Most significant challenges worldwide include
- Longevity: The solution adopted by most appears
to be postponement of the retirement date. Many
jurisdictions are already at age 66 and are phasing in age 67 or older. The challenge is to find ways
to prepare and protect stakeholders during the
- Blurring contrast between work and retirement: The general principle “earn and contribute to your
retirement fund for a period of around 40 years
so you can retire and live on your pension for a
period of around 20 years” is making way for a
more gradual progression from work to retirement.
Members who have not saved enough to retire often
have no choice but to find ways to earn an income
for longer. Retirement funds must adjust to serve
these needs. Many jurisdictions will allow members
to continue to belong and contribute to their
previous employer’s occupational fund.
Demographics are changing in first world countries. OECD statistics suggest that during the 1950s there
were 7.2 persons between ages 20 and 65 for each
person older than 65 on average. By 2010 it reduced
to 4.1 and is predicted to reduce to 2.1 by 2050. It is
therefore no longer possible for affected jurisdictions
to grow out of any funding shortfall by way of a pay-as-you-go model. The only sustainable solution is financial
discipline. The state and or the members have to make
sufficient contributions to the fund over the required
period for the pensions system to be sustainable.
The world of work is changing. The “on-demand
economy” – fuelled by interconnectivity, new
technology and different needs of the younger generation – is already impacting. The current
retirement fund models must shift even further from
being employer-centric to more member-centric.
Retirement funds will have to focus more on the needs
of the individuals they serve.
It is predicted that, by 2020, more than 40% of
American workers will be freelancers. The shift in
Europe appears only marginally lower. The on-demand
economy seems particularly to suit millennials who
might, for example, prefer using Uber than to buying
a car. Also, permanent employment is harder to find.
Changes driven by technology may put a significant
part of the population at an even bigger disadvantage,
so they will require more state support. Categorisation
issues may cause a reduction in taxes and levies (think
retirement funds, unemployment insurance and
workmen's compensation), putting greater pressure on
the funding of pensions and social security.
Key strategic approaches
When retirement-funding systems are reviewed in the
context of these challenges, the better results should be
But there are significant differences between firstworld
jurisdictions and SA. The number of South
Africans who carry the tax burden in relation to the
number who need assistance is so significant that a
state old-age pension at much higher than present levels
cannot realistically be supported.
- Compulsory fund membership
(combination of a state pension
and occupational retirement
- An alignment between the
taxation model and contribution
- Aligning levels of standardisation
to dynamic thresholds.
Because of high unemployment, many South
Africans will simply be unable to enjoy a significant
pension. Further, there’s the systemic risk associated
with putting everyone’s savings into one state-controlled
fund such as the proposed National Social Security Fund.
It doesn’t mean that we shouldn’t create appropriate
infrastructure for those who earn an income and can be
required to make provision for their own retirement.
We should make it compulsory for all those
who earn over a certain threshold to contribute a
minimum amount to a retirement fund. We should
allow the private-sector retirement fund industry
to develop practical and cost-effective solutions to
serve this market effectively. Were a fund to fail,
the UK has shown how it can be handled with state
Culture and balance of power
One comes away from an international conference with
the sense that development of a country’s retirement
system often has more to do with its culture and the
balance of political power than with its academic
understanding of the most appropriate model.
In the Czech Republic, for example, we were told
that it has only a state old-age pension. Legislation to
provide for occupational pensions (to align with the
rest of Europe) was withdrawn by a government which
feared it would be voted from power if the contribution
burden shifted from employer to member.
The position in Greece could have been much more
workable if the party in power did not agree to pensions
that were so rich that the country simply could not
afford it. In Belgium, compulsory annuitisation was
scrapped in favour of lump sums because it increased
the government’s short-term tax income and helped
balance the budget.
In SA, auto enrolment and compulsory fund
contributions will increase the cost of labour. It will
also reduce the take-home pay of those affected. Some
pushback must be expected when these measures are
It will take a great deal of political will to implement
a more sustainable SA pension-fund system. Is there
* Hanekom is principal officer of the Sanlam Umbrella
Fund and contracted principal consultant at Simeka
Consultants & Actuaries.