Global Courant 2023-05-27 16:00:20
The Mercer CFA Institute’s most recent Global Pension Index shows that South Africa’s pension system is ranked 34th out of 44 countries and achieved an overall C grade due to a number of shortcomings.
The Index is an annual study based on the World Bank model, with the main objective of ensuring that older citizens maintain a decent standard of living by conducting a comprehensive review of global pension systems.
These systems are scored based on three sub-indices:
Adequacy – what will you get when you retire, and how much will it be compared to your current salary; Sustainability – can your pension continue to pay off; and Integrity – an evaluation of the regulations surrounding your pensions and their costs.
According to the report, the overall index value for each system represents the weighted average of the three sub-indexes.
The weightings used are 40% for the adequacy sub-index, 35% for the sustainability sub-index and 25% for the integrity sub-index. These weightings have remained unchanged since the first Index was published in 2009.
According to the report, different weightings reflect the primary importance of the adequacy sub-index, which represents the benefits offered along with some key features of the system design.
The sustainability sub-index focuses on the future and uses several indicators that influence the likelihood that the current system will deliver benefits in the future.
The integrity sub-index includes many legal requirements that affect the overall governance and operation of the system, impacting the trust that the citizens of each country have in their system.
The research shows that Iceland, the Netherlands and Denmark have the best systems, each with an A grade (index value >80) in 2022 – A first-class and robust pension income system that offers good benefits, is sustainable and has a high level of integrity.
Most of the first world and European countries received a B grade (75-80), reflecting a solidly structured system with many good features, but with some areas for improvement that set it apart from an A rank system.
No system in this year’s Index has an E-class system with an index value below 35. A score between 35 and 50, representing a D-class system, indicates a system with some sound features and significant omissions or weak points.
A D rating can also be granted early in the development of a particular retirement income system.
The top 10 countries and their respective scores for the three sub-indices, and where South Africa fits in, are listed in the table below.
Country General index score
Fitness
Sustainability
Integrity
1. Iceland 84.7
85.8
83.8
84.4
2. The Netherlands 84.6
84.9
81.9
87.8
3. Denmark 82.0
81.4
82.5
82.1
4. Israel 79.8
75.7
81.9
83.2
5.Finland 77.2
77.5
65.3
93.3
6. Australia 76.8
70.2
77.2
86.8
7. Norway 75.3
79.0
60.4
90.3
8. Sweden 74.6
70.6
75.7
79.5
9.Singapore 74.1
77.3
65.4
81.0
10. UK 73.7
76.5
63.9
83.0
34. South Africa 54.7
49.7
78.4
South Africa
South Africa scored an overall score of 54.7 – which translates to a C score – placing us 34th out of 44 countries.
South Africa scored 44.2 (out of a potential 100) on adequacy, which translates to a D rating.
The highest ranked countries for adequacy are Iceland (85.8), Portugal (84.9) and the Netherlands (84.9). The lowest scores on this scale are Indonesia and India.
Variables contributing to sustainability are the coverage of funded pension schemes, the level of pension assets as % of GDP, demographic variables, funded mandatory contributions, older age labor force participation, public pension costs/net government debt and real economic growth.
South Africa’s score increased by 3.4 points to 49.7, while only 16 of the 44 systems examined in the study have a coverage rate of more than 64%.
Moving on to integrity, which focuses on the regulation of private pension schemes, as well as governance requirements, protection of member benefits, communication to members and costs of the system, this is an area where South Africa has a high score of 78.4, through good regulation and good governance.
Pension plans are facing challenges the global economy has not seen in decades as they feel the effects of the pandemic, international conflicts, supply chain disruptions and a reversal of the trend towards globalization, the report said.
Speaking at the second annual pension reform workshop – a collaborative initiative between CFA Society South Africa and the Institute of Retirement Funds Africa – CFA Board Director and NMG Benefits Investment Team Head Raazia Ganie told delegates that “South Africa has unique circumstances that we need to find positive ways to deal with this and improve so that we can compete globally” – referring to the country’s position on the Index.
“The local pension industry and regulators should look at improvements in adequacy and sustainability as defined by the study, where improvement is indicated – adding that “South Africa can significantly improve our scores with the right focus,” said Ganie.
The report also added that the overall index value for the South African system could be increased by:
Increasing the minimum level of support for the poorest; Increasing employee coverage in occupational pension plans, increasing the level of contributions and assets; introduction of a minimum level of mandatory contributions to a pension savings fund; and Introducing retention requirements prevents members from withdrawing money from occupational pension plans before retirement.
To that end, Ganie said industry representatives and policymakers had been discussing ideas and possible solutions. These are currently being compiled into an executive report that will soon be available in the public domain.
Read: SARS is approaching trusts in South Africa
