The Pensions Crisis - Are Retirement Funds in danger of becoming extinct in South Africa?

By Roy Zazeraj

[Roy Zazeraj is a Management and People Development consultant who has had many years of experience as an independent trustee to various retirement funds. He is also a freelance facilitator, speaker, lecturer and writer and is a registered Master HR Practitioner.

Ironically, all the effort being put into improving retirement fund regulation in South Africa could be signing the death warrant of many employer-initiated retirement funds. It seems increasing complexity, costs, compliance and other demands are already causing some employers to look for ways to escape this perceived burden. 'Solutions' can range from liquidating the fund in total, to closing it to new members, to never starting one in the first place. Can South Africa live with the consequences?

Firstly, lets look at the backdrop to this dilemma. We are a developing economy where many employees already do not enjoy any form of company-sponsored retirement provision. This is further exacerbated by modern trends towards cash-based remuneration packages and greater use of independent (and not-so-independent) contractors) - trends actively supported by many workers in the new world of work. Add the fact that the state social security net is far from adequate (and the costs of significant improvement probably prohibitive) and we see the bulk of retiring workers are being left financially exposed. Where retirement benefits are provided by employers, these are (more often than not) totally insufficient, due to short service, job-hopping and poor preservation habits. This sorry picture is not helped by the fact that relatively few employees seem to be actively concerned about the importance of retirement provision, with their focus rather on daily survival or instant gratification in the consumer economy.

And although more and more individual investment products are being made available for the relatively sophisticated, coupled by increasingly popular media coverage on personal finance, the financial services sector has performed abysmally in recent years. This trend has negatively impacted on both retirement fund and individual investment returns, has been well publicised in the popular press, and is hardly likely to encourage workers to save for a rainy day. Most funds have also converted from Defined Benefit (where the employer carries the risk) to Defined Contribution (where the employee carries the risk). Add whiffs of corruption here and there (for example, the liquidation of the SACCUWU fund) and faith in the system is at an understandable all-time low. Yet retirement funds have a crucial role to play.

Where properly built up and preserved, an employee's retirement benefit is arguably their most important (and largest) financial asset. The portability of both employee and employer contributions are now thankfully well-entrenched, and there are a range of tax-efficient preservation options available for the astute. The benefits for the member are obvious. The consequences of not having an adequate retirement nest egg are equally obvious, for the member, but also for the state. From the employer's perspective having a retirement fund as part of the remuneration package has always been assumed to enhance their position as an employer of choice, and to enable them to part with the retiring employee with a clear conscience - both arguable benefits in our current context. So what's in it for the employer?

The world of retirement funds has become increasingly complex in South Africa (read any copy of the journal Pensions World), inevitably reducing their attractiveness to employers and even employees. Certain investment returns have been taxable for some years now. A raft of regulatory and recommended measures have sought to provide greater protection for retirement fund members - a laudable intention in itself, but with perhaps some unintended consequences. These have included regular financial reporting, management boards (trustees) being made up of 50% member- elected representatives, independent trustees for umbrella funds, the need to train trustees, strict equity in distributing death benefits, greater transparency, good governance and risk practices and many others still on the drawing board. All of this means more management time and increased costs being spent on an area that is not the core business of the employer. As economic pressures build up, it is a natural tendency to want to 'stick to the knitting' to ensure survival.

Notwithstanding the general lack of worker interest in their retirement benefits mentioned above, interest does peak at certain times (like wage negotiations) and the age of consumer demand is beginning to penetrate here as well (seen for example in the demand for flexible investment choice). Each company will have its own threshold beyond which it will deem the investment in a retirement fund (in time, resources, money, hassle, compliance risk etc) as just not worth it in terms of the potential return for them. Where the debate is taking place it is largely behind closed doors. The result could be an overall reduction in the number of retirement funds and the number of members covered by such funds - not a desirable state of affairs.

South Africa simply cannot afford this. The social and economic consequences are likely to be devastating. This trend, where it exists, must be unearthed and nipped in the bud. Business and State (maybe through NEDLAC) need to urgently collaborate to find practical and cost-effective solutions to provide for retirement provision for all, ideally through non-state agencies and mechanisms. This could range from simplifying and supporting the growth of traditional private funds, a vast expansion of umbrella funds, or even state-sponsored compulsory retirement provision. On pensions matters there have been vast differences of opinion at NEDLAC, but they have shown the ability to eventually find workable compromises. Halting and reversing the contraction of retirement provision could be one of their greatest legacies to a future South Africa.

First published in People Dynamics in June 2003

Article IPM pensions