Retirement
reform
Retirement
reform:
the need for
government
and private
sector
interaction
preservation and annuitisation, and is
serious about ensuring that savers get
good value for their money from the
system. It has hopefully been learnt from
the recent redrafting of Regulation 28
of the Pension Funds Act that the real
challenge lies in implementing such
reforms.
This theme continues. In 2011, BBVA
Research issued a report entitled,
‘The unavoidable role of private
pensions in retirement income systems’.
Unsurprisingly, this report concluded
that all over the world, governments had
no alternative but to rely on the private
sector to help reform their pension
system.
The evolution of retirement reform
Retirement reform is, however, neither
new nor unique to South Africa. Otto van
Bismarck is credited with initiating the
first modern state-funded pension system,
which he introduced in Germany in 1889.
At that time, pensions were paid from age
70. The first major reform was in 1916,
when the retirement age was dropped to
65. In the UK, the Old Age Pension system
was introduced in 1909 with a retirement
age of 70. This was also later reduced to
age 65 because it was felt too few people
were benefiting from the system.
South African retirement reform
today
When South Africa began its retirement
reform journey, it was clear the system
was failing, simply because too few
people participated. Also, the reported
success rate then was less than 10
per cent. Unfortunately, not much has
changed since then. At that stage, the
government’s preferred solution was to
establish a state-run fund (the National
Savings Fund) and make it compulsory
for all working people to contribute to
it. Compulsory membership is not new
and the Australian/Chilean experience
has demonstrated that, if properly
implemented, a compulsory system can
work well.
While the future of the National Savings
Fund remains unclear, it is pleasing to
note that the government is working
with the private sector to address the
structural failings of the current system.
Individuals generally do not appreciate
the importance of saving for retirement
until it is too late. Experience around the
world clearly shows it is the government’s
responsibility to force people to save. The
private sector, in turn, needs to focus on
making efficient long-term savings vehicles
available to savers to meet their needs.
Chile is regarded as a pioneer in later
modern retirement reform: in 1980, it
converted a state-run pension system
to a compulsory one that is privately
operated. In 1992, Australia introduced
a compulsory superannuation system
that is frequently reformed. Changes are
also being introduced in the UK through
‘auto enrolment’, whereby employees are
automatically enrolled in private pension
plans to top up the state-funded system.
Current thinking
Most current thinking on retirement reform
was influenced by a report entitled,
‘Averting the old age crisis: Policies to
protect the old and promote growth’,
that was issued by the World Bank in
1994. Almost 20 years ago, the World
Bank warned of a looming pension crisis
resulting from an ageing population in
the developed world and changing social
norms in the developing world, where
family-based systems would be unable to
support the elderly in future.
Allan Wood, Head
of Institutional
Business,
Investment
Solutions
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INVESTSA
Discussion on
retirement reform in
South Africa started
in earnest in 2004
after the release of the
National Treasury’s
first discussion paper
in December 2003.
A
lmost 10 years later, the concept of
retirement reform is finally moving
on from deliberations to detailed
consultation on how it is to be
implemented.
Much of the implementation detail still needs
to be ironed out and it is clear that certain
compromises will need to be made along
the way.
However, it is also clear that the government
embraces the merits of compulsory
In that report, the World Bank put
forward its famous three-pillar model
and recommended that countries reduce
reliance on Pillar 1 (essentially a pay-asyou-go state-funded pillar) and focus on
policies to pre-fund pensions liabilities
through Pillar 2 (occupational schemes)
and Pillar 3 (voluntary top-up savings).
Even then, the recommended plan was
to reduce reliance on governments in
looking after the aged through a payas-you-go system, and increase reliance
on the private sector to pre-fund pension
liabilities.
INVESTSA
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