By Lehlohonolo Lehana.
The South African pension system has been ranked at the bottom of a global ranking of 75 countries by financial services company Allianz.
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.
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).
In addition, South Africa has the “poorest” pensioners in the world, with a gross benefit level of only 15%.
Kenya and Lebanon join South Africa with a measly score of 15%.
The report said the benefit ratio of a first pillar pension should range between 40% and 60% of the average wage as per International Labour Organisation standards, as public pensions are very often the only source of income in old age.
According to the OECD, Brazil’s 89% benefit ratio is the best in the world.
Despite the issues found within South Africa’s pension system, there are a few positives.
South Africa’s pension system scores slightly better when it comes to sustainability, which is due to low contribution rates – this could ease future reforms.
In addition, South Africa has financial leeway as public spending on the elderly is very low and the country remains relatively young.
With an old-age dependency ratio only expected to rise by 16.3% by 2050, South Africa is set to be one of the countries with the youngest population worldwide.