Follow us

A Journey to Reform the Retirement System: South Africa’s Experience and Perspective


Retirement reforms are necessary but difficult for any country. They require strong political will from the Government, support from labour unions and industry, and buy-in from members
of retirement funds. While South Africa’s journey to reform the pension sector began in 1992, the focus of this chapter is on the reforms undertaken between 2012 and 2022.

South Africa has one of the largest retirement assets in the world, with a well-developed retirement savings industry and a sound regulatory framework. It has achieved this outcome without a
national mandatory contributions pillar or fund. However, the country continues to face some challenges around adequacy of benefits, certain opaque costs, sustainability, poor coverage and
suboptimal fund governance. In areas like Sustainable Finance and ESG however, South Africa has been one of the early adopters and champions.

The first phase of reform, between 2012 and 2019, sought to; (i) encourage post-retirement preservation by requiring annuitisation for all retirement products; (ii) simplify tax incentives for retirement contributions through a uniform tax treatment of various retirement products; (iii) encourage discretionary individual savings over and above retirement contributions through
tax incentivised individual plans; (iv) encourage good value retirement products and services by reviewing cost structures and introducing “Default Regulations”; (v) enhance governance
of retirement funds through various regulatory interventions like prohibiting certain gratifications; and (vi) encourage pre-retirement preservation to address leakages associated with resignations.

The Covid-19 pandemic has raised various issues for countries and retirement funds like sustainable finance, funding for infrastructure and whether there should be early access to
retirement savings for emergencies. The second phase of reforms (post-Covid-19), were therefore focused on these issues, as also on extending pension coverage to salaried workers without
retirement plans as well as to those in the informal sector, and designing pension products that appeal to the youth. In this context, one of the questions South Africa is grappling with is
whether retirement funds, in their traditional sense, are suitable for low-income workers, and whether micro-pensions can assist in dealing with this cohort. South Africa’s proposed “Two-Pot”
system (described ahead) aims to deal with pre-retirement leakages, and the identified behavioural challenges of inertia and financial discipline. Africa is a young continent, and therefore
retirement systems must be reformed and designed to also appeal to the youth.