How South Africa’s pension system compares to the rest of the world

 ·27 May 2023

The latest Mercer CFA Institute Global Pension Index shows that South Africa’s pension system is ranked 34th out of 44 countries and garnered an overall C grade due to some shortcomings.

The Index is an annual study based on the World Bank Model, whose primary objective is to ensure 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 do you get on retirement, and how much will it be relative to your current salary;
  • Sustainability – can your pension keep delivering; and
  • Integrity – an evaluation of the regulations surrounding your pensions and their costs.

The report said that the overall index value for each system represents the weighted average of the three sub-indices.

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 subindex, which represents the benefits provided, together with some important system design features.

The sustainability sub-index focuses on the future and uses various indicators that will influence the likelihood that the current system will be able to provide benefits in the future.

The integrity sub-index includes many legislative requirements that influence the overall governance and operations of the system, which affect the level of confidence the citizens of each country have in their system.

The study shows that Iceland, the Netherlands and Denmark have the best systems, with each receiving an A grade (index value >80) in 2022 – A first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.

Most first-world and European countries received a B grade (75-80), which reflects a system that has a sound structure with many good features, but has some areas for improvement that differentiates it from an A-grade system.

No system in this year’s Index has an E-grade system with an index value below 35. A score between 35 and 50, representing a D-grade system, indicates a system with some sound features and significant omissions or weaknesses.

A D-grade classification may also be conferred early in developing 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 given in the table below.

Country Overall index score Adequacy Sustainability Integrity
1. Iceland 84.7 85.8 83.8 84.4
2. 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
  • 44.2
49.7 78.4

South Africa 

South Africa scored an overall score of 54.7 – translating to a C grade rating – placing us 34th out of 44 countries.

South Africa scored 44.2 (out of a potential 100) on adequacy, translating to a D rating.

The highest-ranking countries for adequacy are Iceland (85.8), Portugal (84.9) and the Netherlands (84.9). The lowest rankings on this scale are Indonesia and India.

Contributing variables to sustainability are coverage of funded pension plans, level of pension assets as % of GDP, demographic variables, mandatory contributions with funding, labour force participation at older ages, public pension costs/net government debt and real economic growth.

South Africa’s score rose 3.4 points to 49.7, while only 16 of the 44 systems considered in the study have coverage rates above 64%.

Moving on to integrity which focuses on the regulation of private pension plans, 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, due to sound regulations and sound governance.

Pension plans are facing challenges not seen in the global economy in decades as they feel the effects of the pandemic, international conflicts, supply chain disruptions and a reversal of the trend toward globalization, said the report.

Speaking at the second Annual Retirement 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 which we need to find positive ways to deal with and improve on so we can compete globally” – noting the country’s ranking on the Index.

“The local retirement sector and regulators need to look at improvements to adequacy and sustainability as defined by the study, where improvement is indicated – adding that “South Africa can make significant improvements on 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-aged individuals;
  • Increasing the coverage of employees in occupational pension schemes, thereby increasing the level of contributions and assets;
  • Introducing a minimum level of mandatory contributions into a retirement savings fund; and
  • Introducing preservation requirements prevents members from withdrawing funds from occupational pension schemes before retirement.

To this end, Ganie said that industry representatives and policymakers had workshopped ideas and potential solutions. These are currently being compiled into an executive report to be available in the public domain shortly.

Read: SARS is closing in on trusts in South Africa

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