MCGPI report reveals South Africa is ranked 31st in the Global Pension Index

Companies must remove eligibility restrictions for individuals to join employment-related pension arrangements.

In a live webinar, David Knox, senior partner and actuary at Mercer Australia and Vickie Lange, CFA, head of research, best practice & academy at Alexander Forbes unpacked the findings of the 2021 Mercer CFA Institute Global Pension Index Report (MCGPI).

MCGPI is a comprehensive comparison of 43 retirement income systems against more than 50 indicators and benchmarks on three sub-indices: Adequacy, Sustainability and Integrity.

It benchmarks retirement income systems around the world, highlighting some shortcomings in each system and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.

According to the report, Iceland’s retirement income system has been named the world’s best in its debut in the 13th annual MCGPI. The Netherlands and Denmark have taken second and third places respectively in the rankings, after a decade of competing for the top spot. The study also reveals that there is much that pension systems can do to reduce the gender pension gap – an issue inherent in every system.

In comparison, South Africa received a C-grade, indicating that the system has some good features, but also has major risks and/or shortcomings that should be addressed.

President of CFA Society South Africa, Jennifer Henry, said that the MCGPI benchmarking and insights provide South Africa with tangible objectives that will help improve the pension system, key being that increasing coverage of employees, particularly self-employed or entrepreneurs into private pensions, will positively contribute to the system’s sustainability.

“Pension funds should aim to improve governance and increase transparency so that members’ knowledge and confidence in their retirement savings improves. The special chapter on gender differences in pension outcomes is a strong reminder that unequal pay and lack of job opportunities for women has ramifications over many years, resulting in sub-par pension outcomes; and therefore we need to continuously look to close the gender gap,” said Jennifer.

Senior partner at Mercer and lead author of the study, David, agreed with Jennifer, saying it was imperative for participants in the pension industry to act now.

“Governments the world over have responded to Covid-19 with significant levels of economic stimulus, which has added to government debt, reducing the future opportunity for governments to support their aged population. Retirement schemes globally are tipping further towards accumulation-style plans, away from traditional defined benefit plans.

“Despite the challenges, now is not the time to put the brakes on pension reform – in fact, it’s time to accelerate it. Individuals are having to take more and more responsibility for their own retirement income, and they need strong regulation and governance to be supported and protected,” said David.

Vickie Lange, CFA, head of best practice at Alexander Forbes, Mercer’s strategic partner in Africa, said that South Africans have generally needed to take responsibility for their own retirement income, as their private pension system is largely on a defined contribution basis.

“Several reforms have been implemented over the last few years, and there’s likely to be an even stronger focus on governance, with further reforms expected in the near future,” she said.

Gender differences in pension outcomes

The MCGPI’s analysis highlighted that there was no single cause of the gender pension gap, despite all regions having significant differences in the level of retirement income across genders.

“The causes of the gender pension gap are mixed and varied. Every country and region has employment-related, pension design and socio-cultural issues contributing to women being far more disadvantaged than men when it comes to retirement income,” said David.

While employment issues are major contributors and are well known – more female part-time workers, periods out of the workforce for caring responsibilities and lower average salaries, for example – the study found that pension design flaws were aggravating the issue.

This includes non-mandatory accrual of pension benefits during parental leave, absence of pension credits while caring for young children or elderly parents in most systems, and the lack of indexation of pensions during retirement, which have a larger impact on women due to longer life expectancy.

“We know that closing the gender pension gap is an enormous challenge given the close link of the pension to employment and income patterns. But, with poverty among the aged more common for women, we can’t afford to sit idle,” added David.

“There are a number of actions that pension industries can take. As a start, they must remove eligibility restrictions for individuals to join employment-related pension arrangements. Regardless of how much you earn, how much you work or how long you’ve been working for, every individual should have the ability to participate in a pension scheme that provides adequate benefits.

“Pension funds can also introduce credits for those caring for the young and old. Carers provide a valuable service to the community and shouldn’t be penalised in their retirement years for taking time out of the formal workforce,” he concluded.