While existing private pension funds face participation challenges, the proposed scheme promises inclusivity and adaptability. With flexibility in contributions and a focus on preservation, it seeks to revolutionise retirement planning, offering portability and coexistence with current occupational schemes
Pension fund administrators have determined that implementing a national pension scheme will effectively address the pension fund gap by expanding coverage. This initiative, they believe, will ensure that every employed individual in the country is actively contributing to a retirement fund, bolstering financial security for all.
While the industry thrives on a vibrant private occupational pension fund, Kesego Gosata-Mosweu, Team Leader at Assure Wealth observed low coverage and participation. “People in the informal sector are not really participating,” she remarked during a panel discussion at a recent Pension Fund Society Conference. For those who do participate, she said contribution rates are often inadequate, as employers typically volunteer to contribute on behalf of the members.
This major weakness of voluntary contribution within the system was also acknowledged by Abisha Ndoro, the Acting Managing Director at Fiducia. “The result is it’s really up to an employer to decide,” he said during the panel discussion. “Then we have large pockets of employees being on severance which is a huge challenge.”
Ndoro shared the findings of a World Bank study revealing that approximately 38 countries have established mandatory national pension schemes. Among these, about 31 jurisdictions have structured their national pension funds based on a defined benefit model. Notably, a majority of African countries adopting the scheme have followed the International Labour Organisation model, setting up a defined benefit arrangement that is partially funded.
If a National Pension Fund is established through legislation, it would mandate contributions from all individuals. However, according to Ndoro, a significant challenge lies in the financial constraints faced by employers. Many employers may struggle to contribute to both the national scheme and maintain their existing employer-sponsored pension funds.
In Ndoro’s perspective, the feasibility hinges on the structural design of the scheme. He suggests that an unintended consequence could arise, particularly concerning the level of benefits and contributions within the national scheme. Many employers might opt to discontinue their existing pension funds.
“If employers say they cannot sustain existing private pension funds and they actually go the route of discontinuing them it means the whole industry would be placed in jeopardy,” Ndoro said.
Contrary to Ndoro’s fears, Oagile Zilwa, a Senior Consultant at Alexforbes, envisions the national pension scheme coexisting alongside the current occupational schemes.
In several countries where national funds have been established, Ndoro said there are predefined levels of benefits and contributions set at relatively low levels. This strategy aims to ensure that private pension funds can continue to operate without being overshadowed by the national scheme.
Importantly, in many countries, a salary cap has been instituted concerning both benefits and contributions. This measure aims to mitigate the potential financial burden, especially on employers, when funding additional schemes alongside existing employer-sponsored ones.
Ndoro advised that a national pension scheme could be established with the provision that it is mandatory only for employees who do not already have pension funds.
“That way we make sure that for those employers and members already covered under private occupation, we don’t disrupt them.”
A key consideration highlighted by One Mokokwe, Senior Employee Benefits at NMG is flexibility. She stated that while participation in the National Pension Scheme must be financially viable, it also needs to be inclusive, accommodating the diverse needs and circumstances of individuals.
“We know that currently the informal sector individuals or individuals in the informal sector are left out of the equation,” she said.
Mokokwe advises these should be given the flexibility to contribute to the national pensions according to their preferences. They should have the option to make ongoing or regular contributions to the scheme, or to make periodic contributions based on their financial circumstances. Mokokwe is alive to the challenges faced by individuals with low intermittent income and stresses the importance of accommodating their needs within the scheme.
Another key feature Mokokwe advocated for is “compulsory preservation”. “Again in our occupational retirement funds, we are not achieving that 70-75% net replacement ratio.”
Mokokwe drew lessons from the two-port system model that is set to be implemented in South Africa, starting from September 2024. A draft Bill for this system was passed in January.
Under the two-port system, there is an element of compulsory preservation. “What we see happening here is that, of the contribution that a member makes on a monthly basis, two-thirds of those contributions must be preserved,” Mokokwe said.
She explained that this implies that when a member changes jobs, they cannot access the amounts held in this retirement port. Only the savings portion allows members to access a portion of the benefit when they change jobs.
“So if we draw up on this model, this will ensure that members’ retirement savings are not depleted prior to them reaching retirement age. It will also ensure that preservation is enforced,” Mokokwe said.
“We will be assured that a certain portion of the member’s retirement savings can only be accessed at retirement,” she said elaborating that when the member reaches retirement age, they would utilise the funds designated for retirement to purchase an annuity. However, if the amounts in question are below a certain threshold, members would be allowed to encash the entire benefit.
Mokokwe also advocated for portability, emphasising that members should be permitted to continue contributing to the national scheme even when changing jobs. “Another key feature is that members be allowed to participate in both the occupational retirement fund as well as the National pension scheme.”
Comments