This summary is based on the work of Sippel et al. (2011).
That brings us to South Africa. While the study cited below appeared in 2011, it’s insights are worth noting. The same study grouped countries into four clusters (A, B, C and D) of varying levels of progress. South Africa fell into cluster B, described as having ‘few children’ and a ‘medium to high level of development’. The only other African countries in this cluster were Morocco and Tunisia. The rest were Central or South America or Asian nations.
At 2.3 children per woman, the average fertility rate in cluster B is slightly above the simple replacement level, and therefore not much higher than in cluster A. It varies between 1.8 children in Thailand and three in the Philippines. South Africa is in between 2.2 and 2.4. Fertility rates are therefore (now) reasonably under control.
South Africa’s economic growth rate, however, is lower than many in the same cluster. According to the Gini coefficient, income distribution is particularly unequal in South Africa and the Latin American states. In South Africa, 26% of the population has to live on less than $1.25 a day, which may be due to an unemployment rate that is rather high for a newly industrialised country. Only in India and Indonesia is the proportion of the poor higher.
In the entire cluster, the number of people advancing their education after primary school has been increasing during the past four decades. In all countries for which data are available, except Thailand and Morocco, about 30% of the population has attended secondary schools, and in Malaysia and Mongolia the figure is 60% or more. In South Africa, though, the quality of school education leaves much to be desired.
Owing to the high prevalence of HIV Aids in South Africa (18% of the population was infected in 2011, one of the highest rates worldwide at the time), the average life expectancy actually started to decline and at the time of the 2011 study it hit an average of 52 years. The number of tuberculosis infections in South Africa was also correspondingly high (970 patients for every 100 000 inhabitants) since HIV Aids weakens the immune system, contributing to the spread of infectious diseases.
Over one-third of the countries in cluster B – predominantly Latin American states – have a high score in the Gender–related Development Index. The Gender Development Index (GDI) is an index designed to measure gender equality developed by the United Nations Development Programme. Compared internationally, the scores of the remaining countries are more or less in the middle range. South Africa is at the bottom of the rankings of cluster B.
Although ‘free’ in the political sense, most countries in cluster B experience corruption as a problem.
For populations in cluster B, the conditions for using the demographic bonus are ideal: there are hardly any retirees and there are no longer strongly growing young age groups who are flooding the labour market. If these countries are able to provide enough jobs for the large working-age population, then there should be positive and dynamic economic development.
And therein lies the rub for South Africa. To capitalise on the demographic dividend, we need to:
- create jobs for our emerging labour market
- improve healthcare and strengthen the health system
- reduce corruption
Finally, and most importantly, we have to improve education. Education must be recognised as the key factor for development. It prepares the way for the demographic bonus: mortality and fertility will decrease with the population’s rising standard of education. In addition, human capital increases through education. Education is the most important tool for achieving the demographic dividend.
Therefore, it is necessary to:
- create equal education opportunities for girls
- expand secondary education, in particular, because it is crucial to decreased fertility and an economic upswing
- establish vocational training as a bridge between school and the working world
- provide microcredits to improve the education of adult women and empower them, which will also promote entrepreneurship
Jargon buster
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or a verifiable credit history.
Human capital improves decidedly through education and lower numbers of children. In order to achieve this, jobs must be created. To create productive employment opportunities for everyone, we need to first invest mainly in sectors with a high need for low-skilled workers. Once education has improved, we need to create jobs in knowledgeintensive sectors that achieve greater added value.
Once the formal employment sector grows, social security systems should be developed. This will cause birth rates to decrease because children will become less important as security for old age. This is also a first step in preparing for the long-term ageing of the population.
In other words, to capitalise on the demographic dividend we need to get the basics right first as a country – or risk being shut out.
Lowest common denominator
In a diverse and unequal society, schemes provided by government will typically address the most basic needs and are therefore not optimal on their own. They can be supplemented by voluntary schemes run by NGOs (as happens elsewhere in the world), but apathy and issues of affordability may prevent people from enrolling in such schemes. Countries which have gone that route have started experimenting with auto-enrolment (where individuals get automatically enrolled) in supplementary schemes to boost participation and reduce reliance on state-provided benefits.
Public trust and political interference
To instil trust and prevent people from actively seeking ways to opt out of the system, governance must be strong and above reproach. Schemes must also be free from political interference and manipulation as an electioneering tool.
Start-up businesses and freelance workers
Globally, there is an increase in freelance workers and traditional structures may not cater for this in the changing world of work. Schemes must be flexible enough to provide solutions for these types of workers. Where to now? According to a white paper published by the World Economic Forum, key challenges facing retirement systems include:26
- Greater longevity results in higher levels of savings required to sustain longer lifetimes and ageing populations, putting a strain on the sustainability of pay-as-you-go systems (such as many social security arrangements).
- Individuals are increasingly responsible for ensuring they have an adequate retirement income. This situation is driven largely by governments and employers moving away from traditional defined benefit systems towards defined contribution systems. Also, trends in labour markets are resulting in less traditional employment patterns; contingent and self-employed workers are unlikely to have access to employer-facilitated plans.
- Individuals have low levels of savings.
- Poor financial literacy occurs in an environment where responsibility has shifted to individuals.
- A lower-than-expected investment-return environment places more importance on the level of contributions.
- Limited access to savings vehicles is one of the biggest barriers to saving for retirement.
A key finding in an earlier World Economic Forum paper is that expanding access to retirement savings vehicles is one of the most effective ways to address the global retirement crisis. Without easy access, and in the absence of auto-enrolment or mandates, people are less likely to save. While giving them access to the tools needed to plan for retirement is important, engaging them effectively to participate in the first place is critical. In addition, financial innovation is necessary to make sure that savings can be invested in low-cost products that produce a stable and sufficient retirement income.
The paper included findings on techniques that governments and employers can use to close the savings gap, from increasing coverage to adopting digital financial systems. The following three principles were identified as necessary to improving financial inclusion and retirement security:
- Expand coverage to more people, including lower-income populations and women. Employer-facilitated plans are a way to achieve this.
- Use technology to increase levels of savings.
- Structure pension systems to provide incentives to improve participation. For example, use automatic design features to help improve retirement outcomes and address the need for emergency cash.
These are all issues we have highlighted and discussed in Benefits Barometer at some point.
Employer-facilitated plans can have a big impact on retirement savings. Research shows that people are 15 times more likely to save if their employer offers a plan. Mercer’s Healthy, Wealthy and Work-wise research shows that people trust their employers more than third-party providers.27 Using employers to encourage people to save for retirement is one of the most effective ways of expanding access, so it’s critical to maximise the role of the employer. Mandatory compliance has been used effectively around the world to compel employers to provide retirement savings plans. Moving to automatic enrolment with an ‘opt-out’ option as opposed to an ‘opt-in’ approach has proven to be quite effective as well.
Mercer research also suggests that there is a discrepancy between the reasons people give for not participating in savings plans and what their employers think the reasons are. Business leaders believe that employees are not participating in savings plans due to low awareness or visibility of the plan, while employees claim it is due to affordability. Here are some ways employers can encourage participation:
- Allow employers to contribute independently or match employees’ contributions. This has been shown to encourage participation and improve adequacy. When businesses contribute to retirement plans, full-time employees are more than twice as likely to contribute themselves as employees in businesses that do not contribute.
- Find ways to include contingent and informal workers, as they are least likely to have access to a traditional workplace savings plan. And this group of workers is growing. In addition, more workers are moving between informal and gig work throughout their careers, which disrupts regular saving habits.
- Encourage emergency savings for the short and medium term. This can help employees avoid high fees on short-term credit for unforeseen emergencies or using their retirement savings early.
As we argued in Benefits Barometer 2016: 'Benefits models fit for South Africa', the retirement fund could be the platform for delivering a wider range of financial planning aspects targeted at meeting individual needs and helping people manage the balance between short-term and long-term needs. We argued that trustees and employers could consider providing solutions to deal with housing, education, emergency savings, post-retirement medical savings, and other aspects of personal and financial well-being. We have also previously addressed most of the points raised above and provided practical steps towards achieving these desired outcomes.
There is a growing appreciation among all stakeholders involved with employee benefits that individuals are at the centre of who is being provided for. On the flip side, the general view among employers is that employees couldn’t care less about employee benefits, particularly those in younger age groups, where there is a general apathy towards benefits.
We do recognise, particularly in a diverse setting such as South Africa, that a person’s mindset and attitude towards finances are often influenced by their situation (including lifestage, partner and responsibilities). It is important to understand how people view the world, and how this view is shaped by their background, culture, faith and values.
Where will it all end?
These dynamics will change the nature of our investments, our risk benefits, the choices we will be allowed to make in terms of add-on benefits and, of necessity, the way benefits are administered, accounted for and reported on. The world will wake up to the idea that what used to be a pension fund can, with the right platform and structuring, be translated into a powerful financial planning tool for individuals and their families that can go significantly beyond addressing only two parameters of our lives: retirement savings and income protection.
There may well be ways to use disruptive fintech solutions to address issues of risk pooling and cross-subsidisation, but workplaces allow us to go even further in providing support systems for their employees. Let’s find ways to use that opportunity to address issues of coverage for the unemployed, the inadequately skilled or the intermittently employed in a changing world of work that suggests that we will see increases in all those areas.
Towards a solution: mass customisation at employer level
For most people, life does not follow a planned or linear trajectory, with many sharing the sentiment that ‘life is a journey of ups and downs’. In the framework of Benefits Barometer, it is the journey that matters more than a static saving model.
How to map the journey? One solution could be an employer-provided flexible benefits platform that:
- targets individual goals in its default set-up
- is a condition of employment
- addresses a range of shorter- and longer-term priorities
Because it’s compulsory and has a default set-up, it addresses cross-subsidies and risk pooling. It could also address employer productivity challenges, and potentially transformation and corporate social investment requirements, too.
The primary focus of this platform is giving employers a ‘plug and play’ solution that allows them to structure the kind of savings and risk management options that best address their employees’ needs.
Essentially, we are expanding the ambit of traditional employee benefits to allow members to address everything from emergency savings, housing, education funding, post-retirement medical savings, savings for asset purchase, infund preservation and annuities. This would be in addition to the conventional offerings of retirement savings and risk benefits.
The end goal is to provide a guided financial planning framework targeted at securing employees’ financial well-being along their life journey. This means that each solution on offer comes with its own advice and educational framework.
Employers and employees have limited budgets for meeting competing financial needs. As articulated in the 2016 edition of Benefits Barometer, these needs can be met more effectively through a lifecycle approach to funding. Employers play a critical role in the choice of benefits that they offer their employees and the spend that they direct through payrolls.
Ease of use and access to benefits are important design elements of the platform. It should be easy for employers to use and should also allow members flexibility in selecting benefits and benefit levels. The platform should interface with employers’ payroll systems and any administration systems used to administer benefits offered to employees. For employers, this provides a centralised portal from which to manage the benefits they offer their employees and allows them to draw management reports.
Importantly, there needs to be flexibility around when contributions are allocated to the different savings vehicles. Switches could be determined algorithmically using self-selected parameters for inflows, and by self-selection at the point of withdrawal. Ideally, we would like to see the member maintain a constant savings rate, irrespective of how those funds are allocated between the short- and long-term savings vehicles.
Digitalisation and communication
The world is increasingly connected, mobile and digital. The internet of things infiltrates almost every aspect of our lives. Retirement funds will be no different.
This new era offers trustees fantastic opportunities to communicate effectively with members. In fact, many funds and providers are embarking on this journey already.
Communication is an area of retirement funding that has remained difficult to get right. The ideas being communicated relate to distant problems, so getting and holding the attention of members is tough, and it’s difficult to make a positive and lasting impact.
With vast improvements in digital platforms and portals, it should be far easier for fiduciaries to communicate with members using a wide range of media and engagement devices. Learning and communication can now be tailored to members who have different needs, knowledge and levels of understanding when it comes to retirement funds and financial services in general. But digitalisation goes further than this – employees will expect to not only see and hear about their benefits digitally but also be able to manage them digitally.
This requires everything from the right digital engagement strategies to the ability to process instructions and give employees a consolidated view of their benefits on a digital platform.
All of these factors are going to have to be understood if we are to genuinely shift our focus from the pursuit of growth at any cost towards becoming an economy that develops South Africa and its people to deal with the challenges of the future from a collective position of collaboration rather than one of contest and strife.