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262 | ACTUARIAL SOCIETY 2014 CONVENTION, CAPE TOWN, 22–23 OCTOBER 2014

What is the best way of extending retirement coverage to the six million employed South Africans who do not have access to an occupational retirement plan?

By DT Chamburuka and C Aitchison

Presented at the Actuarial Society of South Africa’s 2014 Convention22–23 October 2014, Cape Town International Convention Centre

ABSTRACTAbout half of formally employed people are not a part of their employer’s retirement saving fund, and while some people may take action themselves and open an investment account or increase savings, other people display a sense of hopelessness. Many people may not take action themselves and thus mandating or requiring employees to save for retirement through an occupational retirement fund is ideal. The paper explores different models that the South African government can use to extend the coverage of retirement savings.

KEYWORDSAMPS; auto-enrolment; defined benefit; defined contribution; compulsory retirement saving; retirement coverage

CONTACT DETAILSMr Darlington Chamburuka Tel +27 (0)11 217 1363, Fax +27 (0)11 217 1398Email: [email protected] Craig Aitchison Tel +27 (0)11 217 1681, Fax +27 (0)11 217 1398Email: [email protected]

DT CHAMBURUKA & C AITCHISON EXTENDING RETIREMENT COVERAGE TO SOUTH AFRICANS WHO DO NOT HAVE ACCESS | 263

ACTUARIAL SOCIETY 2014 CONVENTION, CAPE TOWN, 22–23 OCTOBER 2014

1. INTRODUCTION1.1 Background

The government of South Africa during the 2014 National Budget speech stated that they were exploring measures to extend the net of retirement savings coverage to six million employed South Africans who do not belong to an occupational retirement fund (National Treasury, 2014). While membership of an occupational retirement fund is compulsory for all eligible employees, the main reason so many formal sector employees are not covered is because they are working for companies that do not have a retirement fund or are not eligible to join their occupational retirement fund. The employees that are usually not able to join their employer’s retirement fund are mainly employees who earn irregular income such as part-time employees, contractors or seasonal workers. In addition, there are informal employees who work for employers that do not provide retirement benefits.

During the 2014 Budget Speech the Minister of Finance highlighted that government plans to mandate every employee to belong to an occupational retirement fund. The mandatory coverage proposal has its roots in the 2002 Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa (hereafter referred as the Taylor report) (National Treasury, 2007). The Taylor report recommended that South Africa needs to have some form of mandatory insurance covering for all the formal sector employees (including all casual and part-time workers) and their dependants. The main advantage of this form of mandatory insurance is a reduction in cost to the members as there will be no need to underwrite and to market the product. The Taylor report recommended excluding employees at the bottom of the pyramid where the administrative expenses as a percentage of contributions will be proportionally high.

The Taylor report also recommended the preservation of compulsory savings. That is all the savings earmarked for retirement should remain invested until the member reaches retirement. In order to reduce financial hardship, the Taylor committee further recommended that if a member remains unemployed for more than six months, they should receive a monthly income equal to no more than 60% of their income before becoming unemployed once they are no longer entitled to Unemployment Insurance Fund benefits. The Road Accident Fund (RAF) will need to be abolished as the disability benefits will be paid from the mandatory retirement fund (Taylor et al., 2002).

In 2004, the National Treasury in the retirement fund reform discussion paper proposed the introduction of National Savings Fund (“NSF”) to cover people with low incomes (particularly workers in the informal sector, part-time and seasonal employees, domestic and agricultural workers). This differs from the Taylor Commission recommendation in that the scheme was meant to cover only low-income earners. Employees below the tax threshold would be required to join the NSF and would not be compelled to join their employer’s retirement fund. If an employee cannot join the employer’s retirement fund, the employer would be required to facilitate payroll

264 | DT CHAMBURUKA & C AITCHISON EXTENDING RETIREMENT COVERAGE TO SOUTH AFRICANS WHO DO NOT HAVE ACCESS


deduction for either an individual retirement fund or the NSF (National Treasury, 2004).

In the second discussion paper on retirement reform published in 2007, National Treasury proposed to close/cover the gap between social assistance grants and private sector provision by:

— mandating those above a certain income threshold to participate either in private occupational or individual retirement funds; and

— providing a wage subsidy to cover the costs of social security contributions and mandating contributions above the social security contributions for low-income earners (National Treasury, 2007).

It is important to note the mandatory cover proposed here would differ from the NSF proposal introduced in 2004 as the scheme will be aimed at employees with income above a certain threshold whereas the NSF was there to facilitate saving for the low-income earners (National Treasury, 2007).

In 2007, the Department of Social Development (DSD) proposed compelling all employees to participate in a two-tier system that includes a pay as you go (PAYG) defined benefit system and a funded defined contribution system. The PAYG benefits are formula-based and are automatically adjusted in line with the changes in the ratio of contributors and beneficiaries. The benefits can reduce in the future when the country ages as there will be more beneficiaries than contributors. The DB portion of the contribution would go towards PAYG benefits, and no one would be allowed to opt out of the PAYG section. The DC portion of the contributions would default into a Government Sponsored Retirement Fund (GSRF) which will be fully funded. The employer would only be permitted to opt out of the defined contribution scheme if they participate in an accredited retirement fund (Department of Social Developments, 2007).

The proposed DSD mandatory system was meant to increase both the coverage and the replacement rates (Department of Social Developments, 2007). The DSD was concerned that the trend towards the defined contribution and lack of mandatory preservation has resulted in low-replacement rates for those saving for retirement. In addition, because of the lack of a mandatory retirement savings requirement, a significant gap between those saving for retirement and those not contributing towards their employer’s retirement funds was developing. The DSD was also concerned about the broader needs of employees for benefits such as spouse cover and funding of post-retirement medical benefits for those in retirement funds. Therefore, the DSD’s mandatory retirement system will include disability provisions and benefits for surviving dependants. More benefits will increase the cost of the system, and single people will need to subsidise people with dependants.

In 2012 the National Treasury published a chapter on social security and national health insurance in the budget review and they proposed that there should be an integrated contributory social security system that will cover all workers’ social security



needs including retirement pension (National Treasury, 2012). Currently, the Road Accident Fund and Unemployment Insurance Fund cover all employees but the two funds are not integrated. In addition, the government plans to integrate health-related benefits provided by the Workmen’s Compensation Fund, Road Accident Fund and the proposed National Health Insurance. The government proposed the establishment of a mandatory statutory fund that will provide a government-guaranteed pension, life insurance and disability benefits.

The DSD proposed the National Social Security Fund (NSSF) to work as the following:

— Compulsory contribution of 12% of income between R12 001 and R150 000 per annum towards NSSF.

— NSSF would be run on a PAYG basis and would provide defined benefits. The benefits would be in proportion of years contributed and wages over the course of the individual’s career (Department of Social Development, 2007).

There would be closure of schemes that do not meet required standards, and their members would be transferred to NSSF. However, the members’ vested rights before the closure of their scheme would be protected. The higher income earners could supplement their national social security fund contributions by contributing to an approved retirement plan (Department of Social Development, 2007).

In 2013, the National Treasury in the discussion paper termed Charges in the South Africa Retirement Funds proposed to compel employers to automatically enrol their employees into one of the private retirement funds to increase coverage and also to reduce the cost passed to the members of retirement fund. To further reduce the cost, National Treasury proposed the formation of a retirement exchange that will facilitate employers or employees to select the retirement fund of their choice without requiring advice.

The 2014 Budget update on retirement reforms proposed to address the current voluntary retirement system that requires people to be persuaded to make retirement provision by mandating every employee to belong to a retirement fund.

The models to increase coverage and retirement savings have been evolving ever since the release of the 2002 Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa. These models differ in terms of who is going to be covered, the benefits that are covered and who should manage the fund. Table 1 summarises the different models that have been proposed since 2002.

1.2 Research QuestionWhat is the preferred model of auto-enrolment or compulsory retirement from

the perspective of a member? How does the preferred model affect coverage and adequacy of retirement saving?



Table 1 Summary of some of the models proposedWho is covered Benefits The administrator

Mandatory provision recommended by the Taylor Commission (2002)

All formal employees including casual and part-time workers

Integrated social security system. The savings will be preserved. Members will receive 60% of their pre-unemployed income and this will assist compulsory preservation.

Government

National Savings Fund proposed in 2004

Low incomes (particularly workers in the informal sector, part-time and seasonal employees, domestic and agricultural workers)

Retirement savings NSF will be run by government. High income earners can save towards retirement in an approved retirement scheme run by the private sector.

Mandatory provision recommended by National Treasury (2007)

People earning above a certain income threshold

Social security benefits plus the current retirement benefits provided by the private sector

Private sector for benefits above social security contributions

Mandatory provision recommended by DSD (2007)

All employees Partly PAYG defined benefits and partly funded defined contribution

PAYG – Government sponsored retirement funddefined contribution – either government/private sector

National Social Savings Fund

Employees earning between R12 001 and R150 000

PAYG and on defined basis targeting a net replacement ratio of 40%

Government for the NSSF

Auto-enrolment All employees in the formal sector

Funded benefits Private sector (stand alone, umbrella or retirement annuity)

1.3 The Importance of the ResearchOne of the key aims of retirement reform is to improve the retirement savings

of the employees. Clearly, regardless of the eventual format of a mandatory retirement savings system, the employee is affected. A successful system for extending coverage of retirement savings should therefore take into account the preference and views of these employees. The study aims to presents the views of the preference of the members regarding the design of a mandatory retirement system and thus enriches the debate on the issue. It is the authors’ hope that various stakeholders will be able to derive and apply insights from the research when designing the solutions for and in response to the need to extend retirement savings coverage.



1.4 Aim of the ResearchThe aim of this study is to explore different compulsory or auto-enrolment

designs in the South African context. The study aims to investigate which form of extending coverage employees prefer and the fundamental design aspects of such system:

— level of contributions — target replacement ratios — type and level of benefits: death benefits, disability, ill-health benefits

1.5 Research ObjectivesWhilst there is a need to extend coverage, there remain many unanswered

questions regarding the appropriate approach to extending coverage. This research adds to the debate around compulsory retirement savings by addressing the following issues:

— How should retirement savings coverage be extended in the South African context? Ever since 2002, two systems of extending coverage have been proposed in South Africa, namely mandatory retirement savings or auto-enrolment where employers are required to enrol their employees into an approved retirement saving vehicle by default.

— Who should be covered? There is some debate as to whether informal and very low income earners should be covered, given that the State Old Age Grant gives a more useful replacement ratio for people earning below the tax threshold. The question remains whether it is sufficient.

— What is the appropriate level of contributions? One concern with the current retirement arrangement is that people are retiring with low levels of retirement savings. Some surveys indicate that currently the average replacement ratio for members retiring from DC retirement funds is approximately 30%, and that many members retire with net replacement ratios of less than 30%. Therefore, what is the appropriate minimum rate of contributions that a mandatory retirement savings approach should be targeting? Further, should that rate be phased over time and what will be the length of that time period be?

— Who should administer the scheme? The government or private sector or both? The design can affect the economies of scale for the private sector and hence the ability of the private sector to bring down the cost of retirement provision.

— What benefits should be covered, at what level and in what form? For example should death benefits be paid out as lump sum or as a spouse’s pension? Should post-retirement medical aid be covered?

— Opting out: should a member be allowed to opt out of the mandatory system or from the auto-enrolled fund? Opt-out can affect the economies of scale and cost. However, it gives the member the right to choose the solution that fits their financial situation, even although this may not be in their eventual best interest.

— Should the cost of the system be directly regulated, or should there be regulations to drive more competition, through mechanisms such as increasing



the transparency of fees or having a single charging metric similar to the Total Expense Ratio metric as used for Collective Investment Schemes?

1.6 Research QuestionsThe research presented in this paper seeks to develop an understanding of what

the preferences are of employees, who are not currently in their employer’s retirement fund, regarding:

— Compulsory versus auto-enrolment — Benefits to be provided — Contribution levels — Who should administer the fund: government or private sector? — Who should be covered?

In addition, the paper looks at how satisfied employees are who do not currently belong to their employer’s retirement fund about their financial readiness or provision for retirement.

1.7 Layout of the PaperThe paper has five sections, and the remaining parts of the paper are arranged

as the following:Section 2 is a review of the literature and starts off with contrasting compulsory

saving and auto-enrolment and then looks at the merits and demerits of both compulsory and auto-enrolment. Four different international compulsory saving and auto-enrolment models are considered.

Section 3 discusses the methodology used and the research process that was undertaken to answer the research questions.

Sections 4 and 5 detail the findings and analysis of the research. The sections present the answers to the research questions and the implications of the results for the various stakeholders of the retirement fund industry.

Section 6 concludes the findings on the research questions and research aim and gives some recommendations. The weakness of the findings is discussed together with some areas of potential further research on the subject.

2. LITERATURE REVIEWThe main aim of this section is to review the relevant research done by other

researchers on the topic of compulsory retirement savings and auto-enrolment.The review considered the following:

— The distinction between compulsory retirement saving and auto-enrolment. — The merits and demerits of both compulsory retirement saving and auto-

enrolment. — Different compulsory retirement saving and auto-enrolment models used

worldwide.



2.1 Compulsory versus Auto-enrolment2.1.1 Employee Choice

Whilst both auto-enrolment and mandatory retirement savings approaches have many similarities, there are some important differences between these approaches that are useful to note.

While both approaches require designated parties to make a minimum amount of saving towards retirement, auto-enrolment models allow individual employees to exercise an option to exit the savings arrangement. This opt-out is usually available for a limited time after an employee joins employment or a retirement savings plan. Some versions of opt-out also allows members to cease making contributions for a period.

New Zealand has implemented auto-enrolment and has experienced rapid growth in retirement savings as a percentage of GDP without forcing people to save for retirement.

Mandatory retirement savings arrangements tend to require qualifying employees or employers to make a minimum level of contribution without individuals having the ability to opt out or cease contributions. Mandatory retirement savings systems may exempt certain employees completely from the requirement to save. For instance, very low income workers could be excluded from a requirement to save for retirement. Compulsory retirement saving takes away the choice but is expected to result in more people saving for retirement. Therefore, there will be fewer people who will rely on the government for financial support.

2.1.2 Impact on CoverageThe coverage for auto-enrolment depends on:

— The types of companies required to implement auto-enrolment, e.g. only formal sector companies or companies with at least five employees.

— The categories of employees that will be auto-enrolled e.g. new employees only, employees earning above a certain income threshold and permanent employees only.

— The number of people that will opt out of the system. — The future governmental changes to the programme: for example between 2008

and 2011 the number of people who opted out of the New Zealand KiwiSaver was around 30% and the main reason for such a high opt-out rate was the uncertainties brought about by a number of changes since its implementation in 2007 (Carrera, 2012).

The first two factors above, namely the type of companies and categories of employees, will also affect coverage in a mandatory savings environment. However, the coverage in a mandatory retirement savings environment is expected to be higher since everyone who qualifies to contribute will be required to save. The other factors such as the rate of opt-out rates and the future governmental changes to the system are less likely to affect the coverage for compulsory retirement savings.



2.1.3 Need for EngagementAuto-enrolment requires people to have a certain level of involvement as one

needs to decide whether to remain opted in to the retirement fund. Compulsory retirement savings is possibly a more paternalistic approach that involves requiring people to save for retirement. The motivation behind requiring people to save stems from the view that increasingly people will choose to spend on the current important things that affect their lives rather than save for retirement. In countries such as Australia where there is compulsory savings, the number of people making voluntary savings has significantly dropped. Whilst more people in a compulsory environment will save for retirement, savings towards other goals might actually decrease. This becomes a bigger concern if access to retirement savings is not permitted until one reaches retirement age; some people might struggle if they run into financial difficulties if they do not have adequate short-term savings.

2.2 Why are Auto-enrolment and Compulsory Retirement Saving Important?Auto-enrolment and compulsory savings have both been shown to increase

the coverage of retirement savings. For example, in America, some companies have experienced on average a 50% increase in participation rates by switching to auto-enrolment, and some companies with default escalations on contribution rates have seen an increase in the saving levels among participants (Bronchetti et al., 2012). Auto-enrolment and compulsory savings can increase retirement savings by mitigating the problems caused by procrastination. To effectively increase coverage, auto-enrolment requires certain measures to be in place, such as requiring employees to make an active choice by a set deadline and having appropriate defaults and features, such as having automatic contribution increases (Fisher, 2013).

If either auto-enrolled retirement funds or the compulsory system are well designed, they can give many people access to low-cost accounts. There is generally pressure in many countries to bring down the cost of saving through a retirement fund and hence mandatory retirement allows for economies of scale which might enable certain costs per member to come down. It should be noted whilst economies of scale might reduce administration costs per member, they might not necessarily bring down the total cost. In Australia, the growth of members has resulted in a decline in administration costs per member. However, the investment management fees have been rising despite the growth in assets under management and therefore total costs have remained around 0.75% to 0.80% of assets from 2008 to 2012.

In South Africa, a survey conducted on graduate professionals in 2014 showed that about two-thirds of the graduate professionals firmly believe that saving for retirement should be compulsory as it will ensure adequate provision in the old age (Schramel, 2014). Some people prefer for processes and systems to be in place to facilitate saving as they will not be able to save on their own. In the UK, only 9% of people have opted out of the auto-enrolment funds, a much lower figure than expected. Thus, by requiring employers to enrol their employees automatically in an approved



retirement savings vehicle, the coverage may increase due to the “endorsement” effects. That is, many employees may take the default as the recommendation from the experts (Bronchetti et al., op. cit.).

2.3 Disadvantages of Auto-enrolment and Compulsory Retirement SavingThere is a danger that auto-enrolment may lead to lower contribution rates than

what the individuals would have voluntarily saved due to the “endorsement impact”. The contribution rate set as the default by the scheme might be viewed as the optimal rate to save for retirement as recommended by an expert. If the contribution rate is not adequately set, there is a danger that many members will stay with the default options. There is some evidence that employees who are automatically enrolled remain in the default option and only a small proportion choose a different contribution rate or asset allocation at least in the short term (Butrica & Karamcheva, 2012).

Compulsory retirement saving or requiring certain people to be auto-enrolled might not be suitable for certain people (e.g. people with low incomes) because the charges on small amounts (especially if not regulated) can erode the real value of savings. In Australia, the charges cannot exceed the investment returns. Despite this constraint, some people are disadvantaged as they will not receive investment returns above inflation. The Pensions Policy Institute of UK (PPI) defines an auto-enrolment retirement fund to be suitable if the individual does not lose out as a result of their saving (Curry, 2008). Auto-enrolment or compulsory savings can be unsuitable if people cannot receive value for money on their savings.

If an active choice is required, this presents some problems as some people may be hampered by their lack of knowledge and willingness to make decisions regarding savings. If the defaults are not properly designed, many people may be disadvantaged as the majority of people by nature might stay in the default options. Proper defaults that ensure that majority of members retire adequately need to be put in place.

2.4 The Role of the EmployerCompanies can increase participation in an auto-enrolment fund by co-

contributing to the fund, e.g. by matching the employee contributions. The London School of Economics and Political Science researched 26 000 people in England who are employed. The research revealed that the availability of employer contributions increases the likelihood of an employee saving in a retirement fund by 71% (Lloyd, 2011). These results will be distorted by the effect of other factors such as the provision of employee financial education by the employer or the insurance provider. Whilst there are always other factors that could come into play, the results suggest that one of the factors that government can utilise if it wants to reduce the number of employees who will opt out of auto-enrolment schemes is requiring employers to contribute a certain portion towards their employees’ retirement. We should note requiring employers to contribute a certain portion towards their employees’ retirement is the current prevailing practice in South Africa. In the South African context when



extending coverage to the employees in the SMEs, cost to the employer is an important consideration and hence this will need to be managed carefully.

If the employer is required to contribute e.g. matching the employee’s contributions, there will be additional costs incurred by the employer. In America, some employers match employees’ contributions to increase the participation. The greater the number of employees who save in a retirement fund, the higher the cost the company will incur. Some companies have cited the cost of matching contributions as a key barrier to adopting automatic enrolment (Butrica & Karamcheva, op. cit.). There might be some unintended consequences such as companies reducing other employee benefits e.g. by reducing the real growth in salaries and medical cover.

Employers can help employees to make appropriate financial decisions by ensuring that employees access financial education. Financial education increases one’s confidence and helps the employees make active choices.

2.5 Who collects the Contributions?The authors suggest that a good collection system should be:

— Efficient and fast — Easy to access — Easy to administer and control — Easy to report and audit — Cost effective — Allow for continuous improvement to improve efficiency and take advantage of

changes in technology and the environment

A question that arises in an auto-enrolment environment is who collects the contributions towards retirement savings from the employer and the employee? (Rusconi, 2007: 35) recommends that the contributions need to be paid directly to the accredited provider chosen by the member, and this may not be efficient as we may end up with many contributions collectors for the same employer.

In countries like New Zealand, the submission of contributions by the revenue collector to the investment provider can take up to three months. The delay implies that a member can lose out on the investment income. If the loss in investment income is compounded over a long time, the loss will be significant.

The other pertinent question is what role the premium collector also provides. If the services include administration services such as paying out claims and sending member statements, then it eliminates the need for another administrator and hence impacts on cost. However, if only the contributions collection service is performed, the cost might increase as there will be a need to reconcile the records of both the premium collector and the administrator.



2.6 Worldwide Models used to extend CoverageThe World Bank has suggested the following three separate “pillars” of a

retirement funding system: — Pillar 1 is a public benefit programme, funded from general government revenue,

which is aimed at redistribution (from the more well-off to the poor) in order to prevent poverty in old age.

— Pillar 2 is typically privately managed, fully or partially funded, with mandatory participation, within which individuals save to provide themselves with an income during retirement.

— Pillar 3 comprises voluntary savings, permitting individuals to choose how they allocate income over their lifetime (Department of Social Development, 2007).

A well-designed retirement system should consider the following issues: — The level of coverage achieved by all the retirement savings vehicles in the

country The retirement vehicles include both individual retirement vehicles such as retirement annuities in South Africa and corporate schemes whether mandatory or voluntary.

— The adequacy of retirement benefits from all the sources of retirement income There is a need to consider the income from each of the pillars of retirement savings including the state old age pension.

— Financial sustainability and affordability to contributors A high contribution can increase the probability of retirement benefits being adequate but may be unaffordable to the contributors. So the right balance between adequacy of retirement benefits and financial sustainability and affordability to contributors is required.

— Cost efficiency of the retirement system The cost of administration, such as collecting contributions and investment management, should be kept as low as possible. The compound effect of higher charges has the effect of significantly reducing retirement benefits.

— The level of security of benefits in the face of different risks In a PAYG schemes, some countries have responded to the risk of increased longevity, lower contributions by increasing retirement age and reducing benefits (Whitehouse et al., 2009).

Models for compulsory retirement savings and auto-enrolment differ in the way they achieve the above objectives. The four models for compulsory retirement savings and auto-enrolment looked at in this section are:

— California Secure Choice Retirement Savings Program — Australian Superannuation Guarantee — New Zealand KiwiSaver — UK Auto-enrolment



2.6.1 California Secure Choice Retirement Savings Program2.6.1.1 Introduction

The Act for California Secure Choice Retirement Savings Program was signed into law in September 2012 and is intended to be implemented at least from 2015. The main aim of the Act was to create a retirement vehicle run by the state for the private sector employees who are not currently saving for retirement (Sprague, 2013: 6). The state intends to administer and fund the scheme via a trust overseen by the California Secure Choice Retirement Saving Investment Board which will be comprised of nine members.

As many Americans are not adequately saving for retirement, the California Secure Choice Retirement Savings Program is aimed at providing a vital supplement to social security income for Californians (De-Leon, 2014).

2.6.1.2 BackgroundSavings rates in America are low. It is estimated that over 6.3 million Californian

employees are not saving through their employers’ retirement plans as employer-sponsored retirement plans have never been universal. It is estimated that currently more than 50% of households have less than US$25 000 (R264 000) in total savings and investments. At least one-quarter of Americans have less than US$1 000 (R10 560) in investments and savings (Dolsen et al., 2014). Thus, many Americans are at risk of experiencing a significant reduction in income when they retire.

There is, therefore, a need for more workers in America to save more as they are currently not saving enough. The most worrying fact is those households aged 55–64 who are expected to be prepared for retirement have average retirement savings of US $120 000 (R1 267 200). Given that the average will be skewed to households with a higher balance, the majority of households will retire with balances less than US$120 000 (Dolsen et al., op.cit.).

The problem of inadequate savings will be compounded by the effect of longevity and inflation experienced during the years in retirement. It is estimated that for a couple aged 70, there is a 50% probability of one of the spouses reaching the age of 92 years. With even an inflation rate of 2% per year, the average nominal cost of goods will increase by more than 50% over a period of 22 years.

The Californian middle class is at a great risk of having inadequate retirement income. It is estimated that at least 50% of the middle class will fail to meet basic expenses and will retire at or near poverty (León, 2012). The lack of adequate retirement savings and the high rate of unemployment will further strain the safety net programme (Dolsen et al., op. cit).

2.6.1.3 EligibilityAll workers who work for companies with at least five employees that do not

have a retirement fund will be automatically enrolled unless the company offers another retirement option (Pension Rights Center, 2014). Although companies with



fewer than five employees will not be required to enrol their employees, they may do so if they wish to.

The members can opt out and withdraw their contributions within the first 90 days without any penalties. The members are always permitted to leave the state or the government-sponsored retirement fund and join a private retirement savings provider. After 90 days, any withdrawal will incur fees. Members are allowed to make their balance paid-up.

The employers will be required to auto-enrol those who had previously opted out once every two years (Sprague, op. cit.). This might increase the coverage if the reason for opting out was because of poor financial position at the time and if the financial circumstances have improved in the two years.

A company that does not offer auto-enrolment when it is required to do so by the Act will be fined US$500 (R5 280) per employee (Harrington, 2012). For companies with a large number of employees, the cost will be significant which means that we might see better enforcement with large companies. However, as a proportion of turnover, the cost might be also significant for small employers which might encourage them to comply too.

2.6.1.4 ContributionThe default contribution rate is 3% of salary. Members can adjust their

contributions including stopping the payment anytime. The trustees have the authority to change the default contribution rate upwards or downwards by 1% for different employees on the basis of duration in the programme (Sprague, op. cit.). There is no requirement for an employer to match the contributions. If many employers match employee contributions, the coverage is likely to increase as many employees will be incentivised by the employers’ contributions.

The bill provides for the creation of a Retirement Investments Clearinghouse that will provide information on individual retirement accounts and annuities offered by the private sector for consideration by eligible employers. This will enable the employers and the employees to make more informed decisions if the information is presented in a consistent manner, and it is easier to understand.

2.6.1.5 AdministrationThe programme will be administered by the California Secure Choice Retirement

Trust (Harrington, op.cit.). The Trust is appointed by the state and, therefore the accounts will be managed by the government on behalf of the private sector. The contributions are going to be saved in individual retirement-type accounts, but will be managed collectively in order to gain from the economies of scale.

2.6.1.6 Portability and PreservationAs the accounts are not tied to a single company but linked to the worker,

portability is improved. The California Secure Choice accounts are kept open when



an individual changes jobs so that they can roll over their balances. The individual can continue contributing to the same account when they change jobs. Preservation is hence the default option, and this increases the preservation as it reduces the need to cash in savings when there is no need to do so.

2.6.1.7 InvestmentsThe bill is going to spell out the investment policies for the Board (León, op.

cit.). The Investment Board will be responsible for the investment strategy. The Board will also be responsible for contracting out the responsibilities to the investment managers. The investments will be conservative and are aimed at providing a safe and stable rate of return (Sprague, op. cit.). Recent projections estimate that a hypothetical conservative portfolio (50% equities/50% bonds or treasury bills) for a publicly spon-sored retirement fund is likely to generate a 5% real rate of return over the long-term (Sprague, op. cit.). Based on international norms, a real return target of 5% sounds high for a conservative strategy.

The plan is different from existing accounts as a guaranteed return is provided in the law. The accounts provide a guaranteed return which provides protection against declines in the market without members foregoing the upside potential (Sprague, op. cit.). The Bill does not state what the guaranteed rate of return will be.

The Investment Board will be responsible for setting the specific rate annually for the next year. The guaranteed returns will be provided through the purchase of private insurance. As the private sector will provide the guarantee, and this alleviates the fears of relying on the state if the fund goes into deficit (Sprague, op. cit.). If the guarantee is onerous, the expected real returns might reduce by 2% and 3% (Sprague, op. cit.).

2.6.1.8 CostThe administration fees are paid from the contributions and are capped at 1% of

the fund. The fund is expected to break even after 40 years on a modest contribution of 3% of salaries (Sprague, op. cit.). That is the administrator (who is the state) expects the revenue from the administration fees to exceed the actual expenses of running the fund after 40 years. The plan is designed not to impose direct costs on employers as companies are not required to match the contributions. Companies will be required to facilitate the payment of contributions and to provide their employees with information, which will lead to indirect costs.

The cost of the plan is expected to be lower due to economies of scale brought about by the pooling of contributions, and this can boost returns in the long run.

CommentsThe required contribution of 3% is low by international standards to offer a good replacement ratio at retirement. By not requiring employers to contribute, it reduces the cost to the employer. The scheme aims to offer a real return of 5% and based on



international norms, a real return target of 5% sounds high for a conservative strategy. The existence of a guarantee might be attractive from the employee point of view as it offers peace of mind.

2.6.2 Compulsory Superannuation System in Australia2.6.2.1 Introduction

Australia is one of the few countries in the world that has a compulsory employer-funded retirement plan. The compulsory retirement plan is called the Superannuation Guarantee (SG).

The SG should be able to provide an average replacement rate of 90% for an employee earning an average salary, who starts work at 30 years and retires at 67 (Guest, 2013 ). The employees who started in an SG in 1992 when the scheme was introduced might retire with less than the replacement rate of 90% as the contributions started at a low base of 3%.

Australia has a three-pillar system which is comprised of: — A mean tested public pension (pillar 1) which is funded on a purely PAYG — Compulsory private superannuation (SG) — Tax-preferred voluntary private superannuation funds

It would appear that the SG has benefited some employees who probably would never save for retirement if there was no compulsory retirement saving. Research in 2009 indicated that about 20% of the retirees depended entirely on superannuation for retirement (Qu, 2014).

2.6.2.2 BackgroundInstitutionalised employee superannuation was born in 1985 when the

Australian Council of Trade Unions negotiated a 3% contribution to be paid into an approved multi-employer industry fund (APRA, 2007). Government endorsed this move as a way of curbing wage inflation and this was important as the Australian Reserve Bank did not have an inflation targeting policy at that time. Australia’s Reserve Bank only introduced an inflation targeting policy in 1996, well after the introduction of compulsory superannuation in 1986. In the eighties there was no policy to cap the inflation pressures that might have arisen as a result of higher wage demands (Kirchner, 2012).

Thus, compulsory savings in Australia were born in an era of public policy that was aimed at controlling the wage-price spiral. The introduction of award-based superannuation in 1986 meant that employees traded off the potential increase in net salary with contributions towards retirement. The arrangement helped to prevent wage spiral inflation that could have destabilised the economy.

Wage spiral inflation is no longer a significant risk as union membership has dropped since 1992 and now there is an inflation targeting policy from the Reserve Bank (Kirchner, op. cit.). In addition, the close linkage between wages and productivity



means that the risk of wage spiral inflation has significantly reduced. Although the original rationale for the compulsory savings is no longer valid, the motive for continuing is still there as coverage might drop. Before compulsory mass coverage was introduced in 1992, the proportion of employees that were in the superannuation funds was low. In 1998 only 58% of full-time workers were in the superannuation funds and only 19% of part-time workers were covered (Drew & Stanford, 2003).

Another reason why compulsory retirement saving was introduced in Australia was to reduce the reliance on the old age pension (Feng et al., 2014). The old age pension is mean tested and, therefore, the more people that save for retirement, the fewer people will rely on the mean tested old age pension. Whilst the number of people that qualify for the mean tested old age pension has reduced, the majority of people qualify at some time in life (Feng et al., op. cit.). Even though some people will qualify for the state old pension later in life, the total cost to the government will be lower as the benefits will be paid over a shorter period.

2.6.2.3 EligibilityThe SG is applicable to all employees who earn a salary and who are below the age

of 75. Self-employed people are excluded from the mandatory coverage, but they can make voluntary contributions. The government imposes a severe penalty on employers who do not comply. This includes the payment of overdue contributions plus interest and an administrative charge. The mandatory coverage plus the enforcement of the non-compliance penalty has resulted in extensive coverage of 90% for full-time staff.

2.6.2.4 ContributionThe SG has a compulsory fixed employer contribution currently at 9.5% and is

expected to increase to 12% in 2020. The contribution rate started off at a modest rate of 3% and has been steadily escalating to the current 9.5%. Members can make further contributions into their superannuation through the following ways:

— Sacrificing part of the pre-tax salary in exchange for employer contributions. The salary sacrifice contribution is taxed at 15%, and this is very valuable to employees with high-margin rate of tax.

— Making irregular personal contributions from post-tax salary. The contributions are not taxed, but the investment return on the irregular individual contributions is taxed at 15%.

— Making contributions on behalf of a spouse. The investment returns are not taxed, and there is a tax rebate of 18% on first AUS$3000 (R29 460) (Feng et al., op. cit.).

2.6.2.5 AdministrationMandatory Australian superannuation comprises privately managed individual

accounts that also provide channels for voluntary contributions. If an employee cannot make a choice with regards to the fund they want or if the fund chosen by the employee



cannot for some reason accept the contributions, the employer will contribute to an employer default fund (Liu, 2013). Thus there is a need for an employer to have a default fund into which they can default employees who cannot decide on the fund they want.

2.6.2.6 Portability and PreservationThe mandatory contributions are automatically preserved in the member’s

individual account when the employee exits from the employer and can currently be accessed from the age of 55 and from the age of 60 from 2025. Since the account is assigned to the employee and not the employer, the employee has the right to all of the accrued benefits (Liu, op. cit.). Portability is, therefore, improved as the accounts are assigned to the individual member.

2.6.2.7 InvestmentsThere are very few restrictions in terms of investments as compared to other

countries. Trustees have discretion on the investment strategy and mix, and there is greater bias towards growth assets such as equities and property. There is however a 5% limit on investment in the sponsoring company (Liu, op. cit.).

2.6.2.8 CostOperating expenses (which include actuarial fees, administration fees, audit

fees, interest expense and trustee fees) differ between corporate funds which are managed by financial institutions and the industrial funds. In 2012, corporate funds had an average operating expense margin of 0.28% (that is, operating expenses as a percentage of assets), and this has been trending down over the last 10 years. In 2004, the operating expense margin for the corporate funds was 0.45%. Industrial funds had an operating expense margin of 0.49% in 2012 and thus the industrial funds are on average 75% more expensive than the corporate funds (Raftery, 2014).

The operation expense margin has been reducing over time largely due to the significant consolidation which has occurred over the past 20 years. The large funds with assets over AUS$20 billion (R199 billion) had on average an operational expense margin of between 0.13% to 0.22% over the period 2008–2012 which is 33% less than the average of the industrial funds over the same period (Old, 2013).

Whilst the operation expenses margin has been reducing due to economies of scale achieved due to the growth of the industry and the consolidation that has been taking place, the investment management fee grew at a rate of 10% a year from 2008 to 2012. The investment management fee margin (investment fees/average assets) including performance fees increased from 0.17% in 2009 to 0.43% in 2012. As a result of the increase in investment fee margin and the decline in operational expense margin, the combined cost margin has remained unchanged at 0.80% over the last seven years up to 2012 despite the fact that the size of the industry almost doubled (Old, op. cit.).



CommentsThe SG can introduce significant cost to the employer as the contribution rate required from the employer is very high. As a result of the high contribution rate and the mandatory nature of contributions, both the coverage and the adequacy of retirement savings will be high. The proportion of retirees who will solely rely on SG is expected to increase over time as SG was only introduced in 1992 and this has caused voluntary savings to decline.

2.6.3 New Zealand KiwiSaver2.6.3.1 Introduction

KiwiSaver retirement schemes were introduced in 2007 to encourage more New Zealanders to save for retirement. It was the first nationwide auto-enrolment arrangement in the world. KiwiSaver has both voluntary and compulsory elements in that an employee is mandatorily opted in, but they can choose to opt out (Matuschka et al., 2011). Employers are required to automatically enrol all qualifying new employees. The employee can choose to leave the fund between within the first 2 to 8 weeks. If a member does not opt out, the savings will be preserved until they reach the age of 65. The automatic feature helps to increase the saving rate by helping employees to start savings and avoid procrastinating.

Studies around KiwiSaver auto-enrolment have shown that once employees are enrolled in a plan, it is likely that they will stay in the plan even with the option to opt out. KiwiSaver plans have been highly effective at facilitating employees to save and keep on saving. KiwiSaver has a wide scope for the New Zealanders as it has extended the option to the unemployed to join a savings plan.

The KiwiSaver has arguably been a success story. The opt-out rate for KiwiSaver from 2007/08 to 2011/07 of 30% was lower than the expected opting out rate of 61.5%. Total KiwiSaver assets have grown from NZ$954.10 million (R8.78 billion) at 30 June 2008 to NZ$14.48 billion (R144 billion) at 31 March 2013 (Morningstar, 2013).

The government gives a limited amount of free financial advice to employees regarding KiwiSaver. Employees can obtain free advice from www.sorted.org.nz. The advice can help them to make an informed decision when selecting the fund into which to auto-enrol.

2.6.3.2 BackgroundThe KiwiSaver was introduced in 2007 as household saving levels in New

Zealand were low and also declining (Law et al., 2011). The proportion of people that were saving towards retirement in New Zealand before the introduction of KiwiSaver in 2007 was less than 19% of the working population. Although most people historically relied on universal public pension funded benefits (also known as universal superannuation benefits), these were based on the average population salary and thus did not effectively serve the middle and the upper income earners. All New Zealanders above age 65 with a minimum residency requirement of 10 years, even



those still working, automatically qualify for the universal benefit and the universal benefit has an average replacement ratio of 40%.

The universal superannuation benefit is a flat defined benefit based on the average salary of the population. The universal flat benefit gives low-income earners good replacement ratios but poor replacement ratios to the high- and middle-income earners. The introduction of the KiwiSaver was therefore meant to help the middle and higher earners to supplement the universal benefit so that they can maintain their preretirement standard of living (Kritzer, 2007).

KiwiSaver also introduced some tax credits. Before the introduction of KiwiSaver in 2007, there was no tax advantage for saving through private and occupational superannuation schemes (St John et al., 2011). In fact, the tax rates for saving in a bank account were the same as saving in a private and occupational superannuation schemes. The contributions towards superannuation were after tax earnings which is contrary to many countries where contributions towards retirement savings are tax deductible.

2.6.3.3 EligibilityIn New Zealand, only new employees aged between 18 and 65 who are

permanent residents are required to be auto-enrolled on starting a job for the first time or on changing jobs (Carrera, op. cit.). The members have a unique KiwiSaver account throughout their working life and therefore they do not need to open a new account when they change their employer.

Individuals are allowed to opt out of their KiwiSaver account between two and eight weeks of being automatically enrolled (Carrera, op. cit.). After eight weeks, once auto-enrolled, the employee cannot opt out in normal circumstances. There are some circumstances where an employee can opt out after eight weeks, such as being in financial difficulty.

2.6.3.4 ContributionsWhen the scheme was first introduced in 2007, employees could choose to

contribute 2%, 4% or 8% of their salary. The employers were required to contribute a further 2% of their employees’ salaries and the government matched employees’ contributions up to a maximum amount of NZ$20 (R184) per week (Matuschka et al., op. cit.). The minimum contribution on inception of the KiwiSaver was therefore 4% for high income earners. For those contributing below NZ$20 (R184) per week, the total contribution was around 6% as a result of the contribution from the government.

The minimum contribution rate was increased from 1 April 2013 to 3% of gross salary for the employee and 3% of the gross salary for the employer bringing the total minimum contribution to 6% for high income earners (MacDonald et al., 2102).

Lump sum contributions into the KiwiSaver account are allowed. In addition, funds from existing complying pension schemes can be transferred into the KiwiSaver



account (O’Connell, 2009). This flexibility can increase the voluntary additional contributions as it does not tie the employee to continue paying voluntary contributions.

The government provides a NZ$1 ,000 (R9 200) kick-start and an NZ$40 (R368) annual fees subsidy (Kritzer, op. cit.). This benefit is more tangible than tax credits for low-income earners and can therefore increase the participation by low-income earners.

There is an option to take a contribution holiday, after one year of membership. A member can take a contribution holiday for at least three months and at most five years and there is no need to provide a reason. Employees can take a contribution holiday before one year of service is complete, if they are in financial difficulty (Kritzer, op. cit.).

The government also provides a housing subsidy of up to $5 000 (R46 000) for first-time buyers if they have contributed for at least five years (St John et al., op. cit.). This benefit is also very tangible and can increase the participation rates in the scheme.

2.6.3.5 Portability and PreservationAfter the opt-out period expires, the retirement benefits will be preserved until

the age of 65 or for at least for five years after opening the account if the account holder is above 60 years old (Kritzer, op. cit.). The participants can however withdraw their benefits in the case of severe illness, financial hardship or when leaving the country.

The system’s portability is enhanced because individuals have just one account which avoids having many different accounts from different jobs. The KiwiSaver market is relatively simple with few existing providers. This should be an advantage from the individual saver’s point of view in that all retirement saving over a lifetime can be collected in one KiwiSaver pot. KiwiSaver can be the organising account for an individual’s lifetime savings.

Members can switch between funds in their current scheme or even between schemes (Matuschka et al., op. cit.). The switch between schemes encourages competition between the scheme providers but can result in undesirable consequences if switches are done at an inappropriate time e.g. selling at the bottom of the market and buying at the peak of the market. Should a member want to buy his/her first home three years after the first contribution, he or she can use the savings (except the $1 000 (R9 200) government kick-start) and may also be eligible for a subsidy from Housing New Zealand. If a member switches jobs or leaves the workforce, the member’s KiwiSaver account remain in force.

If an employee has multiple jobs they are allowed to make contributions from all their employers into one KiwiSaver Account. KiwiSaver accounts are portable and members may change plans and investment risk portfolios at any time.

2.6.3.6 AdministrationOnce the employee is auto-enrolled, they need to open an individual KiwiSaver

account. The individual account is linked to KiwiSaver scheme providers which are run by banks and investment companies. The experience so far is that many people are



selecting their own KiwiSaver account instead of defaulting into the employer’s default scheme. In fact, some employees are moving their KiwiSaver account to their own bank (Inland Revenue Department, 2011).

The investment plan allocated to a member can be the same as the one chosen by the employer or chosen by the owner (member) of the KiwiSaver account. If an employee does not choose a preferred plan, he/she will be auto-enrolled into a default conservative (low risk) scheme. The majority of the employees (93%) who stay in the employer-chosen scheme are in the default option of that scheme (Dwyer, 2013).

KiwiSaver is administered by the Internal Revenue Department (IRD) using the pay as you earn tax system (St John et al., op. cit.). The IRD holds the contributions for an initial three months whilst the employee is seeking financial advice on the fund to select. If an employee wants to opt out they will need to advise their employer or the IRD of their decision between the second and eighth week of joining. If someone opts out, they cannot be auto-enrolled again unless they have changed jobs.

2.6.3.7 InvestmentsKiwiSaver scheme providers have a range of investment funds where members

can place their savings. The members can select from conservative to aggressive funds. The risk of underperformance lies with the member as the government does not guarantee their funds.

2.6.3.8 FeesThe KiwiSaver Act states that the trustees, administrators, the investment

managers and all the other service providers to the KiwiSaver scheme must not charge a fee that is “unreasonable” (St John et al., op. cit.). The Act does not dictate how much each service provider should charge. There will be some challenges as each service provider may have a reasonable charge but the total charge may not be reasonable. The total fees charged may be excessive in the case where there is duplication of the service provided by different providers.

The KiwiSaver Periodic Reporting Regulations requires the fund managers to report in addition to assets and liabilities, their performance and returns, and the total fees levied on the fund (Dwyer, op.cit.). The main objective is to disclose fees and performance to encourage competition among different product providers.

CommentsKiwiSaver has had many changes and this is argued to affect the participation rate. However the participation rate is good. From the inception the contribution rates from both the employer and the employee have not been onerous and have been gradually increased over time. This is an important lesson for South Africa as it shows that it may be necessary to increase coverage first by getting the employees used to the culture of saving towards retirement and deal with the issues of adequacy in the latter years.

The system’s portability is enhanced because individuals have just one account



which avoids having many different accounts from different jobs. The KiwiSaver market is relatively simple with few existing providers. This should be an advantage from the individual saver’s point of view in that all retirement saving over a lifetime can be collected in one KiwiSaver pot. KiwiSaver can be the organising account for an individual’s lifetime savings.

2.6.4 UK Auto-enrolment2.6.4.1 Introduction

Auto-enrolment in UK was promulgated in 2012. Auto-enrolment is a government policy that requires the employer that does not have a pension scheme to establish a workplace pension. The employer must auto-enrol all qualifying members into the pension scheme. Employees can opt out, but the employer must auto-enrol those that have opted out every three years.

Auto-enrolment has been deemed as success so far. By the end of the third quarter of 2013 more than 1.9 million workers had been automatically enrolled. According to the UK Department for Work and Pensions third-quarter report for 2013, the opt-out rate was only 9%. One of the reasons why opt-out rates are low is the awareness campaigns for both the employer and the employees driven by the Department of Work and Pensions. The active membership of workplace pension (both the private sector and the public sector) has increased from 61% immediately before auto-enrolment was introduced to 83% in October 2013 (UK Department for Work and Pensions, 2013).

Not all employers are required to auto-enrol immediately. The staging period for auto-enrolling employees is determined by the size of the employer as follows.

Table 2 Staging period for auto-enrolling employees

Type of employee Dates to auto-enrolLarge (with more than 250 employees) October 2012 – February 2014Medium employees (50–247 employees) April 2014 – April 2015Small employers (less than 49 employees) June 2015 – April 2017New employers (started after April 2012) May 2017 – February 2018

Source - www.thepensionsregulator.gov.uk/employers/tools/staging-date

2.6.4.2 BackgroundIn 2011, only 33% of the private sector employees were saving towards

retirement. Auto-enrolment was, therefore, introduced to increase the coverage of a number of people saving towards retirement. The Department of Work and Pensions estimates that the number of employees who will be eligible for auto-enrolment between October 2012 and February 2018 is 11 million people (UK Department for Work and Pensions, op. cit.).



Life expectancy in the UK has been on the rise. The increase in life expectancy means that an individual will need to build up more savings to provide income for a longer period. As the savings levels in the UK had dropped since the global financial crises of 2008 (Watson & Eliasson, 2013), auto-enrolment will enable many people to boost their savings.

2.6.4.3 EligibilityThe employer is required to auto-enrol every qualifying employee who is not

an active member of a qualifying scheme. Qualifying employees are those aged above 22 but below the State Pension Age and with an annual gross salary above UK£9 440 (R166 000) (The Pensions Regulator, 2014). Thus, income and age are a key determinant factor of whether an employee needs to be auto-enrolled.

Employees can opt out within a month. Workers can also choose to terminate their active contributory membership after the opt-out period has closed. This is different from the KiwiSaver where the member is not allowed to terminate membership after the opt-out period has expired. However, every three-year cycle the employer is required to auto re-enrol those that have opted-out (The Pensions Regulator, op. cit.).

Non-eligible members aged between 16 and 21 or above the State Pension Age pensions earning above £9 440 (R166 000) per year can opt in if they wish to do so. Those earning below UK£9 440 (R166 000) per year but above UK£5 668 (R99 700) can also opt in if they wish to do so.

2.6.4.4 ContributionsThe minimum contributions based on the qualifying earning are 0.8% rising to

4% by 2018 for the employee, 1% for the employer rising to 3% by 2018 and 0.2% for the government rising to 1% by 2018. This means the total minimum contribution rates are 2% in 2012 rising to 8% by 2018. The qualifying earnings are defined as the annual gross earnings including bonuses, overtime less UK£5 772 (R101 529).

The employee contributions can be less than the minimum contribution as long as the total contributions are above the minimum. This can be case where the employer is contributing above the minimum. Contributions above the minimum are permitted.

2.6.4.5 Portability and PreservationIf a person opts out, they can withdraw their account balance. The employee

is auto-enrolled into the employer scheme and this can create several pots when an employee changes job, thus, portability is less than that of KiwiSaver.

The government is encouraging the “savings follow the saver” principle where savings should be transferred to the new employer pension scheme when the employee changes jobs. This move will enhance portability and will reduce the current problem where one can end up with many savings pots if one frequently changes jobs.



2.6.4.6 AdministrationThe employer will need to set up a workplace pension scheme, if they do not

already offer their workers a pension scheme. An employer with an existing pension scheme will need to check whether the scheme qualifies for auto-enrolment. If an employer offers a stakeholder pension which is an alternative personal pension plan, they will need to run it as a closed scheme for existing members, provided that the existing members of the stakeholder pension agree to remain in it. The employer will need to open a qualifying scheme to auto-enrol other employees (The Pensions Advisory Service, 2012).

Employers can auto-enrol their employee into a qualifying defined benefits, defined contributions or a hybrid scheme. However, it is expected that most employers who did not have pension schemes before the regulation will auto-enrol their employees into defined contribution pension funds. This is because defined contribution schemes do not result in further liabilities for employers in the case of an adverse investment experience. The National Employee Saving Trust (NEST), which is a national defined contribution pension scheme, is one of the qualifying schemes that were created specifically to facilitate employers to auto-enrol their employees. It is a low cost pension fund that offers an option to employers who may not want to create their own pension fund.

2.6.4.7 CostThe NEST charges are as follows:

— Administration charge of 1.8% of the contributions — Annual management charges of 0.3% of the assets

NEST is therefore a low cost fund if compared to the other funds. As a result of high charges, the government is proposing to cap charges at 0.75% of assets for workplace auto-enrolment funds (Cumbo & Pickard, 2014). About one third of the funds are paying fees above 0.75% of assets (Cumbo & Pickard, op. cit.). Thus members in schemes with charges above 0.75% of assets will benefit from this change as lower charges will mean that they will retire with better benefits.

2.6.4.8 InvestmentsThe scheme must have a default investment to assists employees who do not

select an investment option. A member can choose to select one of the core investment options selected by the employer. The employer can have a range of core options to meet the different needs of the employees in the company. A member can also choose non-core investments not provided by the company by making a specific investment choice.

CommentsThe coverage rates both in the US and the UK shows that even the developed countries are battling with the issue of low coverage of the retirement savings. The success of UK



Auto-enrolment over a short period of time shows that auto-enrolment can greatly increase coverage without forcing people to save for retirement. Savings follow the saver is a good principle as it reduces the number of unclaimed benefits and it is easier for many members to manage their retirement savings in one place.

2.7 Impact of Each Model on the Retirement Asset Build-up in South AfricaThe impact on assets added to the economy under each auto-enrolment or

compulsory retirement savings model is discussed below. National Treasury estimates that there are about six million employees not contributing to an employer-sponsored retirement fund. According to the 2013 Q3 Quarterly Labour survey there are about 6.3 million formally employed employees who do not belong to their employer’s retirement fund.

Table 3 Employees not contributing to their employer’s retirementFormally employed

Age groupContributing to employer

retirement fundNot contributing

to employer’s fundTotal

15–19 12 172 79 964 92 136

20–24 275 554 835 203 1 110 757

25–29 728 903 1 231 522 1 960 425

30–34 990 340 1 157 261 2 147 601

35–39 1 043 887 900 570 1 944 457

40–44 892 386 695 602 1 587 988

45–49 639 861 521 484 1 161 345

50–54 530 805 433 132 963 937

55–59 401 325 292 115 693 440

60–64 161 268 110 793 272 061

Totals 5 676 501 6 257 646 11 934 147

Source – Adopted from the 2013 Q3 Quarterly Labour survey. The number do not add up to the total number of people in formal employment as it excludes 200 000 people who do know whether they belong to their employer retirement fund or not.

The average monthly income in South Africa according to the January 2013 to December 2013 Amps data is approximately R8 000. Table 4 below shows the average monthly income per age group.



Table 4 Average monthly incomeAverage gross income per month

15–24 6 01325–34 7 30435–49 9 331

50+ 7 808Totals 7 950*

Source – Adopted from the January 2013 to December 2013 Amps data. * StatSA estimates that the average monthly earnings, including bonuses and overtime payments, paid to employees in the formal non-agricultural sector were R14 298 in May 2013 (www.statssa.gov.za/publications/P0277/P0277June2013.pdf). AMPS data includes both formal and informal employed.

2.7.1 AssumptionsTo project the retirement assets added to the economy as a result of implementing

auto-enrolment or compulsory saving in the similar way to the California Secure Choice Retirement Savings Program, Australian Superannuation Guarantee, UK Auto-enrolment or New Zealand KiwiSaver the following assumptions were adopted:

— Average salary growth of 6% each year — Formal employment grows by 2% each year — Average annual investment rate of 9% each year — Annual management fees as a percentage of assets of 1.5%

2.7.2 Asset projectionThe assets in year n were projected as follows.An = An–1(1+r) (1–f ) + Cn(1+r)0.5(1–f )0.5 ; whereAn= assets in year nCn = contributions in year nr = average annual returnf = annual management fees expressed as a percentage of assets

The total contributions depend on the average contribution rate, the number of people contributing to the fund and the average salaries.

2.7.3 Asset Growth under Each Model2.7.3.1 California Secure Choice Retirement Savings Program

Under the California Secure Choice Retirement Savings Program, the average contribution rate from year 1 to year 10 is assumed to be 3%. Table 5 below shows the additional assets in South Africa under different levels of opt-out if compulsory retirement savings similar to the California Secure Choice Retirement Savings Program is implemented in South Africa.



Table 5 Assets build-up under the California Secure Choice Retirement Savings Program

Opt-out ratesAssets R billion 30% 50% 70%

Year 1 13 9 6Year 5 87 62 48Year 10 253 181 108

The California model has a very modest contribution rate of 3% from the employee. There is no indication that the contribution rate will increase after the programme is launched after next year, but it may increase. The results above assume that the contribution rate stays at 3%. Even with a modest contribution rate of 3% a year and a high opt-out rate of 70%, the total savings added to the country will be R108 billion in year 10.

2.7.3.2 Australian Superannuation GuaranteeUnder the Australian compulsory model everyone is compelled to join

a retirement fund. Even though it’s compulsory, it’s always difficult to get to 100% coverage. The coverage was assumed to be 90% (similar to the levels currently observed in Australia). The contributions are assumed to start at 3% and increase by 0.5% each year to 8% in year 10.

Figure 1 shows the additional assets added to the economy if compulsory saving is implemented in South Africa similar to the Australian Superannuation Guarantee. The assets grow rapidly and even under conservative assumptions the assets can grow to over half a trillion in year 10.

Figure 1 Assets build-up under the Australian Superannuation Guarantee



2.7.3.3 KiwiSaverThe KiwiSaver only auto-enrols new employees. The average rate of people

starting a job for a first time or on changing a job as a percentage of total employment was derived from the quarterly labour surveys from 2008.

The average number of people starting a job for a first time or on changing a job was assumed to be 15% of the total number of people employed at the start of the year.

Table 6 Number of people starting employment

Opening jobsNumber of people starting

a job for a first time or on changing a job

Rate of people starting a job for a first time or

on changing a job2008 12 617 487 1 625 083 12.90%

2009 12 699 967 1 754 449 13.80%

2010 12 084 711 2 168 967 17.90%

2011 11 939 764 2 075 238 17.40%

2012 12 321 427 2 029 208 16.50%

2013 12 422 042 2 010 516 16.20%

Average 15.80%

To project the additional assets from the KiwiSaver model, the average contribution rate from year 1 to year 7 was assumed to be 4% and 6% thereafter.

Table 7 shows the total retirement assets added to the economy if the KiwiSaver model was implemented in South Africa.

Table 7 Assets build-up under the KiwiSaverOpt out rates

Assets R billion 30% 50% 70%Year 1 2.6 1.8 1.1Year 5 52 37 22Year 10 294 210 126

Using the KiwiSaver model even though it only auto-enrols people starting a job for a first time or on changing a job, the projected asset build-up is faster than in the Californian Secure Choice Retirement Savings Program. This is because of higher contribution rates.

2.7.3.4 Auto-enrolment in UKThe qualified employees for auto-enrolment in UK are those employees earning

above £9 445. If, in South Africa, we assume that only those earning above R72 000



per year (which is consistent with the current tax threshold of R70 700 per year) are required to auto-enrol, the number of people that will be required to auto-enrol will be around 2.6 million as shown in Table 8 below.

Table 8 Employees required to auto-enrol if the income threshold is R72 000 per annum

Number of employees Average income15–24 289 104 11 76925–34 958 875 13 11235–49 1 089 604 14 941

50+ 340 686 14 673Total 2 678 269

To project the additional assets from the auto-enrolment similar to the UK model, the average contribution rate was assumed to start at 3% in year 1 increasing by 1% each year to 9% in year 6 and remain at 9% thereafter.

Table 9 shows the total retirement assets added to the economy if the UK Auto-enrolment model was implemented in South Africa. Even with a high opt-out rate of 70%, the assets build-up in year 10 will be around R180 billion.

Table 9 Assets build-up under the UK auto-enrolment modelOpt-out rates

Assets R billion 30% 50% 70%Year 1 5.5 4.0 2.3Year 5 149 73 44Year 10 431 308 184

2.8 ConclusionsThe compulsory coverage such as the superannuation guarantee in Australia

results in the highest estimated retirement assets build-up because of high coverage and high contribution rates. The UK Auto-enrolment has a lower coverage as only employees with certain income thresholds are auto-enrolled but will result in higher assets build-up than the KiwiSaver model or the California Secure Choice Retirement Saving model because of higher contribution rates.

The UK, Australian and KiwiSaver models require the employer to contribute and hence these results in higher cost to the employer.

Table 10 below gives an overall summary of the models for extending coverage used in some countries.



Table 10 Summary of the worldwide modelsCalifornia Secure Choice Retirement Savings Program

Australia Superannuation Guarantee

New Zealand KiwiSaver

UK Auto-enrolment

Eligibility All private sector employees, small employers with less than five employees exempted

Age (less than 75) and self-employed are exempted

Age (18 to 65 years), exempt groups(those in financial distress)

Age (22 to State Age Pension) income above £9 445), exempt groups (e.g. those already in retirement funds)

Who gets enrolled

Existing and new workforce

Existing and new workforce

New employees Existing and new workforce

Opt-out option No No Yes YesOpt-in option Yes Yes Yes YesEmployer minimum contribution

0% 9.5% going up to 12% in 2020

3% 1% going to 3% in 2018

Employee minimum contribution

3% 0% 3% 1% going to 5% in 2018

Government contribution

$1,000NZ Kick start, Up to $521 members tax credit

1%

Portability Account is attached to the employee and not the employer so portability is enhanced

Account is attached to the employee and not the employer so portability is enhanced

Account is attached to the employee and not the employer so portability is enhanced

The account is linked to the employer’s fund and portability is difficult

Preservation Not compulsory Compulsory Compulsory after the opt-out period expires

Not compulsory

Other features Home loan withdrawal, first home deposit subsidy

Scheme choice Government Employer chosen Employee (or default allocation)

Employer chosen

3. METHODOLOGY3.1 Introduction

Section 1 introduced the aim of the research which is to investigate the preferences of members on the ways of extending retirement coverage. Section 2 looked at the literature review of some of the different models used in a few countries for extending



coverage which includes both compulsory coverage and auto-enrolment. This section describes and explains the methodology deployed. The research method used was an online survey. The respondents who are not contributing towards a pension fund or provident fund were randomly selected.

Data collection for the survey occurred between 8 and 16 July 2014. Only people with full-time employment, part-time employment or self-employed were surveyed. A random sample was selected to ensure a good demographic spread between age, race, gender and income.

An online survey included both quantitative and qualitative questions. The qualitative questions included open-ended questions to facilitate dialogue. The main objective of using the qualitative approach was to get real insights as to why some employees may prefer or not prefer the idea of being required to contribute to a retirement fund.

3.2 The QuestionsThe survey consisted of 23 questions on key aspects of retirement savings and

covered the following five focus areas of the research: — Compulsory versus auto-enrolment — Benefits to be provided — Contribution levels — Who should administer the fund – government or private sector — Who should be covered

The following basic demographic data were used in order to stratify the results accordingly: the gender of the participant, marital status, level of education obtained and employment status. Where there appeared to be major differences in responses depending upon age and income, these are highlighted in the commentary. The detailed questionnaire is attached in the appendix.

3.3 Reliability and Validity of ResearchThe sample comprises 809 employed metropolitan dwellers, screened as follows:

— All were either employed full-time; part-time employed or self-employed, — 18–64 years old and — Not currently contributing to an employer-sponsored retirement fund.

An email invitation was sent to members of the Columinate Online Research Panel to take part in the survey.

The sample quota was controlled by personal income so as to allow sufficient sub-sample sizes to analyse by income group. Thereafter quota controls were applied in respect of the following demographics to ensure that the profile of each income group matches the population profile of that group as per AMPS: gender, race and age profile.



The validity of the questionnaire was improved by checking with the pilot participants of 50 people on their understanding of the issue and the spread of the responses. The main aim of checking the spread of the responses was to validate whether some questions were not biased.

3.4 Data used3.4.1 Split by Categories of Employment

68% of the respondents were permanently employed, 12% of the respondents were part time employed and 18% of the respondents were self-employed.

Table 11 Split by categories of employmentTotal Sample 809 100%Permanent employees 554 68%Part-time employees 112 12%Self-employed 143 18%

3.4.2 Split by Gender, Age, Educational Qualifications, Income Distribution and Formal Savings

— 55% of the respondents were females. — The average age of the respondents was 36 years. — At least 96% of the respondents had at least a high school certificate. — Although members said they were not contributing to a fund, but over 20% say

they have an RA.

Figures 2 to 6 give further information for each category.

Figure 2 Gender distribution



Figure 4 Education qualifications of respondents

Figure 5 Income distribution of respondents

Figure 3 Age distribution



3.5 Ethics and ConfidentialityThe data integrity in line with the principles and spirit of Protection of Personal

Information Act was applied. The participants were guaranteed anonymity for all of their responses. Results were treated as confidential and in line with the principles and spirit of Protection of Personal Information Act, the information was used for only for the purpose of this research and analysis. The participants’ answers to this survey were pooled together with others and reported on the overall level.

4. RESULTS4.1 Introduction

Columinate was commissioned to conduct research amongst employees who are not currently members of either a pension or provident fund. The aim is to better understand what these employees think of the prospects of being required to belong to an employer-sponsored pension fund.

The specific objectives include: — Understanding how satisfied employees are with regard to their financial

readiness or provision for retirement and what they think they can do differently to make them feel more secure and satisfied when they retire.

— How many employees would like to join an employer-sponsored pension fund? — What benefits would they like included in the pension fund? — Who should manage the funds? — How much employees can contribute to a pension fund?

The survey was run over a period of a month. A total of 809 participants completed the survey. An initial pilot survey was run on 50 people to determine the appropriateness of the questions.

The results of the survey are presented below.

Figure 6 Formal savings product holding



4.2 How Satisfied are People who do not belong to a Retirement Fund with Their Financial Readiness for RetirementOnly 16% of the respondents said that they were satisfied with their financial

readiness or provision for retirement. Approximately half of the respondents said they were not at all satisfied with their financial readiness for retirement.

The survey showed that employees who do not belong to their employers’ retirement fund generally have a negative outlook on their current financial situation. The results differ significantly by income, race and gender. Employees earning less than R12 000, white employees, and female employees are significantly more likely to be dissatisfied with their financial readiness for retirement. Employees who currently have a retirement annuity are significantly more likely to be satisfied.

The respondents were asked which two things they think they will do differently to feel more secure and satisfied when they retire. One in 10 employees not belonging to a retirement fund display a sense of hopelessness regarding their current financial situation and readiness for retirement. The group that displayed a sense of hopelessness mainly comprised of employees earning less than R5 000 and the self-employed.

About one in five of the employees indicated that they would like to continue to work after the age of 65 to supplement their income in retirement. About two fifths of those aged above 40 indicated that they would like to work after 65 to feel more financial secure and satisfied in retirement.

4.3 Compulsory Retirement Savings versus Auto-enrolmentThe respondents were asked whether members should be allowed to opt out if

government makes it compulsory for every employee who does not currently belong to a pension fund. The respondents had a polarised view of the fund and whether employees should be allowed to opt out. Middle aged employees (31–40 years) and those saving through a retirement annuity believe that no opt-out should be allowed.

Figure 7 How satisfied would you say you are currently with your financial readiness or provision for retirement?



In other words they prefer compulsory retirement savings. Some of the reasons for preferring compulsory retirement savings include:

— The government should take a paternalistic approach as many people do not realise the expense of living when retiring, and they end up unable to survive.

— The compulsory retirement fund will relieve the government from having to take care of the elderly.

— The compulsory retirement fund will encourage people to start saving.

Approximately half of respondents said that they would want to have the right to opt out. Those who chose an opt-out option were not necessarily opposed to the idea of government making it a requirement for every employee who does not currently belong to a pension fund to belong to this fund. This is because some employees

Figure 8 Which two things do you think you can do differently to make you feel more secure and satisfied when you retire?

Figure 9 Should employees be allowed to opt out



preferred having the option to exercise their choice. One-fifth of the respondents said that they would want to have an opt-out option because they might not afford to save towards retirement.

4.4 Who should be enrolled into the Compulsory/Auto-enrolment Fund?The respondents were asked to indicate the category of employees that should

be included in the above employer-sponsored retirement plan. Most respondents felt that all employees should be included in the fund, irrespective of tenure and type of employment. About 9 in 10 felt that both the new employees and existing employees should be enrolled in the employers’ fund. About 60% of the respondents said that contractors and part-time employees should also be covered in the employers’ fund.

4.5 Opt-in Rates for the Auto-enrolment FundThe respondents were asked, if government is to require their employer to

enrol them in a retirement plan, how likely are they to choose to be part of such a programme. Two in every three employees are likely to join the fund, which suggests that employees do see the benefit in being part of such a fund. Full-time employed, part-time employed and black workers are significantly more likely to want to be part of the fund. Employees who already own a retirement annuity are significantly more likely also to choose to be part of the fund. However, self-employed and white employees are significantly less likely to choose to be part of the fund.

About 15% of the respondents said that they are either very likely or completely likely not to join the employer’s retirement fund.

Figure 10 How likely are you to choose to be part of such a programme if it is introduced?



4.6 Which Risk Benefits would Members like to have included in a Retirement FundThe three main risk benefits that members prefer are post-retirement medical

aid cover, life cover and spouse benefits. Figure 11 shows the main benefits which clients will prefer.

4.7 Who should decide where to invest the Contributions?The results below suggest that individuals prefer to have a say and some control

over their fund. Two-thirds of the respondents said that both the employer and the employee should jointly decide on the company that will manage their investments.

The respondents were asked if they have an option to join a retirement fund created by their company and managed privately or the government retirement fund, which were they likely to join assuming the benefits are the same. The results indicate

Figure 12 Who should decide where to invest the contributions?

Figure 11 Which risk benefits would members like to have included in a retirement fund?



that very few people prefer having a government-administered fund only. 15% of the employees indicated that they would prefer only the government fund. About one-fifth of the employees indicated that they would prefer to split their contribution between a government fund and a privately managed fund. About half of the respondents indicated that they would not prefer the government fund.

4.7 How Much should an Employee contribute?On average employees indicated that they are able to contribute 7% of their gross

salary towards their retirement savings. On average respondents indicated that they should contribute about 11% of their salary towards retirement.

While one-third of employees claim they should be contributing more than 15% of their salary to a pension fund, only 10% state that they can afford to contribute this amount. Employees over the age of 40 show the greatest disconnect between what they can contribute and what they should be contributing.

Figure 13 Who should invest your contributions?

Figure 14 How much should an employee contribute?



5. ANALYSIS OF THE RESULTS5.1 What is the best way of extending retirement coverage to the six million employed South Africans who do not have access to an employer-sponsored retirement plan? The results of the survey indicate that none of the four models discussed in this paper fits perfectly with what employees prefer:

— California Secure Choice Retirement Savings Program — Australian Superannuation Guarantee — New Zealand KiwiSaver — UK Auto-enrolment

The California Secure Choice Retirement Savings Program in its pure form is not appropriate for South Africa as only 15% of the employees indicated that they would prefer the government fund. Since the majority of the respondents indicated that they were not in support of the government retirement fund, it is not advisable to implement a programme similar to California Secure Choice Retirement Savings Program.

About half of the respondents indicated that they would like a compulsory fund similar to the Australian Superannuation Guarantee. Buy in from at least half of those affected will be needed if a compulsory fund similar to the Australian Superannuation Guarantee is to be implemented.

The results indicate that the model for extending retirement coverage should be a mixture of the New Zealand KiwiSaver and the UK Auto-enrolment. In the UK Auto-enrolment model, the retirement fund is selected by the employer. However, only 10% of the respondents indicated that they would like an employer to choose a retirement fund. Thus, on the aspect of selecting a retirement fund, respondents were leaning towards the KiwiSaver model. However, other aspects that respondents preferred pointed towards the UK Auto-enrolment such as:

— Having both government and privately managed funds to choose from. About one-fifth of the respondents indicated that they would like to split their contributions between government and privately managed funds;

— Requiring all qualifying employees to be enrolled. The results indicated most employees preferred both new employees and existing employees to be covered. In a KiwiSaver model, only new employees are auto-enrolled.

About 67% of the employees indicated that they would join if their employer introduces a retirement fund. The opt-in rate should be around 60% to 70% if auto-enrolment is introduced. Given that 50% of the employees in the formal sector are already contributing in their employer’s retirement fund, the coverage could increase from 50% to over 80% and this is close to the 90% coverage in the Australian compulsory retirement savings.

The desired features of each model are highlighted in Table 12 below.



Table 12 Desired features of each modelCalifornia Secure Choice

Retirement Savings (CSC) Program

Australian Superannuation

GuaranteeNew Zealand KiwiSaver UK Auto-enrolment

The level of coverageCovers both existing and new employees

Coverage will depend on the opt-out rate – the survey indicates that opt-out rates will be around 33%

Covers both existing and new employees

The coverage will be good and will depend on how government enforces the regulation

Covers only new workforce


Covers both existing and new employees above certain income threshold


The adequacy of retirement benefitsLow as South Africa does not have a generous state old age grant.

No preservation required and this will limit the adequacy of retirement benefits

Highest net replacement ratios due to higher contribution ratesPreservation enhances the adequacy of retirement benefits

Higher than CSC due to higher contribution rates

Preservation enhances the adequacy of retirement benefits

Higher than KiwiSaver in the long run as contributions are set to increase

No preservation required and this will limit the adequacy of retirement benefits

Financial sustainability and affordability to contributorsNo financial contribution expected from employers

The survey shows that people can afford higher contribution rates than implied in CSC

Employers contribute on behalf of employees and the system places a lot of burden on employers

Both employer and the employee contribute which can reduce the financial impact on employees

Need to check whether small businesses can afford

Both employer and the employee contribute which can reduce the financial impact on employees

Need to check whether small businesses can afford

The average contribution rates from the survey are in line with UK 2018 contribution rates



Cost efficiency of the retirement systemLess efficient – break-even only expected after forty years of administration

High asset management fees despite growth in assets

Efficiency enhanced by competition between many industry players

Efficiency enhanced by competition between many industry players and between private and government

The level of security of benefits in the face of different risksThe guaranteed investment return protects against benefits falling below certain threshold

No requirement to buy annuities

No requirement to buy annuities – exposes members to longevity risk

No requirement to buy annuities – exposes members to longevity risk

5.2 Who should administer the Scheme?The results show that both government and private schemes could exist, and

that employees should be given options to join either the government fund or the privately managed retirement fund. Further, employees should be allowed to split their contributions between the government and privately managed funds.

About 19% of the employees that indicated that they would like to contribute to both the government and private funds. For this segment of employees, the model pro-posed by DSD in 2007 where 50% of the contribution will go towards PAYG benefits and other 50% of the contributions will be towards a Government Sponsored Retire-ment Fund (GSRF) or private fund may suit them. Even the 15% that selected that they would prefer a government fund only will also be serviced by the above model.

5.3 Benefits to be providedThe DSD is concerned about the lack of some of the benefits in existing

retirement funds such as spouse benefits and post-retirement medical benefits. The research indicated that the three benefits that employees most prefer were post-retirement medical benefits, life cover and spouse benefits.

The provision of these benefits will increase the cost of the system and might reduce the amount of contributions that will go towards retirement savings. However, these benefits should be provided as options as there is some evidence of demand for them.

5.4 Contribution LevelsThe range of contributions that the respondents indicated that they could afford

to contribute towards retirement is very wide with about 10% admitting they can afford to contribute above 15%. Whilst it may be necessary to set a minimum level of rate of contribution, employees should be allowed to contribute above the minimum level if they want to.



5.5 Who should be covered?The coverage should not be limited to just permanent employees or new

employees as most employees feel that all employees should be included in the fund, irrespective of tenure and type of employment.

6. CONCLUSIONS AND RECOMMENDATIONS6.1 Areas of Further Study

This study explores design features of models of extending retirement coverage especially from the perspective of the employees. Future research can be focused on some specific areas that are peculiar to South Africa that will affect both coverage and the adequacy of retirement. These include:

— Comparing the cost of setting up a government-run/administered fund versus the projected cost using privately run funds

— Projected retirement income benefits for the different levels of contribution and how the projected benefits compare with the targeted benefits. The projected retirement income benefits should take into consideration the risk benefits that might be included such as death benefits and post-retirement benefits.

— Do we need different models for different income groups? For example the study showed that employees earning less than R12 000 per month are significantly more likely to be dissatisfied with their financial readiness for retirement. In South Africa we have a State Old Age Grant which if increased can provide a more meaningful replacement ratio for low income earners.

— One of the goals of National Treasury is to reduce the cost of retirement savings. The question is how to allow flexibility to meet the needs of different segments without increasing the complexity and cost of the system

— If compulsory retirement saving is introduced, what will the impact be on other savings, including informal savings? South Africans are generally highly indebted and therefore there is a need to investigate the impact on household debt levels if compulsory retirement saving is introduced.

— Alternative ways of extending coverage to the informal sector — For people who earn below a certain threshold, there is a need to do some

modelling to determine the threshold in manner that makes sense for South Africa. From 2016 the government plans to remove the mean test on the state old age grant. Therefore the study will need to take into consideration the universal state old age grant.

— The impact on small businesses if small businesses are to be required to contribute a certain percentage towards their employees’ retirement savings.

6.2 Conclusions and RecommendationsMany employees who are not part of their employer’s retirement fund feel

that they would like to change their approach in order to feel more financially safe and secure when they retire. Almost one in five employees think that



they need to find another job opportunity once they have retired from their current employment. With the high level of debt and low levels of savings, the question remains – will employees take action themselves? Thus, requiring employers to enrol their employees in a retirement fund is ideal for employed South Africans who do not currently have an employer-sponsored retirement fund.

Employees are divided in terms of whether South Africa needs compulsory retirement provision. The key barrier to compelling everyone to belong to their employer’s retirement fund is that many employees feel they should have the right to choose as to whether he or she wants to be part of their employer’s fund.

It is, therefore, recommended that: — Auto-enrolment should be implemented instead of compulsory retirement

saving because it preserves the freedom of choice whilst steering people to save more for retirement. If auto-enrolment is implemented, the coverage can increase from the current levels of about 50% to over 80%. A coverage of 80% is close to the coverage of 90% which is achieved by countries like Australia with compulsory savings

— Default contribution rate should be high enough (approximately 7%) to build decent retirement savings whilst still giving people the choice to contribute above the default contribution rate. The key driver to increase retirement savings in an auto-enrolment environment is the number of employees that opt to stay in and the levels of contributions. This needs to be carefully monitored during the implementation of any auto-enrolment programme.

— Both permanent and part-time employees should be auto-enrolled — The key benefits that should be offered as options are post-retirement medical

benefits, life cover and spouse benefits. — Both government and private retirement funds should be offered to auto-

enrolled employees to give them a choice.

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APPENDIXAuto-enrolment Survey

IntroductionThank you for taking the time to complete this survey. It will take between 5 and 10 minutes to complete.

We guarantee anonymity of all responses. Results will be treated as confidential and will be used for research and analysis purposes only. Your answers to this survey will be pooled together with others and reported on an overall level, so you can be completely honest. We look forward to your feedback!

Section A: Screening and quota control1. Which of the following long-term insurance, savings and investment products

do you currently have?Multi-mention MandatoryProgramming notes: StandardRespondent instructions: NoneBank accountsBanked cash savings (e.g. in fixed deposits, money market, savings accounts) Informal savingsStokvel / rotating savings club (includes investment stokvels)Burial societyFormal Savings ProductsEndowment policiesRetirement annuitiesPension or provident fund Close surveyEducation policiesFuneral policiesLife assurance / death and disability policies Lump sum investmentsInvestmentsUnit trusts / mutual funds / ETFs (exchange traded funds)Shares Off-shore investmentsBondsGovernment retail bondsInflation-linked bondsAlternative InvestmentsArt / antiquesGold coinsOther Please specifyNone of these/I do not own any of these type of products Skip Q2



2. With which of the following companies do you own your long-term insurance, savings and investment products?

Multi-mention MandatoryProgramming notes: StandardRespondent instructions: NoneAbsaAlexander ForbesAllan GrayCapitecCoronationDiscoveryFirst National Bank (FNB)InvestecLiberty LifeMetropolitanMomentumNedbankOld MutualPrudentialSanlamStandard BankOther financial institution Please specify

3. What is your employment status?Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneEmployed full-time

ContinueEmployed part-timeSelf-employed (i.e. YOU are the employer)Student Close surveyRetiredHomemakerUnemployed



4. Please indicate your age:Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneYounger than 18 years Close survey18–21 years22–24 years25–30 years31–35 years36–39 years40–45 years46–50 years51–60 years61–64 years65+ years Close survey

5. What is your total monthly personal income before tax? By this, we mean your personal monthly salary before any deductions.

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneI do not earn an incomeBetween R1 to R4 999Between R5 000 and R11 999Between R12 000 and R14 999Between R15 000 and R19 999Between R20 000 and R39 999Between R40 000 and R79 999More than R80 000

6. Please indicate your gender:Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneFemaleMale



7. Please indicate your race:Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneBlackColouredIndian/AsianWhite

Section B: General Retirement8. At what age do you plan to retire?Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneUnder 50 years51–54 years55–60 years65 years 66 years 67 years 68 years 69 years 70 years Older than 70 years

9. Thinking about how old you are now, and the number of years you have left until retirement (as indicated above), how satisfied would you say you are currently in your financial readiness or provision for retirement?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneNot at all satisfied

Ask Q10Slightly satisfiedModerately satisfied Very satisfiedCompletely satisfied



10. Which two things do you think you can do differently to make you feel more secure and satisfied for when you retire?

Multi-mention Mandatory

Programming notes: Limit to 2 options | Randomise optionsRespondent instructions: NoneI will delay my retirement if the employer permits

I will look for another job opportunity after retiring from my current employment

I will increase the amount I am currently saving

Open an investment account (e.g. a retirement annuity)

Make my savings automatic (e.g. a debit order to an investment account)

Other specify Please specify

I do not think there is anything I can do differently – will just continue as I am currently

Exclusive option

Don’t know Exclusive option

Section C: New government employer-sponsored retirement planPlease read the following and answer the questions that follow: The Minister of Finance during the 2014 Budget speech proposed that the government is going to seek measures to cover the 6 million employed South Africans who do not enjoy access to an employer-sponsored retirement fund such as pension or provident funds. A retirement fund is a type of savings and investment plan that can be used as a method of saving for the purpose of providing an income during retirement. It is often created by companies or the government for employees. Retirement funds collect contributions which are usually expressed as a percentage of salary from the employees and their employers and invest them in order to pay income in the future when the employee retires.

11. Suppose government is to require every employee who does not currently belong to a retirement fund (pension/provident fund) to belong to this retirement fund. Now, thinking about the extract that you just read, do you think the employees should be allowed to opt out?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneYes – they should be allowed to opt outNo – they should be not allowed to opt out



12. Why do you say so?Open-ended MandatoryProgramming notes: Merge with previous questionRespondent instructions: None

13. For the following two sections below please indicate the category of employees who you think should be included in the above employer-sponsored retirement plan.

13.1 Please choose one:

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneOnly new employees (i.e. those who have started at their company in the last 12 months)All employees, regardless of when they started at their company

13.2 Please choose one:

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneAll employees, including part-time workers and contractorsOnly permanent employees

14. If government is to require your employer to enrol you in a retirement plan, how likely are you to choose to be part of such a programme if it is introduced?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneNot at all likelySlightly likelyModerately likely Very likelyCompletely likely



Section D: New employer-sponsored retirement planPlease read the following scenario and answer the questions that follow: Your employer does not currently have a retirement plan to enable you to save for retirement. Imagine that your current employer has now decided to enrol you in a retirement fund. Your employer would suggest not only the retirement fund, but also how much you need to contribute towards the retirement fund (i.e. a specific % of your monthly salary goes to your new retirement fund).

15. How much do you like the idea of your current employer implementing such a retirement fund?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneDo not like it at allDo not really like itNeither like nor dislike itLike it somewhatLike it very much

16. Why do you say so?

Open-ended MandatoryProgramming notes: StandardRespondent instructions: None

17. If your employer was to implement a retirement fund, which of the following risk benefits would you also like to have included? Please choose the top three benefits:

Multi-mention MandatoryProgramming notes: Limit to 3 | Randomise optionsRespondent instructions: NoneLife cover – which pays out a lump sum if you pass awaySpouse benefits – which pays out income to your surviving spouse and childrenDisability Income Benefits – Provides an income payable upon disability until normal retirement date, recovery or death – whichever occurs firstLump Sum Disability Benefits – A lump sum is provided on disabilityFuneral cover – to meet the costs of you and your family’s funeralsDebt Helper – to cover some of the outstanding debt you may havePost-retirement medical cover – to provide income to meet the medical cost which arise after retirement



18. If your employer was to implement such a retirement fund, who should choose the financial company who will invest your retirement fund?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneI would like to choose the companyMy employer should choose the companyI should be a joint decision between my employer and I

19. Imagine you have the option to join either a retirement plan created by your company and managed by a private company (i.e. a company such as Liberty, Sanlam and Old Mutual), OR the government retirement fund which has been created for everyone. Which one are you more likely to join, assuming the benefits are the same for both?

Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneThe government retirement fundMy privately managed employer retirement fundI am indifferent, i.e. it does not matter to me which one I joinI am likely to join both if they allow me to split my contributionsI am not sure

Section E: Saving20. How much do you think you are able to contribute to a retirement fund per

month from your gross monthly salary? Remember, with “Gross” we are referring to your personal monthly salary before any deductions (e.g. tax):

Single mention MandatoryProgramming notes: StandardRespondent instructions: None0% of my monthly salary1%–3% of my monthly salary4%– 6% of my monthly salary7%–10% of my monthly salary10%–15% of my monthly salaryAbove 15%



21. How much do you think you need to contribute per month now (from your gross monthly salary), at your current age, to have a reasonable income when you retire?

Single mention MandatoryProgramming notes: StandardRespondent instructions: None0% of my monthly salary1%–3% of my monthly salary4%–6% of my monthly salary7%–10% of my monthly salary10%–15% of my monthly salaryDon’t know

Section F: Final demographics22. What is the highest level of education you have attained?Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneNo formal educationSome primary school (but not completed)Primary school completedSome (but not completed) high school High school graduateSome (but not completed) collegeCollege graduateSome (but not completed) technikonTechnikon graduateSome (but not completed) universityBachelor’s degreeHonour’s degree, Master’s degree or PhD degree or Specialist Post-Graduate qualification

23. What is your marital status?Single mention MandatoryProgramming notes: StandardRespondent instructions: NoneMarried/living together with partnerSingle, never marriedSingle – Divorced or separatedSingle – Widowed