Pension Revamp Boosts South African Retirements, Alexforbes Says

(Bloomberg) -- South Africa’s plan to allow savers early access to part of their pension funds will enable significantly better outcomes for retirees than what the current system does, Alexander Forbes Group Holdings Ltd. said.

The law that starts Sept. 1 will enable savers to contribute one-third of their savings into an account that’s accessible at any time, with the rest only available at retirement. While the nation’s biggest insurer expects this to lead to a deluge of withdrawals in the near term, the preservation of the bigger portion means more savers can retire more comfortably.

“For new members going forward, they’re expected to have a 2 to 2 1/2 times better retirement outcome,” Alexforbes Solutions Executive John Anderson said in a webinar Wednesday, adding that this holds even if a client withdraws the maximum allowed from the accessible savings portion.

According to Momentum Ltd., only 6% of South Africans are able to enjoy a comfortable retirement, with the rest unable afford their current lifestyle when they reach that stage. Data from the Organization for Economic Co-operation and Development show the average South African can expect to earn only 16% of their working salary in retirement, compared with 88% in Brazil and 70% in Turkey. As a result, South Africans have to rely on relatives for financial support or risk falling into retirement poverty.

The rule change also allows savers a one-off opportunity to withdraw as much as 30,000 rand ($1,660) as the system changes. Alexforbes estimates that the industry will see outflows of about 1% to 2%, with total exiting funds of as much as 100 billion rand.

Retailers will likely benefit because people often use these savings for consumption purposes, Alexforbes Investments Chief Executive Officer Ann Leepile said.

“We also expect some minimal benefit to accrue to building stocks” because people typically use the funds to repair and renovate their home, she said.