Wealth Matters


With life expectancy increasing worldwide, retired people and their retirement funds have already grown into a massive economic sector, albeit presently beset by huge challenges. This holds true for South Africa as well.

At the top end of the global scale the value of pension investments in stocks, bonds, cash and alternative assets in the US jumped over 89% while GDP rose by roughly 42% over the last decade. 

Even though far down the line in the global league, South Africa’s Government Employees Pension Fund, for example, with its 1.2 million active members and 360 000 beneficiaries and pensioners has assets worth R1 trillion.

The importance of this sector has grown on the back of, among other things, the increasing life expectancy in most countries. According to a World Health Organisation (WHO) report of 2012, the life expectancy at birth since 1990 has gone up worldwide by six years to 70, ranging from 62 years in low-income countries to 79 years in high-income countries.

In first-world middle classes age 85 is now regarded as the new 65.

Some futurists even claim that 75% of the first-world middle class currently between the ages of 50 and 65, will reach ages between 100 and 115.

Although regarded as a middle-income country, judged by the latest official statistics, South Africa is positioned at the bottom end of this scale. This is despite life expectancy having turned around from a very low (and at the time declining) life expectancy of 52 years in 2005 to 61 in 2014.

South African public figures are currently not readily available as South African life companies shy away from racially specific figures.

The turnaround is ascribed mainly to the decline of HIV/AIDS-related deaths and an improvement in the infant mortality rate.

This changing situation, however, does not come without some serious challenges for both the economies of countries and for individuals.

For most developed countries, and markedly so for European countries, it has the implication that population growth has become stagnant or is declining. The result is that the population as a whole is aging with the proportion of retired people growing and the economically active shrinking.

In recent years the sale of geriatric nappies surpassed those of infant nappies in Japan.

The bottom line is that a shrinking proportion of the population has to produce the means to sustain a growing proportion of pensioners. It is somewhat cushioned by the fact that in many countries the retirement age has also been edging up over recent years.

That the pensioner sector has grown in both importance and complexity is reflected by the fact that increasing numbers of governments are in the process of or are considering reforms and/or restructuring in the sector. For example, in the US the Obama administration has just moved on a new regulatory regime for retirement funds. In April large-scale change comes into effect in the United Kingdom as it does in South Africa on 1 March.

Interestingly enough, in South Africa and the UK moves on the release to retirees of accumulated retirement savings are in diagonally opposite directions. In South Africa it is becoming more restricted and in the UK restrictions are loosened. .

Although for different reasons, South Africa, in some respects, is in a similar disproportionate situation in terms of productive and non-productive sections of the population. While its retirees are growing in actual numbers it is also experiencing a ‘youth bulge’, without its economy growing robustly enough to keep up with job opportunities. This causes similar distortions to what is experienced in aging populations.

Elephant in the room

The elephant in the room of the retirement home is to what extent the higher life expectancy has left retirement funds in deficit positions.

According to a recent report in The Telegraph, around 5 000 pension schemes in the UK face a funding shortfall of at least £300 billion. There is a danger that “customers seeking to transfer their entitlements out so they can cash in the pension would typically get just £6 for every £10 in their name.”

Under the heading “The Morning Ledger: Pension Shortfalls Mount as People Keep Living”, the Wall Street Journal recently wrote: “Longevity isn’t all it’s cracked up to be, especially if you’re trying to balance the books for a defined benefit plan.”

It, by way of example, quotes General Motors Co. saying, when announcing its fourth-quarter earnings that the mortality changes caused the funding of its US pension plans to fall short by an additional $2.2 billion and contributed to significant pension losses that will be filtered into its earnings over a period of years.”

Implications for individuals

For people starting out on, or even in the prime of, a career the implication is that provision needs to be made for a longer period in retirement, or put differently – living off your life savings.

In light of what has been sketched above it would also be prudent to take note of the fact that the ‘pension industry’ is bound to be under stress for some time to come and not to put blind faith in the pension fund you contribute to while employed.

Another socio-economic trend, which has developed over the last number of decades, is that it has become the exception for people to stay with the same employer for just about their complete working life of 40 years or more and to build up the pension benefits that go with it.

It is human nature to, while we are young, live as if we will live forever. Too seldom do our savings plans and provisions for the future reflect the same attitude.

The fact that pension fund reform in South Africa is stalled by the labour movement is not helping to alleviate the problem and is definitely not to the benefit of those who need these reforms the most, namely the previously disadvantaged.

                                                                                                                                                                                   by Heinrich Kruger

(Heinrich Kruger is the founder and CEO of Kruger International Asset Management. He writes this column in his private capacity.) [email protected]

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