SOUTH AFRICA - Unless financial markets recover smartly over the next two to three years, South Africans face a pensions crisis.
Independent consulting firm Riscura calculates that pensioners retiring in March 2003 – assuming they were switched from defined benefit to defined contribution funds in the 1990s - should receive between a third and about a half of their final salaries. The final pay-out varies greatly depending on when the switch was made.
It is a sobering prospect for those facing retirement over the next few years. There is no certainty that stock markets will come to their rescue, notwithstanding the recent rally in world financial markets.
South African retirement funds are 70-80% invested in equities, exposing them to the mercies of the stock market. Bonds have performed better over the last decade, but the average South African retirement fund is under-invested in this asset class compared to their overseas peers.
The move from DB to DC funds, which now make up 80% of the total, accelerated in the 1990s. Resistance from members was muted so long as the financial markets were booming, but the risks are only now becoming apparent, particularly for those facing retirement over the next few years.
Most at risk are lower income workers whose only savings are tied up in company pension plans. More affluent workers tend to supplement their corporate pensions with endowments and other forms of saving. Those able to afford it are taking out additional retirement savings products, but the vast majority of South Africans do not have this option.
Fund managers point to the fact that equities have outperformed other asset classes over the long-term, so those with several years to retirement can look forward to some kind of rescue.
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