SA’s retirement industry shouldn’t forget the informal sector

“What about the informal sector?” asks Old Mutual Consulting actuary and pensions expert Stephen Walker when talking about retirement fund reform. 

He says it is well known that people in South Africa’s large informal sector fall out of formal retirement savings vehicles, but it’s a problem the financial services industry and government don’t yet know how to solve. 

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Speaking at the 3rd Annual Africa Financial Inclusion Summit in Cape Town recently, Walker said more can be done to create conditions for people in the informal sector to contribute to retirement savings in flexible, small amounts, something pioneered in other countries.

He says South Africa has done a lot of work to reform retirement savings in the formal sector, including tax adjustments to retirement funds and the two-pot system – but other countries are going further by also trying to bring the informal sector into a long-term savings culture.

In search of a solution

In one of the more innovative examples cited by Walker, Thailand, where gambling is popular, will now deduct a percentage from lottery tickets and direct it into micro-savings vehicles. People in Thailand must show an ID to buy lottery tickets. 

And to make saving for a pension more exciting, a monthly lucky draw is held, with some of the interest earned on the retirement savings used to fund the prize.

“Gambling is a terrible idea,” says Walker.

“But at the same time, if people are going to do it anyway, then you might as well make something good of it.”

Walker is chair of the Retirement Matters Committee of the Actuarial Society of South Africa (Assa), which publishes guidance and practice standards on retirement for the industry.

He has proposed that Assa conduct research on developing a suitable solution for the informal sector and present it to National Treasury.

Walker says the old age social grant is vital and has been linked in research to better nutrition for children when grandmothers (not grandfathers) receive it, but more can be done for workers in South Africa’s large informal economy.

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In South Africa, formally employed workers’ pension contributions are often compulsory and deducted before salaries are paid.

By contrast, informal workers struggle to save for retirement because:

• They lack a formal employer-employee relationship;
• The tax deductibility of contributions has little or no impact on them;
• Their income and savings are irregular and unstable; and
• Their focus is on day-to-day survival.

There is also low trust in formal institutions, says Walker.

He believes default savings are a “crucially important concept”.

This is a system used in Kenya, where money is deducted from certain everyday purchases, such as airtime, and placed in a micro-savings product.

“We must allow people to save without realising it.”

How other countries are approaching the challenge

Here are some examples of how pensions in the informal economy are encouraged in parts of Africa and Asia:

• In India, a pension fund for people in the informal economy was launched in 2015. The government matches contributions for the first five years of savings, savings are not accessible for 20 years, and contributions are flexible, with 83 million people joining.
• In Malaysia, the national fund is the same one used for formal employment. The government pays 20% of informal worker contributions subject to a lifetime maximum of R20 000, with automatic deductions from e-hailing drivers.
•  In Ghana, workers on cocoa plantations are encouraged to save in an industry fund specifically set up for them, with the government offering to pay the equivalent of 20% of what they have saved.
• Launched in 2009, Kenya has a micro-pension product that allows citizens to save as little as KSh20 (about R2.56) at flexible intervals, including through deductions from everyday purchases. The products are accessible through low-cost digital channels, with cash fully accessible after three years, and savings can serve as security for a home loan.
• A new national fund in Kenya, supported by the World Bank, allows savings as low as KSh50 a day, with the government matching contributions 2:1, but it has not been very successful yet.
• Walker says Rwanda has had “huge success” rolling out a scheme from 2019, with 75% of workers involved, and the government matching or paying some contributions for vulnerable groups.
• Only 1 % of citizens in Nigeria have adopted a fund launched for the informal sector. The Nigerian government is considering paying limited co-contributions to encourage such savings.

Walker has worked in pensions for 27 years, and says he has also encountered a misconception that people think they do not need savings as they will pass away soon after 60. This is because life expectancy figures in Africa are between 60 and 65.

However, life expectancy for someone who reaches the retirement age of 60 is, on average, another 18 years.

“The message for people who reach their 60s is actually that they are boringly stable people,” he says.

“When you get to your 60s, you’re not driving drunk anymore. You’re not having unprotected sex. You’re not going bungee jumping. You’re not doing any of these crazy things. So you’re likely to live a long time.”

Read:
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