South Africa has one of the worst pension systems in the world, according to the Allianz Global Pension Report 2023.

The report looks at 75 pensions systems across the globe using the Allianz Pension Index (API), which consists of three pillars: Analysis of basic demographic and fiscal conditions, determination of the sustainability – funding and contribution periods –  and adequacy – degree of diffusion and pension level –  of the pension system.

Despite the Covid-19 pandemic resulting in a decline in life expectancy across several countries, with a few nations even registering a baby boom, Allianz said that this is only a short-term interruption to the accelerating trend of societal ageing.

“The latest data from China, Korea or Italy, for example, point to speedup of demographic change,” said Michaela Grimm, co-author of the report.

“In particular, birth rates are developing even worse than assumed, despite all family policy efforts. But it doesn’t help to lament; we have to face the facts: The intergenerational contract has become fragile.”

“The younger generations Y and Z in particular are being called upon to make (even) greater provision for old age themselves. The inconvenient truth is: they have to work longer as well as to save more and in a more focused way.”

South Africa has an overall score of 4.2, which is in the bottom half of the global ranking for pension systems – coming 58th out of 75.

Allianz said that low coverage, the low benefit level and the lack of retirement savings imperil the adequacy of South Africa’s pension system.

A small consolation for South Africa is that the majority of other African countries also have low scores.

For context, Denmark has the best pension system in the world, according to the report, with an API of 2.2.

In addition, South Africa has the “poorest” pensioners in the world, with a gross benefit level of only 15%.

Kenya and Lebanon join South Africa with a measly score of 15%.

The report said the benefit ratio of a first pillar pension should range between 40% and 60% of the average wage as per International Labour Organisation standards, as public pensions are very often the only source of income in old age.

According to the OECD, Brazil’s 89% benefit ratio is the best in the world.

The gross benefit ratio in percentages across nations can be seen below (click to enlarge):

Some positives

Despite the issues found within South Africa’s pension system, there are a few positives.

South Africa’s pension system scores slightly better when it comes to sustainability, which is due to low contribution rates  – this could ease future reforms.

In addition, South Africa has financial leeway as public spending on the elderly is very low and the country remains relatively young.

With an old-age dependency ratio only expected to rise by 16.3% by 2050, South Africa is set to be one of the countries with the youngest population worldwide.

However, Allianz stressed that reforms are needed for pensions in South Africa.

Moreover, financial services and financial literacy need to be improved to support capital-funded pension provisions.

Allianz said that all the thriving pension systems – notably Denmark, the Netherlands and Sweden – set the course for sustainability very early on when the demographic boom was starting.

These models should thus be used as a model for developing counties, which still have the opportunity to stabilize their pension systems.