The provision of financial security in retirement is critical for both individuals and societies as most countries are now grappling with the social, economic and financial effects of ageing populations.
“The major causes of this demographic shift are declining birth rates and increasing longevity. In short, this means that a growing proportion of every country’s population will be in retirement and therefore not directly contributing to the economy’s production. Yet at the same time, most retirees are looking to maintain their pre-retirement living standard and to have access to quality medical and aged care services in their later years. Inevitably this is placing financial pressure on current retirement systems (whether they be in the public or private sector), whilst the growing importance of the aged population also means there is increasing political pressures for these services to be provided,” says Philip Bradford, President of the Chartered Financial Analysts (CFA) Society South Africa.
Based on research conducted by the Chartered Financial Analysts Institute, Bradford outlines fundamentals for an ideal retirement system:
- High coverage of the population in the private pension system
- Mandatory contributions of at least 8% of earnings
- Funded assets set aside for the future that exceed more than 100% of the country’s GDP
- A net replacement rate for the median income earner of at least 60% of earnings
- A basic pension for the poor aged of at least 25% of average earnings
- A system that has a strong regulatory framework that leads to improved governance and better protection for pension scheme members
“Should these be implemented, we would see an improved retirement system that delivers adequate benefits for all workers, as well as being more sustainable over the longer term,” Bradford says.