Private pensions in South Africa continue to outdo take-home pay. In the last six and a half years, real private pensions increased by 21%, resulting in the average private pensioner being 18% better off.
This is remarkable when compared to BankservAfrica’s Take-home Pay Index (BTPI) data where salaries have only increased by less than 5% over the same period.
Outperforming banked private pensions is one of the leading trends observed in the monthly BankservAfrica Private Penson Index (BPPI), which shows pensions have been on the rise since 2013 and have helped senior citizens survive the weak economy relatively well.
“In December 2019, banked private pensions increased by 3,9% year-on-year to reach R7 071 in real terms,” says Shergeran Naidoo, head of Stakeholder Engagements: BankservAfrica. “This value, however, says so much more about private pensions and its performance, which has been incredible in a country with low overall market returns in the last five to six years.”
BankservAfrica has been recording monthly private pension paid into bank accounts since 2012. The BPPI is the first private pensions data series in South Africa and one of the few available worldwide.
“We often hear that people have not saved enough for pension and the data tends to agree with that as private pensioners receive roughly half the money on pension than what they received as take-home pay,” says Mike Schüssler, chief economist at economistscoza. “However, when we see that pensions have beat inflation 94% of the time, it becomes significant as this is far more than salaries. To put this into context, when the BPPI began, pensioners only banked about 40% of the level that take-home pay was. Now, after six years, private pensions are very close to 50% of take-home pay measured by BankservAfrica in the monthly BankservAfrica Take-home Pay Index.”
The equity market has been in the doldrums for most of the BPPI, and one would have expected pensions to struggle to keep up with salaries. However, efforts by pensioners and their fund managers to keep investments in interest-bearing instruments may have borne fruit. “Despite the poor economy, pensions have done remarkably well. Many funds are also not performing much above inflation. Yet pensioners are receiving higher than inflation payouts year after year. This is astounding in a weak economy.” says Schüssler.
While a large part of our pensioners are retired civil servants and they receive a pension based on their final salary rather than investment returns (and their increases are linked to civil servant salary adjustments unlike the rest that depend on investment returns), the fact is that an estimated two-third of our pensioners are subjected to returns in their pension funds or retirement pots. “Yet, the average increase over nearly 80 months and on an annual basis has been 2,9% higher than inflation. This is incredible as the private pensions monitored in the BPPI are after reductions by fund managers and other expenses,” says Schüssler. The strange case of ever-increasing pensions rests partly on favourable real rates while it relies far less on the stock market.
The other question is whether pensioners knew that the Johannesburg Stock Exchange (JSE) would not be a good investment or were they drawing down their money too fast?
“The latter could be the case, but since June 2012 there has been no evidence of a crash in private pension payments, which is what one would expect after five years or so of fast drawdowns. Moreover, our previous and unpublished data suggest private pension increases were lower than interest rates and did not experience the same level of growth as the JSE’s recovery after the Great Recession of 2009,” says Schüssler. “While we cannot answer this question fully, it does appear that interest rates and yields play a far more critical role in helping pensioners receive higher than inflation increases.”
With the number of pensioners increasing, and those formally employed stagnating, we could see pensioners play an even more significant role in the economy.
“Furthermore, the number of people receiving social pensions from government is also growing and therefore private pensions makes them an even more critical part of the South African consumer market,” Schüssler says