South Africa’s pension system urgently requires reform, with Old Mutual’s head of corporate savings and income, Fred van der Vyver, advocating for a more stable and equitable solution through the adoption of a Collective Defined Contribution (CDC) scheme, similar to the one implemented in the United Kingdom.

The 10X Investments Retirement Reality Report found that only 6% of South Africa’s population is on track to retire comfortably, highlighting a significant retirement savings crisis, with most people facing financial difficulty in their “golden years”.

Meanwhile, a study in early 2025 by Sanlam Corporate found that while the official retirement age in South Africa is 65, a significant number of South Africans will likely need to work until they are 80 to afford a comfortable retirement. This is due to the rising cost of living, lengthening life expectancies, and the fact that many South Africans don’t save enough for retirement.

“Our internal member data indicates that while 65 remains the official retirement age, only 25% of South Africans can afford to retire at this age. Most people will need to work an additional 15 years to achieve financial security in retirement,” said Kanyisa Mkhize, the chief executive of Sanlam Corporate.

Old Mutual noted that a volatile first quarter—fuelled by geopolitical shocks, including renewed trade tensions under President Trump’s second-term economic agenda – was further unsettled last week by a ruling from the US Court of International Trade blocking key tariff proposals.

Global markets, including equities and bonds, reacted sharply around the world, highlighting a fundamental flaw in the Defined Contribution (DC) retirement system: even those who do everything right remain vulnerable to losing critical savings through no fault of their own, said van der Vyver.

“Financial security at retirement is increasingly being determined not by how much you save – but by when you retire. We need a model that cushions individuals from unpredictable shocks and gives them confidence that their efforts will translate into a stable, secure retirement,” he said.

This systemic vulnerability was starkly demonstrated during the COVID-19 crisis. In early 2020, as markets collapsed in response to the global pandemic, thousands of South Africans were retrenched or forced into early retirement.

Many had to exit their retirement funds at the lowest point of the market, locking in losses that could not be recovered. By contrast, those who retired just a year later – after the markets had rebounded – fared significantly better.

The difference? Timing, not planning, said van der Vyver. “This pattern highlights a fundamental shortcoming of the Defined Contribution system, which now dominates South Africa’s retirement landscape. In a DC fund, each individual saves and invests independently, and their retirement outcome depends on how markets perform at the time of withdrawal,” he said.

Unlike the Defined Benefit (DB) model – which guaranteed a fixed pension based on years of service and salary – DC shifts all investment risk to the individual. There is no built-in protection if markets fall just before retirement.

To address this structural weakness, van der Vyver pointed to the CDC as a more stable and equitable alternative. CDC schemes retain individual contributions but pool investments, allowing members to share market risk and benefit from smoother returns over time. This collective structure provides protection from market shocks and reduces the role of timing in determining retirement outcomes.

A CDC pension is a group savings plan where members pool their money together to create a shared pension pot. This pot is then used to pay out retirement incomes to all members of the scheme.

How does it work?
–Everyone pays in: Workers (and often their employers) contribute a fixed amount of money every month into the scheme.
–Money is pooled: Instead of having individual pots for each person, all the contributions are pooled together into a single big fund.
–Investments: The fund is invested to help it grow over time.
–Shared risk: Everyone in the scheme shares the investment risk and reward. If investments do well, retirement incomes may go up. If investments do badly, incomes might go down — but the burden is shared across the group.
–Predictable income: Unlike individual pensions, a CDC scheme aims to give members a more predictable income in retirement (though it’s not guaranteed like a defined benefit pension).

The UK introduced CDC schemes in 2022, and Royal Mail was the first major employer to adopt one for its employees. The Dutch pension system also uses a similar collective approach which inspired the UK model.

“CDC offers a more predictable outcome,” said van der Vyver. “It ensures that your income in retirement better reflects your lifetime of contributions—not the mood of the market when you exit the workforce.”

He pointed out that the current DC framework does include some protective features—such as life-staging strategies, smooth bonus portfolios, and default annuity options—which aim to reduce the impact of poor timing. However, these mechanisms are not systemically embedded and often require active decision-making by individuals.

In contrast, CDC integrates these protections directly into the fund structure, offering built-in safeguards rather than optional enhancements, said Old Mutual.

Research presented from Aon at the August 2024 Old Mutual Thought Leadership Forum shows that CDC schemes have the potential to deliver up to 30% higher retirement incomes than standard DC arrangements, depending on fund design, investment performance, and governance.

These gains are driven by lower fees, better long-term investment efficiency, and the ability to avoid locking in losses during downturns. Countries like the UK and the Netherlands are already moving towards CDC to future-proof their pension systems in an era of longevity and volatility.

Still, van der Vyver acknowledged that CDC is not a silver bullet. For one, members generally cannot pass unused savings on to heirs, which may concern those viewing retirement funds as part of a broader wealth transfer strategy.

Issues of intergenerational fairness must also be addressed to ensure younger workers do not disproportionately subsidise older members. Furthermore, portability across employers and sectors requires careful regulatory design.

“These are valid concerns,” he said, “but they are challenges of design, not principle. We’ve already demonstrated, through reforms like the Two-Pot System, that when there’s political will and industry cooperation, complex change is possible.”

As South Africa continues to grapple with global instability, rising life expectancy, and a growing crisis of confidence in retirement outcomes, van der Vyver warned that the real risk is inaction.

“The longer we delay structural changes to deliver more consistent outcomes, the more we undermine public trust in retirement saving. We must build a system that rewards long-term commitment and protects people from forces they can’t control. The current model simply doesn’t yet deliver that.”