Johan Kriek, Founder of Quantum Leap

South Africa’s retirement debate often assumes a simple choice.

Either a pensioner buys a life annuity and has longevity risk managed for them, or chooses a living annuity and is left to manage it alone.

That is the wrong choice.

A life annuity insures longevity risk. A living pension governs it.

South Africa already has the flexible vehicle needed to provide a living pension: the living annuity. What it lacks is the governance that would make that vehicle behave like a pension.

Pooling is not the only answer

A life annuity makes a valuable promise. The member gives capital to an insurer and receives an income for life. Members who die earlier help finance the incomes of those who live longer.

That is insurance.

A living pension works differently. The capital remains the member’s. Income is reviewed against what that capital can support. If markets, inflation or spending turn out differently from expected, the income responds before the damage becomes irreversible.

That is governance.

A living pension does not promise that income will never change. It promises that someone will keep asking whether the income remains affordable, and will act when it does not.

Risk does not become unmanaged simply because it has not been transferred to an insurer.

Adjustment is not failure

At retirement, set a sensible starting income for a long retirement. Then review it each year using what has actually happened to the member’s assets, withdrawals and cost of living.

If experience has been good, income can rise or the extra capital can be kept as a buffer. If experience has been poor, a modest early adjustment can prevent a brutal reduction later.

The adjustment is not evidence that the pension has failed. It is how the pension stays alive.

The real danger in drawdown is not simply that a member might live for a long time. It is that income and capital can drift apart for years while nobody intervenes.

An ungoverned living annuity leaves that drift to the member. A living pension makes it somebody’s job to notice and act.

Fairness matters

A living pension also has an important fairness advantage: there is no mortality cross-subsidy between members.

If a member dies early, their remaining capital does not finance someone else’s retirement. It can pass to their beneficiaries. If they live longer, their income is supported by their own capital and adjusted as experience unfolds.

That matters in an unequal society.

Research by Joanna Combrink and Dale Taylor for National Treasury found that mortality among lower-income male pensioners aged 60 to 65 was around three times that of the highest-income group in the data they studied. They estimated that lower-income members should, other things being equal, pay 20% to 30% less for the same pension.

If annuity prices do not reflect those differences, value can move from shorter-lived, poorer members to longer-lived, wealthier members.

That does not make life annuities bad. It does mean that pooling is not automatically fair.

Nor does individual ownership mean individual abandonment. Funds and providers can supply investment scale, administration, communication and intervention collectively while each member keeps their own capital.

South Africa can collectivise governance without collectivising mortality.

Life annuities still have a role

For members who cannot tolerate any fall in income, a life annuity may be the right answer. It can also be used for part of a member’s savings, or bought later in retirement when certainty becomes more valuable.

But it should be chosen because the guarantee is valuable and fairly priced, not because the alternative has been left ungoverned.

The choice is not between managing longevity risk and ignoring it.

It is between insuring the risk through a pool and governing it through the member’s own capital.

What changes in practice?

A living pension would start with an income that is sensible for a long retirement.

Each month, the member would receive a simple answer to three questions: Is my income still affordable? Am I ahead or behind? What, if anything, should change?

Clear warning points would trigger contact and action. Trustees and providers would be expected to show that they had identified members at risk and intervened. Members would keep the option to move some or all of their capital into a life annuity.

Regulation 39 already expects funds to have an annuity strategy. The proposed FSCA rules for living annuities point towards sustainable income and ongoing monitoring. The next step is to turn those principles into an operating system.

This should be the default for members who do not choose or cannot afford advice: governed support, with the freedom to opt out.

From product to pension

A living annuity is a product.

A living pension is a governed income system.

South Africa already has the product. It now needs to build the pension around it.

That means setting income carefully, reviewing it against experience, adjusting early when necessary and keeping a life annuity available when insurance is the better answer.

Living annuities are not the problem.

Leaving them to manage themselves is.

Turn living annuities into living pensions.

Ed’s note:  This is the fifth in a series of articles that Johan is writing for EBnet building up to this year’s Actuarial Society of South Africa’s Convention. You can find his previous four articles here:

The pension system South Africa nearly has

Living annuities are not the problem – ungoverned drawdown is

Supporting members who cannot afford advice: why governed defaults matter

Adequacy is not only about contributions: fees, asset allocation and governance matter

ENDS