Small, medium, and micro enterprises (SMMEs) in South Africa may soon face a new reality: mandatory retirement funds for employees. With government-led reforms under way, employers, including self-employed business owners, could soon be required to register their workers for a retirement fund. This shift forms part of the National Treasury’s broader efforts to tackle SA’sretirement savings gap.

National Treasury says the Department of Social Development is finalising a social security policy that includes auto-enrolment and a proposed pension scheme for informal sector workers. Internationally, auto-enrolment has become a widely adopted policy, requiring employers to register all workers — permanent or contract — for retirement savings.

A Pressing Need for Reform

The need for a mandatory retirement scheme in SA is underscored by the country’s tight fiscal budget and its growing social expenditure. Government is under increasing pressure to reduce costs, especially as rising old-age pension expenses continue to strain resources. In the 2023/24 fiscal year, SA allocated R98.6bn for old-age grants, supporting more than 4-million pensioners. Within the next two to three years, these costs are expected to grow by 23% to R121.4bn, as more people become financially dependent on state pensions.

To curb the demand for social grants, government officials see auto-enrolment as essential. Participation of all employed workers is a necessary approach towards ensuring adequate retirement income outcomes across SA’s workforce. Prabashani Naidoo, Head of Legal at Liberty, notes that auto-enrolment is part of an ongoing series of reforms aimed at strengthening retirement savings.

“Not all employed South Africans belong to a retirement fund because it’s currently not compulsory for employers to offer such benefits,” Naidoo says.

“Treasury is proposing to expand coverage across both formal and informal sectors, while considering a flexible savings scheme for informal workers.”

Auto-enrolment is part of a decade-long effort to enhance retirement savings policy in the country. Since 2012, government initiatives have introduced regulations to encourage savings, limit premature withdrawals and promote income preservation.

The SMME Sector: Impact and Implications

A recent industry survey found that only 61% of SA’s small and medium enterprises offered retirement benefits to employees in 2023. For SMMEs with annual revenues between R2m and R7m, only 29% were able to provide retirement plans. This raises questions about the preparedness of SMMEs to adapt to auto-enrolment policies, especially since SA’s National Development Plan anticipates that 90% of new jobs will come from the SMME sector.

In the first quarter of 2024, there were 2.6-million SMMEs employing about 11.3-million people, representing more than 60% of the national workforce, according to the SMME Quarterly Update by South Africa’s Small Enterprise Development Agency (SEDA). With auto-enrolment, SMMEs could find themselves playing a crucial role in closing the retirement savings gap — a role that comes with both responsibilities and benefits.

For some, the requirement to administer pension benefits may seem daunting. However, proponents argue that the benefits outweigh the challenges. Craig Rivett, a social entrepreneur in the IT sector, believes that employee benefits foster loyalty and improve talent retention.

“Retirement benefits can create a positive workplace culture, making it easier to attract and retain skilled workers,” he says.

SA’s push for auto-enrolment follows a global trend, with the UK’s adoption in 2012 serving as a notable example. In the UK, workplace pension participation jumped to 88% by 2019 from just 55% in 2012, with an additional £18.8bn funnelled into pensions each year. As SA takes steps towards similar reforms, small business owners are encouraged to see auto-enrolment as an opportunity to invest in long-term workforce stability.

The Path Ahead

With the two-pot system already successfully rolled out in 2024, the government is set to phase in auto-enrolment as its next major policy shift. For SA’s SMMEs, this could represent a meaningful opportunity to enhance employee benefits by providing retirement plans and other ancillary benefits thereby improving employee satisfaction and productivity, while also contributing to the nation’s financial resilience. By embracing these upcoming reforms, SMMEs have the chance to lead the way in creating a financially secure workforce — one that is less reliant on state pensions and better prepared for the future.

This year, the government successfully introduced the two-pot system, a retirement reform policy that separated people’s retirement investments into two components: a savings pot and a retirement pot. A third of the retirement savings were transferred to the savings pot and up to R30 000 was made available for withdrawal by members in financial need. The remaining two-thirds can only be accessed during retirement.

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