Employer duties in South Africa: retirement and pensions

As a market with great potential, South Africa saw an an estimated 18.9 million people in employment in 2023 – a year-on-year increase of 10 million. The nation still has low employment rates compared to other African nations.

However, a new report suggests that quick action will ensure that the new digital age, often referred to as the Fourth Industrial Revolution, has a positive impact on the South African economy and job market.

South Africa’s employment landscape

According to the most recent figures from 2024, the top employment sectors in South Africa are:

• community and social services, which employ 3.79 million workers;
• trade, employing 3.47 million workers;
• finance, with 2.91 million employees; and
• manufacturing, employing 1.60 million people.

A recent report published by McKinsey notes that the potential creation of 4.5 million new roles, across a number of sectors, could result in an overall gain of 1.2 million jobs. This is despite an estimated 3.30 million jobs forecast to be displaced within South Africa as a result of AI.

According to the report, the development of these jobs will be the “result of productivity improvements, strategic policy implementation and the evolution of technology.”

Despite changing its retirements rules to help boost country savings, by increasing employment rates, the state of household savings in South Africa is poor, with the nation’s households currently saving at just 0.5% – one of the lowest rates in the world.

As the South African employment market quickly evolves, significant updates to employer responsibilities can be expected. For example, major changes to South Africa’s retirement savings system, coming into effect in Autumn of 2024, will impact all retirement fund holders. These updates and their effects are, therefore, crucial for employers to be aware of.

Employers’ end-of-employment responsibilities in South Africa

Retirement funds

While it is not mandatory for employers in South Africa to offer or contribute to their workers’ retirement funds, most will offer a pension scheme. Once they have contractually agreed to provide a pension scheme, the employer’s legal obligation is to pay the agreed amount into the scheme each month.

If establishing a retirement fund, employers in South Africa must ensure that it is registered with the Financial Sector Conduct Authority (FSCA). Any funds must be in compliance with the Pension Funds Act 1956. Employers are required to keep meticulous records pertaining to any pension funds established and must ensure compliance at all times.

South Africa’s new retirement system

Announced in June, South Africa is implementing a new retirement system, comprised of two components – known as a ‘two pot system’. The aim of this new system, which comes into effect in September 2024, is to bolster South African workers’ savings. Those, as previously mentioned, are accumulated at just 0.5% per year – one of the world’s lowest rates.

This new system applies to both private and state pensions, including the Government Employees Pension Fund (GEPF), South Africa’s largest pension fund. The primary difference between this new model and the previous pension system, is that it removes the worker’s ability to withdraw all compulsory pension savings upon leaving a job.

The current model has resulted in less than 10% of people in South Africa being financially equipped to retire. While many employers include a retirement age in their contracts, there is no official retirement age dictated by the state.

So, technically, individuals can keep working indefinitely. If a retirement age is stipulated and agreed upon in the original employment contract, workers are required to retire from that job. However, they can continue working elsewhere, if hired.

The eponymous two pots of the new ‘two pot system’ refer to the two components of a worker’s savings:

• The retirement pot – which comprises of two thirds of contributions made by an individual into their retirement fund. Under the new system, withdrawals from this pot will not be allowed until retirement.

• The savings pot – which comprises of one third of retirement fund contributions. Under the new system, a maximum of one withdrawal per year can be made from this pot, prior to retirement.

The National Government of South Africa hopes that, by ensuring that at least two thirds of workers’ accrued pension funds are retained until retirement, the economy will be significantly boosted, and workers will be financially free to retire comfortably.

As it stands, a staggering 73% of South Africans over 60 are in receipt of social grants from the government. Through ensuring the retention of funds until retirement, the ‘two pot’ system aims to alleviate this financial pressure on both the government and the individual. In turn, South African workers are empowered to save, be self-reliant, and stay prepared to deal with any unexpected costs.

Thinking of hiring in South Africa?

If your business is considering expanding into South Africa, Mauve Group can help. With over 28 years of global mobility experience, we have the expert knowledge needed to guide you every step of the way.

From our Employer of Record model, which allows organisations to employ remotely without establishing an in-country entity, to global business expansion services, visa and immigration services, global payroll, HR, consultancy services, and more – our bespoke packages and local experts can help.

Mauve Group recently supported non-profit organisation Ashoka, to expand its operations into South Africa. Using Mauve Group’s Employer of Record solution to employ a worker, Ashoka successfully onboarded and employed its desired worker. Regional Director of Ashoka Anglophone West Africa, Josephine Nzerem, shared:

“We love Mauve’s services because it has allowed us to hire a single paid staff member in South Africa without needing to have set up a legal entity. As you can imagine, [as a non-profit organisation] it did not make sense to manage the complexities and workload of setting up our own legal entity for the purpose of one staff member, so this opportunity with Mauve made it possible for Ashoka to increase its visibility in South Africa without going against the local laws.”

Learn more about this success story, by reading Ashoka Africa’s testimonial in full.

Contact us today, to find out how we can support your organisation on your global business expansion journey.