Two apparently separate events occurred this week. Firstly, Gill Marcus, Deputy Minister of Finance, confirmed that the government was contemplating switching the civil service retirement funds from a defined benefit fund, where a pre-determined pension is guaranteed, to a defined contribution scheme, where the risk of receiving an adequate pension switches to the fund member.
Secondly, the markets took another blow with South Africa again among the hardest hit.
These two issues represent intimidating challenges in ensuring that our retirement savings will be sufficient to ensure a contented retirement.
If government goes ahead with the proposals of the National Consultative Retirement Forum (they are only proposals at this stage) to convert to defined contribution funds, the consequences will be enormous for about a million odd people who are members of the funds.
This will also have a major impact on the economy, similar in scale to the proposed demutualisation of life assurance companies Old Mutual and Sanlam.
The most immediate consequence will be the release into the economy for investment of R100 billion, of which a large proportion is likely to be switched from its current home in government bonds to the share market.
This could have a two-fold effect of pushing up the cost of government borrowing while chasing share prices higher.
The reasons for this are that the government pension funds have been forced to invest about 90 percent of the funds they manage in government bonds (or loans to the government). This has meant a captive ready supply of borrowings for government. Take away that source and government is going to have to find more money in the private sector capital markets. If this creates, as it is likely to do, a greater shortage of money available for borrowing, interest rates will go up.
For the individual members of the funds the announcement is generally good news. Firstly the government will now have to make up the shortfall in funding created by the previous government, which plundered the funds, to meet its spendthrift ways (something for which any private sector fund manager would have received a jail sentence).
This will provide civil servants with greater protection, lessening the chances that they could find themselves in the same position as social pensioners in the Eastern Cape, who were disgracefully the soft target of appalling regional government spending allocations this month.
When the funds are fully funded and are under the defined contribution scheme government will also have to give the trustees of the funds full discretion in investment to get the best returns for their members. This will give additional security to members against a government intent on raiding someone else's piggy bank.
But with this greater security will come greater risk. It is the members who will have to carry the risk of investment performance and ensuring that their savings are carefully invested when they retire to ensure a continual flow of funds, which keeps up with inflation.
It is this investment risk that has been highlighted by the recent investment market volatility around the world.
It is also the reason why Personal Finance has for the past two years been warning anyone who has to make a choice between a defined benefit and a defined contribution fund, whether in the private or public sector, to do so with great care. A sustained downturn in the market, particularly shortly before retirement, can dramatically reduce the possibility of a financially carefree retirement.
Of course the opposite is also true. Sustained bull markets could lead to a far higher standard of living in retirement. The point is you need to be aware of the risks because they are all yours on a defined contribution scheme not your employer's.