<title:Systemic Risks in South African Pension Fund Governance: A Wake-Up Call for Institutional Investors

The South African pension fund sector, a cornerstone of the nation's retirement savings system, faces mounting systemic risks rooted in regulatory failures and governance gaps. Recent data from the Financial Sector Conduct Authority (FSCA) reveals alarming non-compliance rates, fragmented oversight, and outdated frameworks that threaten the integrity of retirement savings. For institutional investors, these vulnerabilities underscore the need for heightened due diligence and strategic adjustments to mitigate exposure.

The Non-Compliance Crisis and Its Implications

The FSCA's 2023 report highlights a staggering 48% non-submission rate for financial statements among privately administered funds and an even higher 86% default rate for underwritten funds as of early 2025. Smaller funds (Performance of the Johannesburg All Share Index (JAL) over the past five years

Fragmented Regulatory Frameworks: A Structural Weakness

The South African pension landscape is fragmented by overlapping legislation. Major funds like the Government Employees Pension Fund (GEPF) operate under separate rules, exempting them from the Pensions Fund Act (PFA). This creates data inconsistencies: the FSCA estimates 4,896 registered funds but acknowledges 2,419 are pending termination. The resulting gaps mean aggregate metrics—such as the reported R5.8 trillion in total assets—rely heavily on the largest funds, potentially masking underlying vulnerabilities in the sector's lower tiers.

Investors must scrutinize fund governance structures. Exposure to funds governed by outdated guidelines (e.g., Board Notice 24 of 2002) or those awaiting regulatory alignment poses long-term risk. The delayed replacement of these frameworks suggests systemic inertia, leaving investors to navigate a legal minefield without clear safeguards.

Governance and Transparency Gaps: A Call for Accountability

The FSCA's report underscores a lack of granular data. While top funds account for 98% of assets, performance metrics (e.g., 5-year returns of 8.862% for private funds vs. 6.454% for underwritten funds) offer little insight into member-level outcomes. Cost ratios, such as the average TER of 1.022%, fail to reflect fee transparency, a critical factor for long-term savings.

Moreover, the FSCA's response to non-compliance—monthly reminders and on-site inspections—contrasts sharply with the stringent penalties imposed on financial advisers under the FAIS Act. This uneven enforcement erodes confidence in regulatory fairness. Institutional investors must prioritize funds with robust governance, clear fee structures, and proactive compliance histories.

Five-year average returns of South African pension funds compared to inflation rates

Regulatory Reforms and the Path Forward

The April 2025 submission of the Conduct Standard for Pension Fund Benefit Administrators aims to strengthen ethics and data protection. However, delayed updates to outdated regulations (e.g., BN24) suggest slow progress. Investors should monitor the implementation of these reforms closely. Funds demonstrating alignment with new standards will likely gain competitive advantages, while laggards face reputational and financial risks.

Investment Implications for Institutional Investors

1. Focus on Scale and Compliance: Prioritize large funds with strong track records of compliance. The top 100 funds, which dominate assets, are statistically more likely to meet reporting standards and weather regulatory scrutiny.
2. Diversify Carefully: Avoid overexposure to smaller funds or those in transition phases. Use diversification strategies to balance exposure to both regulated and exempt funds (e.g., GEPF), but ensure thorough due diligence on governance practices.
3. Leverage Transparency Metrics: Demand detailed disclosures on fees, returns, and liquidity. Funds lacking transparency should be approached with caution.
4. Advocate for Reform: Engage with policymakers and fund managers to push for streamlined regulations and stricter enforcement.

Conclusion: Navigating the Risks Ahead

The systemic risks in South African pension fund governance are not merely administrative but foundational. Institutional investors must treat these challenges as existential threats to long-term value. By focusing on scale, transparency, and regulatory alignment, investors can mitigate risks while advocating for a stronger, unified framework. The stakes are high: without urgent reform, the retirement savings of millions—and the stability of the sector—remain perilously exposed.

In the coming years, the success of South African pension funds will hinge on whether regulators can close gaps, and investors can adapt their strategies to this evolving landscape. The time for action is now.