Aids to slash South African savings funds

Retirement savings could be slashed by the HIV/Aids pandemic ravaging South Africa, the country's largest financial services company warned on Monday.

The warning, issued by Old Mutual will bring home the severity of the financial consequences of a disease affecting one in nine South Africans.

"HIV/Aids prevalence is starting to peak. The effect is going to be felt in the future. The area that hasn't been spoken about is the effect it is going to have on retirement funds," said Johan Schreuder, the head of portfolio management at Symmetry Multimanager Portfolios, a subsidiary of Old Mutual.

The London-listed financial services group, which derives much of its income from South Africa, said the cost of death benefits in some pension funds could double over the next 10 years, rising from 3 per cent of salaries to over 6 per cent by 2010. This would lead to higher contributions, lower retirement benefits or lower death benefits.

The R1,000bn ($97bn, €98bn, £62bn) pension fund industry is South Africa's largest form of saving and accommodates about 10m people. The country's savings rate has fallen steadily over the past 20 years to 15.2 per cent of gross domestic product.

"Aids is undoubtedly the biggest single threat facing South Africa," said Roddy Sparks, managing director of Old Mutual South Africa.

South Africa has one of the highest HIV/Aids infection rates in the world. About 4.7m of its 40m population is HIV positive. The infection rate among the economically active, adult population is estimated at about 25 per cent. Life expectancy among men is forecast to fall to 38 years of age by 2010.

Speaking in Johannesburg at a conference on the prospects for investment in South Africa, Mr Schreuder advised the trustees of South African pension funds to cap their death benefits to limit their exposure to the rising death rate. The effect of rising death benefit costs and tax threatens to almost halve a member's expected pension. "Most trustees have already recognised the threat of Aids to defined contribution funds and have capped contributions to death benefits."

South African companies expect HIV/Aids to have a "moderate" effect on their businesses while a survey by Deloitte & Touche shows that few companies outside of the food and catering business identified HIV/Aids as an extreme threat to their businesses.