There are many hurdles facing Government’s planned retirement industry reforms, not least of which are political dynamics and economic uncertainty.
Elias Masilela, executive chairman of DNA Economics and commissioner for the National Planning Commission, defines what needs to happen for the proposed reforms to be successfully implemented.
Masilela was the keynote speaker at the recent release of the 2016 Sanlam BENCHMARK Survey results, a comprehensive annual review of South Africa’s retirement industry.
Evaluating the future of pensions in South Africa has never been more critical. Our country has one of the worst savings rates in the world, and both economic and political factors – as well as increasing longevity – are resulting in fewer and fewer of our citizens being able to retire comfortably.
Government’s proposed reforms of the retirement industry will go a long way towards addressing this dismal state of affairs, but there are certain critical factors which will play a key role in the long-term success of these changes.
Immediate delivery on key aspects of the National Development Plan (NDP)
The NDP aims to eliminate poverty and reduce inequality by (among other targets) creating 11 million jobs by 2030.
South Africans cannot hope to increase their savings, including putting away money for retirement, if they are unemployed and economically unproductive. More people holding jobs will also mean lower household dependency ratios and, therefore, greater propensity for long-term saving.
Relooking at replacement ratios
This is unrealistic in a South African context. It is generally accepted that a replacement ratio – the ratio of the income an individual receives from a pension once retired, relative to his or her salary or wage just before retirement – of 75% should be adequate for the average person.
The realities in South Africa are far more challenging, as this is not only a financial question – it is also a social one.
Many older citizens do not only look after themselves in their retirement years – they often have extended family members dependent on their incomes as well, a situation exacerbated by the scourge of HIV/Aids in our country.
Revisiting the traditional ‘save 15% of gross salary for 40 years’ retirement methodology
In contrast to Europe, where university graduates generally have 30 years of active contribution to the economy, the figure for South African graduates is about 18 years – as it takes three to five years for our youth to find gainful employment. Structural issues such as the volatile economic cycles, low employment levels and low savings levels add to the complexities.
Making saving a lifestyle
The fact that an individual has an income is no guarantee that he or she will actually save.
Government is aiming to make it compulsory to save for retirement, but we also need to change the mind-set of South Africans in this regard.
With the necessary sensitivity to social dynamics, our citizens need to be educated and conscientised to save – it should define their day-to-day decision-making and should be what people strive towards and compete for rather than it be a grudge action.
Increasing access to retirement products
Government’s proposed retirement reforms will go a long way towards addressing this issue, but the private sector retirement industry needs to continue to devote significant attention to reducing product complexity, improve geographic access of products, and reducing costs, including ensuring transparency of cost structures.
Introducing the concept of social or developmental investing
One of the best ways of encouraging retirement savings is giving retirement fund members the immediate benefit of their savings. Many people do not see the value of saving for something they ‘ca not envision’ and will not reap the rewards of until their retirement.
By channelling fund investments into social projects – such as the development of infrastructure (schools, hospitals and shopping malls, for example) – members will be able to enjoy their savings in their productive years and not only have to wait for their retirement before they do.
Reducing costs further through umbrella funds
South Africa has seen a notable growth of the umbrella fund market over the last few years. Since 2009, commercial umbrella fund membership has grown from just under 800 000 to more than 1.6 million members.
These funds should continue to develop more cost-effective governance models, simpler ways to charge fees that make product comparability simpler, and elimination of unnecessary bells and whistles for ordinary members where cost efficiency is vital. But this is not really observed in the statistics, probably because of the relative size of the emerging industry.
The most important determinant of successful retirement reform is, however, managing the expectations of multiple stakeholders.
We have witnessed a deepening mistrust between stakeholders and Government lately – evidenced by the recent opposition by the trade union movement.
The buy-in of all parties to the reforms before they are introduced, is particularly crucial. This is not only the responsibility of Government – both private and public sectors need to work towards better communication and an improvement in trust levels.
Failure to do this will have far reaching implications for our economy and our future.