The pension fund and life industry has baulked at the government’s proposed national social security system. It says it could lose 60% of its members.
The current national pensions plan proposal is for about 13% of the first R60 000 earned by workers to be invested into a national savings fund. This money would only be accessible on retirement. Of the 9,8-million existing pension fund members, about 60% earn up to R60 000 a month. These people would be required to switch their pension contributions to the national plan.
According to Elias Masilela, chief strategist at Sanlam Employee Benefits, this figure could even be as high as 80% because people earning, for example, R80 000 a month may not want to split their pension contributions between the national plan and a private fund manager and, therefore, opt to invest their full portion in the state’s system. According to Grant Pote, head of pension fund reforms for Old Mutual, union-run funds such as the Mineworkers Pension Fund would be affected to an even greater degree as a higher percentage of its members earn R60 000 or less a month.
Pote adds that it is not only the pension fund industry that would be affected but also life insurance. As many pension funds include death and disability cover, this too would be lost to the national social security system, which proposes to include risk cover.
But, how likely is it that government would insist on creating a new fund that is centrally managed, leaving a well-run industry, with high levels of penetration, to bleed? According to Thoraya Pandy, spokesperson for treasury, nothing is cast in stone and a great deal of debate and discussion still needs to take place.
“As the treasury we are in the process of modelling a threshold; there is no firm decision on these matters or what will best work for South Africa. We will look at the impact on the private sector and key players and we want input from the private sector.”
A recent visit by José Pinera, the architect of Chile’s pension fund system, highlighted how a mandatory system can be efficiently run by the private sector with guidelines set by government. It seems it would be far easier and a quicker start if government simply made pension contribution mandatory for employed people along the lines that are currently offered, prevented early withdrawals and set minimum standards and costs which the pension fund industry would have to meet.
According to Pote, just the fact that the contributions were mandatory would mean the costs of marketing would be slashed and the funds could be run far more cost effectively.
Currently most investments are sold rather than bought, which pushes up costs through commissions to intermediaries and marketing material. Inefficient funds that could not cut costs and compete would naturally be pushed out of the system reducing the number of providers and driving up economies of scale. Going this route would allow government to focus on the far more difficult task of bringing the informally employed into the pension fund net and the mechanism of the wage subsidy to allow lower income earners to participate.