Even if most employed South Africans paid up to 15% of their salaries towards the new national social security system (NSSS), netting a whopping R54-billion, it would fall short of current flows into the pension fund industry by R18-billion.
The problem with pension funds is not so much coverage of employed people, but rather that people are drawing on these savings before retirement.
According to the Financial Services Board’s 2006 annual report, R72-billion flowed into the private pension fund industry in 2006. A discussion document issued by the social development department calculates that if all employed people earning R1Â 000 a month or more contribute to the NSSS, the total would amount to R54-billion.
This is R18-billion less than the current inflow and suggests not only that most employed people are already part of a pension fund, but that the level of contributions is close to 15% of income.
It also suggests that people are voluntarily investing money into retirement funds.
Which leaves the puzzle as to why we have such a poor savings rate and what benefit would an NSSS offer? The answer is that although South Africans might be putting money into a pension fund on a monthly basis, they are drawing on those funds at a rapid rate.
In the same year, 2006, total pension payouts, including death, retirement and withdrawal on resignation, totalled R86-billion, a net outflow of R14-billion.
Actuarial consultant Rob Rusconi, who authored two of the studies issued by the social development department, says the discrepancy highlights the inefficiency of the retirement industry. We are supporting an inefficient system where the industry is benefiting from the inflows through fees and commissions, yet the country is not benefiting from increased savings.
On the surface it would seem a sensible move for treasury to change legislation and prevent early withdrawals, and would immediately boost the savings environment. However, Rusconi warns that this could have unintended consequences for those who opt out of pension funds because they would not be able to access the money and the inflows would drop drastically.
Mandatory contributions would have to go hand in hand with any limitations on withdrawals.
Rusconi’s study drew some fire this week because it differs from the framework set out by treasury so far. In his model, anyone earning more than R1Â 000 a month would contribute to the NSSS at a rate of 15% for every rand earned over R1Â 000 a month. However, Rusconi says the model is simply the basis for the research and sets the parameters in an environment of uncertainty.
“It makes sense to start with the simplest model and then you can start introducing alternatives — like a cap on contributions — and see how it impacts the model.” Rusconi says it is certainly not the view of the social development department that everyone earning R1Â 001 should contribute.
He does, however, believe that not having a cap on contributions does have some merit. In this model, he proposes that all contributors should be able to opt out of the government fund and invest through the private sector for the defined-contribution portion.
The initial proposal by treasury was that the initial 15% up to the capped maximum would form part of the NSSS and those earning in excess of the cap would be able to invest separately in the private sector.
“This is inequitable as both lower and higher income earners should have the same right to opt out,” says Rusconi. This would also allow the private sector to compete with government for the money.
In another paper published by the department and authored by Rusconi, he sets out very clear guidelines as to the conditions the private sector would have to meet to manage the assets. “It takes a pretty tough line — as it should. Considering these are mandatory contributions, the government has a duty to ensure these funds are safe.”
Rusconi says that with regard to the government fund a centralisation of assets would be unlikely because of governance implications. This could be read to mean that the PIC is unlikely to manage these funds, which will be spread across various managers to diversify risk.
The model suggests, however, that the defined benefits portion, which relates to risk cover such as death and disability, will not have an opt-out clause because this is where the cross-subisdisation will occur.
Rusconi says he is still working on a defined benefits model, but that there is scope for government to outsource this portion to the private sector, which will reinsure the risks.
Rates of contributions
All employed South Africans will pay 15% of each rand earned over R1Â 000 into the National Social Security System.
Income of R2 000:
First R1 000 no contribution
Second R1Â 000 will attract a contribution of 15%
Total contribution R150 or 7,5% of total salary
Income of R20 000:
First R1Â 000 no contribution
Contribution on R19Â 000 at 15%
Total contribution R2Â 850 or 14,25%
- No cap on maximum contributions, but individuals can choose private sector funds for their defined contribution portion;
- 12% will go to the defined contribution portion for investment; and
- 3% will go to defined benefits, including death and disability.