Planning for the future needs robust stakeholder participation
The Institute of Retirement Funds Africa (IRFA) put forward four questions to industry role players for its Analysis — Social Security and South Africa’s Retirement Funding Sector to provide in-depth consideration on the likely impact of government’s proposed social security reforms on South Africa’s retirement funding sector and present readers with a range of opinion. The following are some of the answers to the que stions.
Q1. What role do each of the various stakeholders in the retirement fund industry have in achieving a safety net that covers all South Africans, e.g. what is the role of government, the private sector and trustees of retirement funds?
Natalie Phillips, head of SA institutional at Investec Asset Management says:
“The challenges facing the South African retirement fund industry are everyone’s problems and all stakeholders need to be more proactive in taking ownership for this. With South Africa’s poor savings record it is a big challenge and should be a priority for us all. South Africa is unfortunately faced with huge economic challenges and high levels of unemployment for our population of about 56-million people.”
She says a lot of work also remains to be done to build an appropriate outcomes-based attitude in order to ensure that shepherds of their clients’ capital can meet the specific needs of members, so that they can retire with some degree of dignity.
“Of critical importance is training and education across all stakeholders, so that pension fund members understand the risk profile strategies in which they have invested and the implications for their pension outcomes.
“There should be an emphasis on education, which should be directed at ensuring members are fully aware of the implications of the options they choose will result in people making better informed decisions and receiving better outcomes, particularly in the defined contribution environment that we have in South Africa’” says Phillips.
“It is also imperative for trustee boards to ensure that they have a proper governance structure in place. A professional trustee board, with a number of independent representatives who have proven industry skills can add value where specialist skills are required for certain decision-making.
“This is especially important in a defined contribution environment, given that funds have up to half of the trustee board comprised of member representatives who don’t necessarily have investment, actuarial or administration skills, and who are therefore not necessarily as well-equipped to make effective decisions relating to their retirement funds.
The appointment of independent, specialist investment advisors and administrators who follow global best practice, can also allow for more informed and balanced outcomes,” says Phillips.
Richard Carter, head of product development at Allan Gray, says when you think of a “safety net for all South Africans”, the obvious problem is current income security for a large part of the population. How can you plan for retirement if you don’t have a job today?
He says the first priority of government and the private sector should be to get the economy growing and create jobs.
“I would like to see government supporting small businesses and getting this to be the easiest place in the world to do business on the World Bank rankings. If the economy was growing, and jobs were being created, a safety net for all would become more attainable.
“Beyond that, government should set clear rules and promote a stable environment where other role players can do their jobs well. They should work to remove stumbling blocks to saving. The private sector needs to bring solutions to South Africans that are worth investing in — delivering products that meet the needs of savers,” says Carter.
“Trustees play a crucial role in safeguarding the interests of their members. Saving for your future can be a daunting, though often-overlooked task, and trustees need to make sure that their funds and all their service providers are doing the best job for their members.”
Michael Prinsloo, executive: institutional research and product development at Alexander Forbes, says the future working population is characterised with needing flexibility in their benefit offerings, with potential periods of time where participation might not be possible, and portability. Systems must account for the changing world of work.
He says each stakeholder has a role to play and benefits to derive in making the system work.
“The National Development Plan (NDP) shows that the government fully appreciates the role that a good social protection system can play in meeting the twin goals of eliminating poverty and reducing inequality. Within the context of employee benefits, the specific role of the government is to provide the framework, including regulating, providing incentives, making certain actions compulsory and guiding the financial education framework. Over the last few years, the national treasury has been focusing specifically on retirement reform and improving outcomes within this sphere.
“The key benefit for the government if it manages to get this sphere right is to reduce dependency on government and its fiscus when individuals reach pensionable age.
“Various aspects of the retirement reform process — including tightening the rules around preservation, mandating enrolment to capture unenrolled employees and creating options for vulnerable workers — should increase the pools of patient capital available for the economy’s development.
“The government is also focusing on the implementation of a National Health Insurance system, which is aimed at ensuring that everyone in South Africa will have access to appropriate, efficient and quality health services.”
Prinsloo says the role of employers has changed substantially as part of the shift from the defined benefit to the defined contribution framework. In some ways, this has blurred their stake in getting employee benefits right, as they no longer directly bear the burden of getting it wrong. Yet they still remain the central point for providing access for many individuals to the tools needed to protect their standard of living through employee benefits.
“We identified four components of employee benefits in Benefits Barometer 2013: healthcare benefits, financial education, risk benefits and retirement funding. It is still clearly in the interests of the employer to provide some of these. Health related benefits and employee wellness systems, including financial education, that seek to maintain individual productivity, have a clear-cut link to the employer’s operations. As long as the cost of the benefits and systems that maintain productivity are less than the costs of lost time and employee turnover, this makes clear economic sense.
“When individuals value employee benefits, this makes a strong case for the employer providing them, as it assists with employee attraction and retention. But where individuals see employee benefits as infringements on their take-home pay, this motivation is weakened. Employees often appreciate risk benefits, and not offering these benefits can have reputational implications for the employer. Getting retirement funding right across the economy is good for employers — a vibrant economy with robust spending power is good for firms.
“We need employers at the table, and getting all of this right will benefit them in the long term.”
According to Prinsloo, the central objective of social protection is to make households sufficiently secure.
“Many South African households seek this security through other non-financial, informal arrangements. They also often have different priorities and see more security in a house or a well-educated child than they do in a retirement pot. As research from the World Bank and Organisation for Economic Co-operation and Development showed, this is neither irrational nor unfounded. But it does complicate matters for employee benefits.
“What further complicates this is that households seldom represent themselves at the table. Instead, they are represented by various agents in different phases of the development of employee benefits.
“This use of agents may be eminently sensible. Many of the decisions raised by employee benefits are both cognitively complex and clouded by multiple behavioural biases. However, where it can complicate matters is when the interests of households and their agents are not entirely aligned,” says Prinsloo.
As a stakeholder in the private sector, a more inclusive and sustained growth path should be eminently valuable to the financial services industry, but as social protection, especially employee benefits, evolves to close gaps and respond to government reform, the industry’s role in the system is likely to shift, according to Prinsloo.
“The financial services industry needs to apply their expertise and resources to a wider set of needs.
“To this end, the more we can understand about the complete picture for individuals and their dependants, the more meaningful the advice on trade-offs can become. The industry needs to move toward helping individuals assemble the complete picture.
“As risks have shifted from employers to households, this has created the need for the financial services industry to redirect its expertise towards helping households manage these risks.”
Q2. What is an optimal safety net, and what are the minimum benefits that should be provided by a comprehensive social security programme?
Prinsloo says ultimately the social security programme must be sustainable for current beneficiaries and for future generations of beneficiaries. Factors such as the economic growth rate and labour absorption rate must be taken into account when assessing the sustainability of the programme. With learnings of best global practices in mind, what then is a sustainable safety net and what should the minimum benefits be?
A healthy savings culture contributes to economic growth. Long-term savings can:
Prinsloo says there are important social and psychological benefits as well. Long-term savings help smooth consumption, ensuring that people are protected over different phases of their economic journey. By engendering a savings culture, a country can fortify its citizens against short-term economic shocks and, as such, reduce the cost of welfare provision for the state. Most importantly, it can build a level of financial empowerment and stability that has knock-on effects on health, both physical and mental, in individuals, families and communities. Each element of value helps reduce the burden that would fall on the government.
“Social protections, however, represent a slightly different concept. As with social security, the focus here is on providing a financial floor or medical assistance to people who are at risk because of lack of income from unemployment, old age, poor health, limited capacity from childbirth or single parenthood.
“If a country can successfully integrate long-term savings with social security, they can keep their citizens financially secure during good times and bad. This is in effect the imperative that has long kept pension funding at the top of the priority list as a long-term savings initiative in developed economies.
“More importantly, if a country can tackle this challenge through a public-private partnership with its financial services industry, a massive burden on the state fiscus can be relieved. Here the solution is arrived at through the collective efforts of multiple agencies — not just the government — although the government will often play the role of overseer to ensure there’s some link or integration.
“Long-term savings and social protections can be most effective when they are interlinked. We also believe that in a developing economy, a public-private partnership is most cost-effective in providing such a solution. The point we have challenged is whether placing retirement savings at the top of the list for a long-term savings drive serves the broader challenges of a developing economy best. For most South Africans, the immediate challenge is how to better address the issue of social mobility — the ability of an individual or their family to employ occupation, education, wealth or some other similar indicator of achievement to change their perceived status in the community or economy.
Prinsloo proposes a shift in thinking about compulsory savings. He says what’s needed at this point in our evolution as an economy is a compulsory savings programme that promotes:
Tshego Modise, business development at Aeon Investment Management says an optimal safety net would need to meet the challenges outlined in the National Development Plan and its 2030 goals.
“A comprehensive social security programme will consider the universal need for every South African citizen to have the freedom to live the best life possible while conferring the same dignity to a fellow citizen.”
She says minimum benefits include: a living allowance for all South Africans; access to free quality education; and access to employment opportunities.
“South Africa must produce a society where a person can afford to have their basic needs met, be educated and find a way to be of use for the advancement of the country,” says Modise.
Carter says the big challenge is that there is a massive gap between what we would like to provide to all citizens and what we as a country can afford.
“People have different views as to what the benefit structure should be. In my view, it would be ideal to offer a more extensive basic income grant system. To be able to afford this, we need to focus on growing the economy and creating jobs.
“We need to encourage people to provide for their own future rather than relying on the state,” says Carter.
Q3.How should the programme be built and rolled out?
Carter says this is a consequence of what we build and until we get alignment on what we want to build it’s very difficult to know how to go about doing it.
Prinsloo says it’s important to design the scheme by envisioning the desired outcome and then reviewing what South Africa already has in order to decide on implementation.
“There is some amount of duplication and overlap in our benefit system. There are also elements that work well; these should be retained and extended.
“To reiterate, it’s critical that the programme be sustainable for current and future beneficiaries, with high levels of governance and transparency. Implementing a new social security programme is not something that should be rushed into, but carefully and methodically thought through and analysed from a cost, benefit and risk perspective. It’s also critical that experts take part in the efforts of building such a programme. All stakeholder input must be sought, within reasonable time-frames, and taken into consideration.
“A fundamental step in the process will be to conduct pilots (practical case studies) and measure the success of those pilots, then take those learnings into account to ensure that the overall solution will be robust, well-governed, sustainable and meet the needs of all South Africans,” says Prinsloo.
“This conversation takes place against our economic backdrop. South Africa’s tax base is narrow and under pressure in the current economic climate. There is a limit to what the tax base (and households) can carry, and this needs to be considered carefully in the funding models.
“To re-engineer an entire social security framework and to implement it with success can only be done on a phased-in basis, over a long period of time. This is to ensure the entire system isn’t compromised, causing potentially even worse outcomes for South Africans. Rather, implement it gradually and improve it over time, through an iterative-adaptive learning methodology.
“It will also be important to ensure that the system is adaptable enough to cope with the changing realities of the world of work,” says Prinsloo.
Tshego Modise of business development at Aeon Investment Management says to re-invent a model to achieve the set imperatives will create a delay, which may do more harm than good.
“The proposition at hand is to use the systems and structures we currently have in place across different sectors to drive change.
“Companies have corporate social investments that have advanced a part of their profits being reinvested into communities across South Africa,” says Modise.
Q4. When should South Africans be canvassed on the benefits and the roll-out of any proposed programme?
Carter says when we have a good solution on the table, with broad support from various role players — including government departments, community organisations, unions and business — that solution should be made available to the broader public.
“We should seek solutions that attract widespread support,” says Carter.
Modise says we should do this as soon as possible: “The longer we wait as a country to address inequality, particularly regarding participation of all in the wealth of South Africa’s resources, the harder the effort will be to start.
“According to the NDP 2030 goals, we have less than 12 years to reach the milestones we set as South Africans to realise a more normal and equal society,” says Modise.
Prinsloo says South Africans should be canvassed long before implementation begins, so that their input can be considered as part of the development of the programme.
“The ballot box has been the traditional polling mechanism regarding state benefits. However, this has led to unsustainable benefit systems being introduced and expanded in many countries.
“Hearing the concerns of South Africans regarding the benefit system is important, however it should not create the expectation that all aspirations will be met. The ‘Tips for Trevor’ initiative to gather input from South Africans on our tax system seems to have been successful at gathering opinions and ideas without creating unrealistic expectations.
“Certain groups have taken to running workshops to gather the suggestions from communities that may have strong views and good ideas but lack the vocabulary to make written submissions themselves. It may be useful to introduce a similar process to gather suggestions, proposals and ideas on social security from South Africans, and this process could start immediately,” says Prinsloo.