FIFI PETERS: I suppose tying into the unemployment numbers is the issue of retirement savings. Why it’s quite important for us to get more people into jobs is that it will boost our ability to ensure that a lot of people are able to retire comfortably when they reach that stage.
Last week government issued a green paper for public comment, talking about making some changes to the retirement industry. Currently many people don’t contribute to funds that can provide them with income when they are no longer of a working age, and government wants to make it compulsory for people to contribute a portion of their salary into a state-run security fund. The idea is to provide income security in the case of unemployment and disability – and even retirement – to a lot more people.
We have South Africa’s largest pension fund administrator, Alexander Forbes, on the show just to share its view on the proposal. We are speaking to John Anderson, executive for investments and enablement at Alexander Forbes. John, thanks so much for your time. Just speak to us about what this proposal, if implemented in its current form, would mean for your members.
JOHN ANDERSON: Thanks, Fifi; appreciate it. We’ve run some numbers just to have a look at it. Obviously in the industry you’ve got people who are covered by private occupational schemes, where an employer would put a scheme in place. And then you get people who contribute on their own, and you get people who are uncovered. You also get the public sector, the Government Employee Pension Fund, and municipal schemes, where people contribute. Of the 15 million* people who are employed in South Africa, roughly half are covered by some form of retirement provision – through an employer, the government, or one of those schemes.
If the current proposal in terms of the green paper goes ahead – which we don’t think is likely for various reasons – it means that 7.5 million people who are covered, roughly a current 60% of them will be fully covered by the national social security fund. What it effectively means is that for that 60%, for their salaries up to R276 000 and contributions of 12%, their benefits will be covered by the state scheme, rather than their current schemes. Whereas current schemes are backed by assets, the new state scheme is backed by a future promise essentially – whether by future generations or future government.
And then for salaries above R276 000, individuals can then top up the national social security fund with certain accredited arrangements.
So basically your existing schemes become top-up schemes and everybody gets covered by the national fund. Of people who are currently not covered, including [those in] the informal sector, domestic workers, agriculture sector and so on, everybody must then contribute where they’re currently not contributing, or be subsidised by the taxpayer, essentially. That’s in a nutshell what would happen.
FIFI PETERS: As you outlined, [it’s] backed by a promise – and a promise that is not guaranteed if we look at what is presently happening in this economy and the fact that our government doesn’t really have that much money.
But the issue also here, John, is the fact that the retirement industry, as it functions right now, inasmuch as it has come very far, has left quite a number of people behind in that journey. So the current system in itself is not an effective one for all.
So therefore, as Alexander Forbes, how do we make better changes to our retirement industry?
JOHN ANDERSON: I think that’s a great point. There are definitely issues that need to still be resolved in the industry. …I think over the last 10 years there have been a lot of good changes made just to make sure things are more transparent, more competitive. There’s been industry consolidation insuring all of those things, but there are still a number of challenges – a big reason why people who do currently contribute to schemes through the employer fall short at retirement. It isn’t because they didn’t contribute; they did contribute. But when they left the employer – because people on average change jobs about seven times before they retire – every time they change jobs the vast majority cash out the pension, and then start again at the new employer.
So the first thing to change is to keep a portion, not everything, preserved for retirement, because compound interest adds up. The National Treasury is in fact aiming to address that next year through what they are calling the two-bucket system, where people can access some of the money for short-term needs but in exchange they need to then make sure that they preserve the majority for the long term. If that does go through – it still needs to go through a whole process – that will address that specific shortcoming. So that’s the first one.
The second one is that that currently all employers can choose whether to put an arrangement in place for employees. It’s a choice, it’s voluntary. There are a lot of employers out there – be they SMEs, startups [or others] – that don’t have schemes in place. We know that if you don’t provide it through an employer, the majority won’t save themselves.
So what Treasury is trying to do is to try and introduce what they’re calling ‘auto enrolment’ – to use existing private-sector arrangements that have administration capabilities, and then have employers auto-enrol individuals; but they can then opt out if it’s not affordable and so on. That’s the second thing.
And the third thing that we think needs addressing is, when people get to retirement, there’s a state old-age pension that is available, but it has a means test. So, before you qualify for that state old-age pension, which is supposed to provide a minimum (grant) to address people at the poverty threshold, there’s a means test. That actually acts as a disincentive for people to save. So before they get to retirement, in order to qualify for the state old-age pension they spend all the retirement money typically saved through provident funds and the like – and then they are worse off.
So remove that disincentive and remove the means test. If you do all of those things, the existing system can have better outcomes. What it doesn’t address though, is the informal sector. That requires something very different. The current system has not been successful at catering for that market, and it needs a different solution. It’s one where a lot more work is needed. The current proposal is impractical, unfortunately, for that specific segment. But there are examples where it has worked.
FIFI PETERS: John, that’s perhaps a conversation for another day, but your point is well made. Thanks so much for your time – even referencing the fact that a lot of people cash out their pensions and then get another job, assuming that they even get another job. I know a lot of people who do cash out their pensions and spend quite a number of years unemployed, which just adds to the crisis.
That was John Anderson, executive for investments and enablement at Alexander Forbes.
*This initially incorrectly stated 50 million* people. We apologise for the error