SA retirement funds are at a tipping point. They’re at the mercy of two major imponderables: country risk and Covid risk. Hardly could they have conflated at a more unsettling moment. The outcomes are neither reasonably predictable – for upward or downward tips – nor practically controllable.
What’s to be done? Sit tight and pray.
Known unknown 1
Country risk, long in the aggravation, reaches its apex with imminent sequels to the Zondo commission of inquiry into state capture. At best, the bad guys identified at Zondo are arrested, charged, convicted and dispossessed.
It’s the essential catalyst to trigger business and investment confidence. Bluntly, in a protracted course of varying intensity, it’s the difference between upholding and shredding the Constitution.
At worst, in the mobilization of dark forces against him, Cyril Ramaphosa doesn’t see out this year in the presidency. The circumstances of his departure are as much a subject for speculation as the identification and credentials of his successor. Coming atop a bleak economy, where record numbers of unemployed people depend for their livelihoods on relief measures that cannot be extended indefinitely, such negatives are daunting.
Typically, markets factor the best and the worst. For defence against the worst, there’s a surge in promoting (and profiting from) increased levels of offshore investment. At the presidential summit on infrastructure investment last June, for example, one asset manager proposed the introduction of prescribed assets (to fund infrastructure investment) in exchange for a higher level of allowable offshore investment.
It was for Ramaphosa to differentiate between proposals motivated by national interest as opposed to self-interest. While offshore gathers favour, to judge by the noise, it’s not necessarily a one-way street.
For one thing, the extent of offshore exposure is effectively higher than the 30% ceiling allowed under Regulation 28 of the Pension Funds Act. This is because of the large-cap rand hedges, listed on the JSE, which are outside the 30% (a prudential guideline for portfolio diversification, not to be confused with exchange controls).
Second, a reallocation to offshore investments will reduce the availability of resources for infrastructure investments. As the latter is required for SA economic growth and social stability, there’s no domestic benefit from pursuit of shares in Tesla and Apple.
Third, timing on the rand can be decidedly wonky.
It was from the depth of the 2008-09 global financial crisis that SA’s domestic equity funds outperformed (see graph above). Short memories of those days belong to those same experts who, followers of fashion, then exhorted the virtues of staying home.
Known unknown 2
Covid risk represents the further layer of complication. Nobody, but nobody, can be so brave or foolish as to predict the return to something that resembles pre-Covid normality. It might happen in fits and starts, as inoculations are rolled out, or it might take years, as mutations defy vaccinations. Asset allocations and share selections aren’t for sissies. The point for retirement funds, critically, is the durability of present trends.
The longer that Covid threatens, and there’s enforcement of countermeasures to restrict economic activity, the greater the negative impact on fund contributions and withdrawals.
Contributions to funds from employers would logically be reducing, and withdrawals by employees increasing, as they respectively battle to keep their heads above water. Both ways, it’s thoroughly unhelpful to the welfare of future retirees and the capital formation that backs public expenditures.
How bad is it? Not too bad so far, considering that one year of Covid is past. But inevitably, on a perpetuation of existing trends, company profits and savings levels will gradually dissipate.
The more that incomes are lost or reduced, through retrenchments or furloughs, the more reliance is placed on retirement funds as the pocket of last resort (TT Dec ’20-Feb ’21).
In effect, the system allows so much leakage that there’s no barrier to retain money in a fund when the money is needed for lifestyle sustenance. On resignation or retrenchment, the floodgates open. On “excess deaths’, as they’re wistfully described, there’d also be excess payouts.
Alive to the danger of retirement funds being accessed as transmission accounts, National Treasury has tightened withdrawal provisions so that only one-third of the member’s fund interest may be taken as a lump sum (with the balance as an annuity) on the member’s retirement.
The exception is for a fund interest of below R247 500, all of which can be taken in cash. The overwhelming number of blue-collar workers, who fall into this category, tend not to preserve. Some even prefer to resign than await their lump sums.
Treasury-imposed carrots and sticks hold retirement funds together. They could be academic on retrenchment when the member, bereft of an income or other support for sustenance, is forced by financial distress to cash in his or her retirement savings. That’s notwithstanding the huge disadvantages in terms of tax, loss of compound interest and lack of protection for future years.
Larger administrators of retirement funds have quantified their experiences over different review periods. This largest is Alexander Forbes. Its chief executive, Dawie de Villiers, painted a dour picture in his presentation of interim results for the six months to end-September (see slide below).
Much the same is found by Nashalin Portrag, head of FundsAtWork at Momentum Corporate: “Our analysis shows that around 10% of employers are still (by early February) receiving the Covid relief offered in March 2020. Some employers have had to cut the salaries of employees or put them on unpaid leave.
“During the second half of 2020, retrenchments peaked at three times our normal average. We expect that the severe pressure that Covid and the lockdown placed on employers and employees will continue into 2021, but most likely to a lesser extent.”
Similar experience at another administrator is that the increase in suspended contributions had spiked in May but the absolute level remained minimal. On the main umbrella fund, the point was reached where some 25% of the membership base (which includes employers in the hospitality and travel sectors) had suspended contributions.
“Our understanding is that this figure is consistent with many of the other large commercial umbrellas,” a spokesperson believes. The number of member exits remained about the same between 2019 and 2020, but year-on-year the proportion of exits due to retrenchments had more than doubled.
It’s not all downhill. Remarkable numbers come from SA’s collective investment schemes. They’re setting records for net inflows. According to ASISA, last year in Q3 the amount was R57bn; it followed R23bn in Q1 and R88bn in Q2.
An explanation is offered by Tiaan Kotze, chief executive of Liberty Corporate which has a large share in the SMME market. He finds that significant investment flows have taken place out of retirement funds to the traditional retail investments market:
“In this sector, from a retail investment perspective it’s been a relatively good year. Affluent individuals, who have lost their employment, haven’t so much withdrawn cash as adopted different investment strategies. For example, once they reach their tax-free limit in withdrawing from the retirement fund, they’d invest the remainder through preservation vehicles which in many instances has resulted in increased savings in unit trusts.”
He’s particularly sensitive to cash-flow strain at the corporate level. In struggling to survive, companies scale down. Then, when they recommence contributions to their occupational funds, they’re at a lesser level because of the increase in retrenchments.
Pertinent statistics of Liberty Corporate are illustrated by divisional executive Gurschulle Neethling for Liberty-sponsored umbrella funds and Liberty-administered standalone funds: u
- Withdrawal claims (including liquidation payments and individual transfers) increased by roughly 50% between the first and second half of 2020;
- The number of withdrawals relating to involuntary terminations (retrenchments) nearly doubled between 2019 and 2020;
- Essentially as a result of the contribution relief measures, scheme terminations decreased in 2020 compared to 2019.
Then, on the risk book for policies sold to corporates, before the Covid spike last July the death claims averaged 170 per month. During the spike it increased to 280 per month. “We’ve also seen the sizes of claims increase as higher earners are passing away,” Neethling adds. “We’re now at about 30% more than the first Covid wave which itself was about twice above normal.”
At the same time the insurer detects a sharpened appreciation for life cover. Institutional clients are reluctant to reduce cover levels. Generally accepted is the upwards repricing that Covid has necessitated.
Where to from here? Some propositions:
- Negatively, that wealthier individuals are in better positions than poorer to preserve their savings will extend social inequalities. With it comes a heavier burden for the state in support of people who have neither pensions nor jobs;
- Positively, that political leadership is forced to obsesses over an environment for economic growth. Increased investment and reduced savings are incompatible. The battle is not only against Covid but also against time.
The crunch has arrived. Government dare reduce incentives to save, no matter how much the fiscus is squeezed.
Allan Greenblo is Editor of Today’s Trustee
This article was first published in the March/May 2021 edition of Today’s Trustee, here.