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SOCIAL SECURITY & PENSION REFORM

SOCIAL SECURITY & PENSION REFORM. Baron Furstenburg Head: Pension Reform Strategy Liberty Corporate 8 & 9 September 2009. STRUCTURE OF PRESENTATION. Treasury position – 2007 Dept of Social Development – 2007 The World Kept Turning ... Process Areas of agreement ?

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SOCIAL SECURITY & PENSION REFORM

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  1. SOCIAL SECURITY & PENSION REFORM Baron Furstenburg Head: Pension Reform Strategy Liberty Corporate 8 & 9 September 2009

  2. STRUCTURE OF PRESENTATION Treasury position – 2007 Dept of Social Development – 2007 The World Kept Turning ... Process Areas of agreement ? Possible impacts & issues

  3. TREASURY – FEB 2007 • Core proposals: • Introduce National Social Security Fund (NSSF) • mandatory contributions to bridge gap between social old age grant and tax incentivised retirement savings • DC as opposed to DB • Individualised accounts • Caters for savings and basic risk benefits • Silent on “opting-out” • Additional mandatory contributions to private occupational arrangements • Supplementary voluntary savings • Complement with a wage subsidy

  4. DEPT OF SOCIAL DEVELOPMENT – 2007 • Core proposals: • The National Social Security Fund (NSSF) should be: • Totally DB (based on average career earnings) or 50% DB and 50% DC split • Individualised accounts • No “opting out” up to for instance R150 000 p.a. (but threshold debatable) • Additional mandatory and voluntary contributions to “accredited retirement institutions” • Essentially a fully portable, individual environment much like Chile • Remove tax incentives and redeploy the revenue gain to other social needs • Wage subsidy debate should be seen separately

  5. PROCESS • Most of 2008 spent on conducting research work and reconciling conflicting departmental viewpoints: trying to find a “meeting of the minds” • Different ideological positions

  6. THE WORLD STILL TURNS .....

  7. ON THE GROUND ... • People resigning to access retirement funds • People divorcing to access retirement funds • Some employers delaying implementation of a scheme • Why? Financial crisis, uncertainty of the national scheme, both? • Most people are staying the course though

  8. Growth in US household debt vs income Source: Kevin Lings, Stanlib.

  9. Source: Bloomberg, 20 Jan 2009; JP Morgan

  10. SOUTH AFRICAN BANKS

  11. PROCESS • Despite the Press: Don’t act on rumour and speculation • Optimisticscenario: • Finalisation of proposals end 2009. • Commence drafting of legislation and passing through Parliament 2010/11. • Implementation phased-in from 2012. • The elections have come and gone ... • Who will be responsible for policy .....?

  12. PROCESS • Are there any areas of agreement ...?

  13. AREAS OF AGREEMENT • Substantially revise “means test” • Farm out asset management of national fund to private sector • Improve governance and regulation (accreditation process) • Improve disclosure and restrict charges – restricting the types of permissible charges (1st best) or charge caps (2nd best) • Retirees need a pension for life, so some form of compulsory annuitisation, but not 100%. • Review role of “living annuities”

  14. AREAS OF AGREEMENT • Compulsory preservation on merely change employ & assistance mechanisms integrated with UIF given loss of employ. • Increase competition in the pension funds space (ie. open up to banks, CIS) • Limits to individual choice to prevent confusion. Possibly ... • No / little choice in the national fund • Limited choice in accredited funds • Greater choice in the individual retirement fund environment • Limit switching • “A little learning is a dangerous thing” Alexander Pope (1711) • Debate continues on “one stop shop” (independence)

  15. THE CRYSTAL BALL ... • What is likely going forward and ... • What are the hot issues?

  16. STRUCTURE OF SYSTEM

  17. Participants believed that the NSSS should be .... Source: calculated from Sanlam Survey 2009

  18. POSSIBLE IMPACTS AND ISSUES • Participation • Allow “opting out” for savings into accredited arrangements, but not basic risk • Allow the NSSF to serve as benchmark / default fund • DC with a guarantee much more realistic than an obscure DB model • Opting out more viable & Unions wont like a “loss of control” • Possibility of auto-enrolment • Members can get additional top-up risk cover in their accredited arrangement • Require mandatory contribution but only up to some earnings level, beyond which participation is voluntary

  19. POSSIBLE IMPACTS AND ISSUES • Participation • Additional top-up savings through “individual retirement funds” • Essentially RAs in fully portable form • Limit on tax deductibility • Collections done by SARS? Central clearinghouse? [eg. Sweden, Mexico] • De-linking of the wage subsidy debate from social security: • Wage subsidies are usually targeted and tweaked over time but ... • Pensions are long-term • Thinking around co-contributions likely • Large cost of wage subsidy vs benefit

  20. POSSIBLE IMPACTS AND ISSUES • Assets • Larger pool of retirement assets. Growth of national fund will be exponential. • Govt will seek increased participation of black asset managers • SRI debate in the SA context still to be had

  21. AUSTRALIAN SUPERANNUATION Australian Prudential Regulatory Authority (2008)

  22. POSSIBLE IMPACTS AND ISSUES • Regulation & Governance • Continued move towards umbrella and industry funds (but issues: conflicts of interests and transparency) • Fewer funds implies better regulation & disclosure. • Little chance of a Chilean system – ie. one totally based on individual choice. SA not ready for it, but the model is not totally out the window just yet • Fewer trustees required – a greater role for independent trustees & greater “professionalization” of the trustee role

  23. POSSIBLE IMPACTS AND ISSUES • Annuitisation • Compulsory annuitisation implies innovation in the annuity market; • “The first marriage is to please one’s parents, the second marriage to please oneself” (Chinese idiom) • Possibility joint life annuities for married people • Likely prescription of an inflation-linked annuity • Circumscribed scope for living annuities (don’t provide longevity insurance; possible Govt may require a conventional annuity up to a point, then more individual freedom thereafter) • Will a national fund provide annuities? How? • Chile: SCOMP system

  24. POSSIBLE IMPACTS AND ISSUES • Advisors: food for thought • Diversify sources of income? • As-and-when commission implies building a book of clients even of greater importance • Service and service partners increasingly important • Continuing professionalism • Regulatory change

  25. There is no pensions blue-print ... We will have a home-grown, tailored solution ...... And its going to take some time...

  26. END OF PRESENTATION

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