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Pensions & savings

Pensions & savings Reform efforts in South Africa Institute for Financial Management & Research Centre for Insurance & Risk Management Suggested pathway Regulator Environmental uncertainty Challenges for South Africa Progress Environmental uncertainties age distribution

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Pensions & savings

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  1. Pensions & savings Reform efforts in South Africa Institute for Financial Management & Research Centre for Insurance & Risk Management

  2. Suggested pathway Regulator • Environmental uncertainty • Challenges for South Africa • Progress

  3. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives

  4. The world is changing OECD E Europe & former Sov Union Latin America & Caribbean Asia Middle East & N Africa Sub-Saharan Africa South Africa Source: World Bank (1994) Averting the Old Age Crisis Oxford University Press Population over sixty years old % Key determinants • Mortality • Fertility • Immigration 35 30 25 20 15 10 Source: World Bank (1994) Averting the Old Age Crisis Oxford University Press & ASSA AIDS Model Standard assumptions 5 0 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

  5. The world is changing

  6. The world is changing Source: UN World Economic & Social Survey 2007

  7. The world is changing OECD E Europe & former Sov Union Latin America & Caribbean Asia Middle East & N Africa Sub-Saharan Africa South Africa Source: World Bank (1994) Averting the Old Age Crisis Oxford University Press Population over sixty years old % Key determinants • Mortality • Fertility • Immigration 35 30 25 20 15 10 Source: World Bank (1994) Averting the Old Age Crisis Oxford University Press & ASSA AIDS Model Standard assumptions 5 0 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

  8. South Africa is changing

  9. South Africa is changing

  10. South Africa is changing

  11. South Africa is changing

  12. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives

  13. Environmental uncertainties • Personal income per province, 2008 (adults)

  14. Environmental uncertainties • Personal income per population group, 2008 (adults)

  15. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives • Barometer: GINI • Wildcard: immigration

  16. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives • market openness • social protection focus • some vague in-between • key policy issue • Barometer: labour policy • Wildcard: political responsibility

  17. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives • market openness • social protection focus • some vague in-between • key policy issue • what does ‘for the people’ mean? • market regulatory policy • that key again

  18. Policy alternatives for long-term saving Redistribution Saving Mandatory Voluntary I II III I. Social security: disproportionately benefits the poor II. Occupational funds or individual accounts III. Additional provision

  19. Policy alternatives for long-term saving Redistribution Saving Mandatory Voluntary I II III I. Social security: disproportionately benefits the poor II. Occupational funds or individual accounts III. Additional provision

  20. Policy alternatives for long-term saving Community Redistribution Saving Non-contributory Contributory Mandatory Voluntary 0 I II III IV • Context • Flexibility • Diversification

  21. The S African system in 5-pillar language Community Redistribution Saving Non-contributory Contributory Mandatory Voluntary 0 I II III IV • Context • Flexibility • Diversification

  22. System framework DC DB PAYG Funded Public management Private management

  23. PAYG systems: Germany Features Very generous social security DC Complex private sector saving Strong regulatory intervention Small private saving market DB PAYG Funded Public management Issues Ageing impacts very serious Political impasse Stunted development Private management Distracted by EU imperatives  New Zealand

  24. Individual account systems: Chile Features 1st ‘mandatory country’ DC Dependence on a/c’s Underpin provided Gradual liberalization DB PAYG Funded Public management Issues Poor saving outcome Poor solidarity Inappropriate activity Private management Growing cost of underpin  Australia  Nigeria

  25. South Africa DC DB PAYG Funded Public management Private management

  26. South Africa policymaker problems Some of the key issues Participation incentives Preservation imperative System inefficiency The poor & working poor

  27. Putting it another way

  28. Putting it another way

  29. South Africa policymaker problems Some of the key issues Participation incentives Preservation imperative System inefficiency The poor & working poor

  30. Policymaker dilemmas Trade-offs Improving standards without damaging supply Providing paternalistic support for the demand side When has the market failed? Is government participation justifiable? Is the journey more important than the destination? Which objectives are the most important and how should they be evaluated? Participant security Sustainability Solidarity Cost control Poverty alleviation Investment returns Coverage Replacement ratios Public confidence Capital market development Economic stability Health coverage Labour incentives Supply side effectiveness

  31. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives • market openness • social protection focus • some vague in-between • key policy issue • what does ‘for the people’ mean? • market regulatory policy • that key again

  32. SA private sector system – a summary Providers of product Retirement funds Intermediaries & advisers Regulator

  33. SA private sector system – a summary Regulator

  34. Environmental uncertainties • age distribution • education and skills • wealth • equality • Demographic change • Economic alternatives • Policy alternatives • market openness • social protection focus • some vague in-between • key policy issue • what does ‘for the people’ mean? • market regulatory policy • that key again

  35. Low-end issues Genesis (2008:11)

  36. Low-end issues • Six hurdles to rational saving by LSM 1-5 • Short-sightedness • Affordability constraints • Community motivation • Automatic and means-tested income • Unattractive vehicles • Opportunity cost

  37. What are the likely developments? Reducing certainty • Continuation of SOAG • removal of the means test • policy statement on increases (?) • Mandatory contributions • to a central fund • Mandatory contributions • to a central fund • & private alternatives Parameters • Participation incentives • wage or explicit subsidy Reduced tax concessions Annuitization issues Nature of accredited private sector vehicles ? Risk benefit provision Transition rules

  38. Pensions & savings Reform efforts in South Africa Institute for Financial Management & Research Centre for Insurance & Risk Management

  39. Regulatory rationale • Reactive approach • Proactive approach • Market mechanism • Dependent on • independent monitoring • credible deterrents Trustee • Characterised by • few, large providers • strict structural standards • stringent regulations • pre-empting problems • strongly resourced regulator Provider Customer • Competitive differentiation

  40. Product provisions • Need for minimum standard • Current framework focused largely on financial soundness • Customer protection paramount in mandatory environment • Providers will be very powerful • Cost-efficiency is crucial • Consumer comprehension facilitated by simplicity • Portability enhanced by standardisation

  41. Policy lessons from Australia  Chile Source: APRA Annual Superannuation Bulletin 2005

  42. Policy lessons from Australia  Chile Source: APRA Annual Superannuation Bulletin 2005

  43. Policy lessons from Australia  Chile Source: APRA Annual Superannuation Bulletin 2005

  44. Policy lessons from Australia  Chile Source: APRA Insight, special edition 2007

  45. Policy lessons from Australia  Chile Source: APRA Insight, special edition 2007

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