FANews
FANews
RELATED CATEGORIES

Preparing for social security reforms

09 May 2007 Gareth Stokes

Government plans to implement massive reforms to South Africa's social security system by 2010. To this end, a number of discussion documents have been published and feedback sought from various players in the insurance industry. The industry is anxiously

Governments goal is fairly simple. They want to expand the coverage afforded South African citizens in their retirement years. As part of the solution, the social security system will increase the national savings rate, lessen dependence on other forms of social security grants and hopefully reduce the economic hardship suffered by some two thirds of South Africans who retire without adequate retirement cover.

The process is still in the planning stages, so it is difficult to determine the exact impact these changes will have on the pensions and retirement industry. This does not, however, mean that companies in the industry should simply sit on the fence and wait for government to publish a draft bill. Instead, they should be proactive and begin structuring their businesses to meet the challenges head on.

On 8 May 2007 we attended a Metropolitan Asset Managers media day in Cape Town, where Head of Houseview Equities, Ian Troost shared some views.

Finding opportunity in retirement reform proposals

Troost believes that financial service companies will be able to benefit from a number of the proposed outcomes of the new social security system.

One of the major problems that government hopes to address through policy reform is that of coverage in the retirement industry. While the Financial Services Board estimates as many as 9 million South Africans are members of a pension scheme, this number is distorted because the coverage figure is only around 60%. As many as four million formally employed individuals could be without retirement cover. As government addresses the issue, these individuals will be introduced to the retirement savings industry. That of course is an opportunity for asset managers as the savings pool becomes bigger, said Troost.

Another issue which government hopes to address is the preservation of funds in the retirement industry. Government will probably implement policies to ensure that early withdrawals from pension funds are re-invested in appropriate retirement savings mechanisms. This would stop the current situation which sees most of these funds lost to consumption spending. South Africans tend to adopt the view that this money is a windfall and that they will start saving for retirement at their next job. Troost believes that there will be an opportunity for the asset management industry that some of that money will go back into some form of saving vehicle.

The insurance industry will also have to step in to provide administrative solutions for the proposed system of individual retirement savings accounts. While Troost believes that SARS could easily collect retirement contributions, he does not believe that they should administer the system.

Timing looks optimistic

The pension fund reforms proposed by government are complex and will require a great deal of negotiation with industry, trade unions and other interested parties. Troost shares the view of a number of other industry players that governments 2010 implementation date is rather ambitious. Government will have to operate under extremely tight deadlines to implement the system in time. The usually efficient Treasury department is already missing its own deadlines for document publication, so one can be excused for being sceptical about the chances of future deadlines being consistently met.

There are many obvious challenges that face the financial services industry as the system is implemented. Companies will have to position themselves to make the best of the opportunities afforded by the various regulatory changes.

One of the positives emerging at this early stage is the likelihood that retirement savings pool will be much larger in future. While the percentage of retirement funds under management in the current financial services industry might shrink, this smaller percentage will probably represent a greater capital value.

Editor's thoughts:

The proposed social security system will have a huge impact on the financial services sector. One concern raised at the Metropolitan presentation was how the system would affect agents and brokers who make a living from servicing the lower end of the market. Do you believe the proposed reforms will adversely impact the 'smaller' brokerages? Send your comments to gareth@fanews.co.za.

Quick Polls

QUESTION

How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?

ANSWER

Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now