Knocking the wind out of the reform debate

Gareth Stokes, FAnews Online Editor

Cast your mind back to pre-recession times and the leading financial services sector debate was that of retirement reform – the national social security system. The concept seems to have died of natural causes, as government concentrates on steadying the economy rather than rocking the boat with what would be a difficult implementation. So we’ve heard nothing concrete on the retirement reform topic since. Instead – inexplicably – the ruling party decided to stir up a hornets nest by introducing an even more “fantastical” idea for a national health insurance (NHI) system.

These grand designs have a great deal in common. To begin with both NSSS and the NHI address the most basic of social needs. In a welfare state it’s difficult to argue against any system designed for the betterment of the country’s poor. Unfortunately the proposed social security and healthcare insurance solutions are of such magnitude South Africa cannot – without a fundamental swing in employment trends – afford them.

The debate runs cold

Although the debate has run cold in recent months there’s no doubt government will have to improve its performance on the retirement and healthcare fronts. FAnews thought it would be interesting to compare private sector responses to each proposal… We’ll begin with the retirement industry. According to the Old Mutual Retirement Funds Survey 2010 the retirement reform process will play a key role in shaping the financial services space.

No less than 70% of respondents in their 2010 survey cited retirement reform – and the NSSS – as a trend most likely to shape the industry going forward. But the report also underlined the lack of impetus in the reform process. On ground level – when talking to company retirement funds and representatives whose companies were in umbrella funds – only 52% and 34% respectively were aware of the intended reforms. Hugh Hacking, Umbrella Fund Product Manager at Old Mutual Corporate believes the survey result confirms the mixed feelings around the reform proposals. Union funds demonstrate this phenomenon particularly well, with 63% of respondents welcoming reform as a positive event despite 50% of them expecting their funds to shrink or disappear if the reforms go ahead!

There’s precious little consensus over the need for compulsory preservation. Although 71% of respondents to the Old Mutual survey were strongly in favour of the practice, they still felt an opt-out should be included in the NSSS. “The major concerns raised by respondents about the proposed NSSS were related to the ability of government to implement and effectively manage the scheme, the possibility of lower returns for members and the potential for corruption,” notes Old Mutual.

Strength in numbers

The private sector’s best (if not only) defence against a government controlled system lies in consolidation. An industry with a few large well-managed pension funds would achieve many of governments “super fund” promises – most notably cost efficiencies. It would then require only a small amount of intervention to ensure the poor are included in the private sector funding structure, with government (tax) contributions of course! This “private sector controls the funds” model is after all what companies involved in the industry want.

Umbrella funds are a result of this desire to streamline the industry. There has already been considerable growth in umbrella funds in recent years as employers seek to shed trusteeship responsibility in an increasingly legislated industry, while also attempting to reduce costs. The Old Mutual survey concluded many employers now prefer umbrella funds as retirement savings vehicles. Their definition: An umbrella fund is essentially a retirement savings vehicle catering for more than one employer group. “Umbrella funds already meet strict governance requirements – are more cost effective – and offer protection benefits for employees such as death and disability cover,” said Hacking. If every employer in South Africa pumped each of its employees into an umbrella fund it’s hard to see what more government could accomplish with NSSS. Clearly the struggle becomes one for full employment, with the state funding old age grants for those who fall through the cracks.

The industry is certainly ready for these “super” pension funds. Old Mutual said: 89% of respondents had a good understanding of what an umbrella fund is, while 97% of those who were part of an umbrella fund felt their expectations were being met. Hacking continued: “The appeal of umbrella funds for employers lies primarily in the fact that they offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer. These funds also embed the expertise of providers, and can offer better value, lower cost and better benefits than comparable stand-alone funds.”

A closing word on medical schemes

South Africa already has a couple of medical schemes with critical mass. If you use something like Discovery Health Medical Scheme as the benchmark for the level of care government wants to roll out to all its citizens you begin to appreciate the size of the task at hand. Who knows – the best solution for government’s grandiose NHI could be for it to say to the medical schemes industry – we’ve got 43 million lives that need cover – how much?

Editor’s thoughts: I’m not sure – given ongoing reports of corruption in the media – that government should handle either of these reform initiatives. In my view the best solution lies in the private sector – if they can set aside their “greed motif” and make a system work for the poor. They can milk the rich for profit! Do you think the private sector would be able to implement a “not for profit” retirement reform or healthcare solution in South Africa? Add your comment below, or send it to gareth@fanews.co.za