National Social Security Plan (NSSP) - What the latest developments signify

It’s been a few years since the National Social Security Plan was mentioned for the first time in 2007. FAnews spoke to David Gluckman from Sanlam Employee Benefits about the recent developments in this regard and his expectations for future developments.

FAnews: Are we any closer the NSSP becoming a reality?

Sanlam: Yes, and no. In President Zuma’s State of the Nation address delivered on 10 February 2011, he mentioned that “The Government Position Paper on Social Security Reform is expected to be released this year for discussion. Issues to be dealt with include the funding and nature of the National Social Security Fund, how the private sector occupational and retirement funds will fit into the entire system, and the possible regulatory structure.”

However, the 2011 Budget seems to indicate that National Treasury (NT) recognises that wide scale and fundamental reform is a very tricky process, and could take many years to implement. NT has therefore adopted a new stance in 2011 in terms of pragmatic steps to reform fund governance, industry transparency and disclosures, not to mention some fairly fundamental tax reforms from 2012. We welcome the latest pragmatic steps as being in the right direction.

FAnews: Should a national health system take precedence over a national savings fund?

Sanlam: There are many priorities that I believe should take precedence over a national savings fund, including education, health, poverty alleviation and job creation. Yes, health certainly is high on the list of priorities, but whether we should have a National Health Insurance (NHI) system is debatable.

Given the inadequacies of the current health system, such a system would be wonderful indeed, but questions remain whether NHI can be effectively implemented and whether it is affordable. Government seems intent on implementing NHI, but also recognises that a staggered approach is necessary - starting with steps to strengthen our public health system. It appears that the plan is to stagger the implementation of NHI over 14 years, and this does seem sensible as progress versus milestones can then be measured and the policy can be refined as we learn.

FAnews: What are the biggest challenges faced in implementing a NSSP?

Sanlam: South Africa has an extensive existing retirement industry covering many millions of workers which, according to official Government estimates, measured 62% of the country’s Gross Domestic Product (GDP) in 2010. The challenge of transitioning the existing system should not be underestimated – this alone could easily cost significantly more than R50 billion. So, transition costs and risks are major issues.

Another major challenge is the skewed distribution of income and wealth in South Africa. It’s all very well saying more people should save for retirement, but millions of South Africans living near the breadline cannot afford such luxuries. The question is whether we want to force citizens to save for retirement when this might result in people not being able to find jobs, not being able to afford their own homes or not being able to provide their children a better education.

I believe our biggest economic challenge is to decrease high levels of unemployment. A mandatory new retirement funding model might well pull in the opposite direction by increasing the cost of employment. Government appreciates these trade-offs and dilemmas, which have made it difficult to find a workable model for a NSSP.

FAnews: Is the industry now better prepared for the NSSP?

Sanlam: Absolutely. The industry has been rapidly reforming itself in the light of the wider environmental pressures which include better governance, a focus on driving down costs, more transparency and improved communication to members.

This much is clear by looking at the number of retirement funds: in 2005, according to official statistics, there were more than 13 000. A publication released by NT with the 2011 Budget states “although the number of active pension funds has declined significantly in recent years to about 3 200 today, more consolidation is both desirable and achievable.”

The large financial institutions are all investing to build retirement funding solutions that can provide increasing value to the retirement fund member via economies of scale and professional governance with appropriate built-in independence checks and balances. The trend towards umbrella funds, which appears to be accelerating at great pace, is a prime example.

FAnews: What can be expected next?

Sanlam: I believe the latest moves by NT represent the way things are going, and I support this direction. Government appears committed to simplifying the wider financial services industry for the benefit of consumers. In the retirement funds industry, there will clearly be an increasing emphasis on eliminating pockets of inefficiency and facilitating a more competitive environment in which natural market forces will drive down costs and improve service delivery.

The proposed 1 March 2012 tax changes, which are the most fundamental our industry has seen in decades, will also push in this direction by levelling the playing fields in terms of tax for pension funds, provident funds and retirement annuity funds.

Government also seems intent on making it harder for members to access their accrued savings before retirement. Greater preservation will certainly have a massive positive impact on citizens’ ultimate retirement savings. However, this remains a political “hot potato”, given the lack of a comprehensive social security system in South Africa and the genuine need to access retirement savings in many cases. We need to find the right middle ground here.

A mandatory NSSP could still take many years to unfold. But the 2011 Budget makes it clear that retirement fund reform is happening all around us right now, and seemingly in the right direction.

FAnews: If and when NSSP becomes a reality, what are the implications for our industry?

Sanlam: The big funds - those that are able to provide real value for money, good governance structures and excellent service delivery - are likely to survive. The vast majority of the existing 3200 retirement funds will not be able to meet these challenges and will have to consolidate into bigger and better managed funds.

Over the past few years we have witnessed a massive growth in umbrella funds, and there is no doubt in my mind that this trend, which Government supports, is set to continue apace and probably accelerate.

In my 2009 paper, I wrote “Unfortunately a sobering thought is that since the majority of costs of most industry players (investment managers and administrators) are staff-related, it would seem that the end game must be lower overall levels of employment in the retirement industry (possibly combined with lower pay in some specific quarters). This in turn will demand increased levels of automation, and hence benefit structure simplification (e.g. the elimination of manual processes and exceptions, fewer investment options, etc.).” It seems to me this end game scenario is still very much in play.

FAnews: Where do financial advisors fit into the NSSP vision?

Sanlam: There will still be a huge role for brokers to play if the NSSP is implemented. Arguments postulating that we can do without advisors are simplistic and invalid, and emanate from the premise that intermediaries do not add value to consumers - an assertion that I would challenge.

There are both good and bad intermediaries, and we need to find a model where market forces will require intermediaries to “up their game” continually. There are many good intermediaries who not only fight for the rights of their clients, but also serve as an effective means to ensure that product providers are continually aware of the need to provide quality service in an increasingly competitive environment.

The worldwide trend is towards fewer, yet more skilled and professional, advisors, and I can’t see any good reason why the South African EB industry will escape this trend. In fact, good advisors will thrive in this environment, so I believe that it represents a business opportunity for those professional advisors that gear themselves to win in this rapidly changing environment.