Social Security Fund:Defined contribution or defined benefit
With the implementation of the proposed Social Security Fund (SSF), it is inevitable that there will be an integration of funds. We asked some industry players which they predicted to be the winner: defined contribution or defined benefit funds.
Certain private sector funds and pension administrators may find themselves out of business following implementation of the Social Security Fund, says Michael Blain, CEO of Centriq. “There are 13 500 private sector pension funds of which 80% contain fewer than 100 members. If the majority of these members are low to middle income earners, they will be incorporated into the national fund leaving many individuals without access to employer sponsored retirement funds. Care will have to be taken in this regard in order not to leave individuals without a means of accessing private sector retirement funding vehicles and products.
Important principle
“Key to the proposal is the important principle that the fund will operate on a defined contribution basis,” explains Blain. “This implies that all benefits will be fully funded and will not operate on a pay-as-you-go basis. It will be essential that this principle is not abandoned in the final legislation. It will also be important that this principle applies to both the retirement benefits and risk benefit components so as not to burden future generations with unfunded liabilities.”
Simpler and cheaper
“I can’t see the government going the defined benefit route,” agrees Kenny Meiring, Marketing Strategist at Metropolitan EB. “The complications of benefit calculation – for example, length of membership and basis for final salary - make it too difficult and costly to implement.
“I suspect that we will have a ‘pay as you go’ element, being the current state old age grant of R870, which will be funded as part of the annual budget. This will be supplemented by a mandatory defined contribution as part of the Social Security Tax and a further mandatory defined contribution for the balance above the threshold.”
Reducing cross subsidisation
Danie van Zyl, Actuary at Sanlam Employee Benefits says that the defined contribution route is preferable, in that it reduces cross subsidisation at the savings level and gives a direct sense of ownership for individuals, which itself, is an incentive for saving.
Avoiding higher taxes
“There will still be a space for occupational retirement funds for the portion of retirement investments that can be invested tax efficiently,” says Wayne van Rensburg of Glenrand MIB.
“There might be a merger of benefits for those members that fall below a certain tax threshold. I believe the SSF will be a defined contribution fund with the contributory level determining the final benefit. It is unlikely that the state can afford to take on a defined benefit liability and I believe that taxpayers will also object, as it would mean that any shortfall would have to be met by higher taxes. The object of the national scheme is to widen the retirement funding of ordinary South Africans and adding a tax burden will not achieve this.”
The consensus, then, seems to be that the government will take the route of defined contributions, which, as with private sector defined contributions funds will leave consumers uncertain about the real value of the their retirement funds until it may be too late. This will, at the same time, open opportunities for the private sector to offer additional products to the market.
