The holy grail of pension fund reform

Retirement reform is the buzzword in the South African financial services environment at present. But the burning question is whether government is projecting a unified front. FAnews Online editor, Gareth Stokes, investigates.

Since this year's budget speech, the financial service industry has gradually come to terms with National Treasury's proposal for far-reaching reform to the retirement environment. Treasury has subsequently invited industry feedback on their reform discussion documents. The retirement industry has in turn extensively discussed the issue and a number of seminars, conventions and conferences have been held to encourage debate on the topic. Foreign experts have been invited to share their retirement reform experiences.

But it appears the industry has been blind sided by this Treasury-centric approach. The reason is government is working on the pension fund reform issue on more than one front. The latest contribution to the debate is from the Department of Social Development (DSD). In a 196 page broadside (titled Reform of Retirement Provisions) the DSD published a collection of four technical papers with the following disclaimer: "The views expressed in this paper are those of the authors and do not necessarily reflect the views or policies of the Department of Social Development."

That the DSD should issue documents under its banner if they do not ascribe to the principals espoused in them is a bit of a mystery. At the very least, these technical papers enjoy DSD support. Minister of the department, Dr Zola Skweyiya, in his introduction to the discussion paper states that, "The research documents presented here must now begin to inform our final resolutions of the retirement policy position that we must adopt."

Government approach not clear

This second front in the retirement reform discussion process raises a number of interesting questions. Top of this list is how industry can be expected to debate and influence outcomes in the reform process when government has not yet finalised its approach. Exactly who is driving the process ? Is it the National Treasury and the Minister of Finance, or is it the Department of Social Development? How can the financial services industry make representations on a single issue to different government departments that are not on the same page?

If Treasury and the DSD are not 100% in agreement on the requirements of the retirement solution, then it would serve the industry best if these differences were ironed out before further industry participation is requested. We should also be asking what possibility there is of other government departments joining the fray at a later stage with all manner of additional proposals.

No end in sight

The present situation is akin to a long distance marathon with no finish line. It appears the starter's gun went off as far back as 2002, when the Taylor Committee report was published. Subsequent to this report, a number of technical reports and discussion papers were released, resulting in a rough model for South Africa's new pension fund system. The financial services industry focussed their attention on National Treasury submissions, including Retirement Fund Reform: A Discussion Paper (2004) and Social Security and Retirement Reform: Second Discussion Paper (2007).

These papers were split by Trevor Manuel's 2007 budget speech which contained strong social services undertones. Manuel advised that "Significant capacity building and institutional reform are needed on both the tax side and to administer benefits. This work has begun, with a view to implementation by 2010". The five pillar pension fund system, proposed by the World Bank, includes a non contributory pillar for poverty alleviation (pillar 0); a first pillar earnings-related contributory system; a mandatory second pillar with individual accounts; a voluntary third pillar and an informal community support pillar.

In agreement on some issues...

Most participants to the pension fund reform debate support a model based on these pillars. And it is encouraging that government and industry have reached in principle agreements on a number of outstanding issues. They agree that the reform process is necessary and will benefit all South Africans in the long term. They agree that the Social Old Age Grant system cannot be done away with and must remain as a key weapon in the fight against poverty. They agree that a mandatory contribution is essential to ensure better retirement provisions. They also seem to be on the same page when it comes to wage subsidy assistance for low earners, tax incentives for additional voluntary contributions and collection mechanisms.

...but not on others

Amidst this agreement, the DSD technical papers (which may or may not indicate the DSD thinking on the matter) show significant departure from National Treasury thinking. Recommendations in the DSD document make certainties of proposals which Treasury implies are still open for debate.

The first is that another government bureaucracy appears inevitable. "The paper therefore takes it as given that there is to be a mandatory individual account system, with contributions defined as a percentage of salary, channelled into a publicly managed fund, the Government Sponsored Retirement Fund (GSRF), but with the right of participants to opt out of this fund into an accredited private-sector fund of their choice." This provision has not previously been put forward in such non-negotiable terms. The debate from Treasury was whether savings would be managed privately, publicly or in partnership. The DSD appears to have decided that a public-private partnership is a given.

The DSD is also very specific about the type of benefit system that will be employed. Their technical papers suggest a 50/50 split between a defined benefit system and a system of individual accounts run on a defined contribution basis. Each of these systems will receive 6% of gross income earned above a R12, 000 per annum threshold. This view is also a paradigm shift from the Treasury proposal which suggests the defined benefit versus defined contribution solution was still open to debate.

Lost sight of the prize?

It appears that the drawn out discussion process is in danger of hampering retirement reform implementation. The current reform discussions are becoming little more than a bizarre relay race. When the race started, Treasury and various players in the financial services industry were simply bouncing documents and responses from one party to the next. And now the DSD has joined the fray, introducing a new set of rules. The real concern is that all participants seem to have lost sight of the prize.

Industry analysts who complain that the financial services industry is not fully on board when it comes to pension fund reform cannot ignore the shortcomings of the current reform approach. Industry cannot be expected to negotiate with government on multiple fronts. Government has to create a single proposal for pension fund reforms to address the volume of feedback that industry has already supplied. Then, in our view, this unified government model should be presented to industry and the public for full and final feedback. Only then should the proposal be handed over to actuaries to thrash out a financially workable solution.

The 2010 deadline is already slipping and the finishing line will continue to merge with the horizon until clear progress is made.