A couple of years ago Treasury kicked off a debate around a national social security solution for South Africa. The industry responded to government’s initial discussion paper by hosting numerous industry ‘think tanks’, giving presentations and distributing white papers. They even invited retirement reform specialists from countries such as Chile to present on the best way forward. Journalists were soon writing about the four tiers of retirement provision as if they’d designed the model themselves. And then things went totally quiet!
Midway through 2010 one or two financial services groups started revisiting the topic. RGA Group included the reform issue at its recent technical seminar, held Friday 23rd July 2010. We didn’t think it was topical at the time – and don’t feel any sense of urgency from government two months down the line – but thought it would be good to take a look at some of the ideas they shared. André Dreyer, Vice President: Business Development at RGA Australia and New Zealand provided an overview of the Australian life industry before taking a closer look at their ‘retirement reform’ solution.
The Australian super!
Any loyal South African sport supporter is unlikely to use the words ‘Australia’ and ‘super’ in the same sentence – unless they’re studying retirement systems. The Australian life industry features a mix of traditional defined benefit and defined contribution funds. Over time, corporate schemes are falling by the wayside to be replaced by master trusts and industry funds. Dreyer says the county’s large industry and union funds are the main drivers for Australia’s retirement reform.
Superannuation (or the Super) is government’s pension fund offering. If you talk about pensions in Australia everyone knows what superannuation and Super means. The fund was put in place to get employees to save for their retirement and is very similar to pension funds as South Africa knows them. The Super began as far back as 1850, when only a privileged few were involved. In 1992 Australia introduced compulsory retirement savings by stipulating 3% of gross salary should be set aside for superannuation. The contribution was increased to 9% in 2002 and has been pegged at this level ever since.
Even Australians know the ideal gross contribution for a comfortable quality of life through retirement is 15%, so there are plans afoot to up the mandatory contribution part of the way (to 12%) by 2020. An important aspect of the current superannuation system is the 9% comes straight out of the employers’ pocket. The retirement funding is viewed entirely separate to the cost to company package. “Superannuation started out as a one-size fits all solution for insurance and investment choice,” said Dreyer. Choice was introduced to the system in 2005, but similar to South Africa the average member sticks with the default option.
Life business is huge in Australia
The total funds under management in the superannuation space are approximately US$1.2 trillion spread across 429 individual funds. This means there are dozens of opportunities for companies like RGA. “Risk insurance in Australia has been going through the roof,” observed Dreyer. The total inflow across individual death and income protection, individual disability insurance and group risk policies has been growing at 13% per annum compounded since 1996.
Total annual insurance premiums top AUS$ 2.9bn per annum, with 90% of this within the superannuation space. Individual superannuation fund members are engaged on both investment and insurance opportunities. We were intrigued by the success of the system’s voluntary ‘opt out’ for insurance covers. Dreyer said the bulk of members were content to keep the cover, for which premiums were simply included in the ‘total’ 9% paid over by employers... South African group schemes operate in a similar fashion, though savers should be advised to check their contribution split between investment and risk (insurance) to ensure adequate retirement provisioning.
A fatal flaw
The Super system has one fatal flaw. The Australian government regulates contributions to retirement funding, enforces preservation in the superannuation system, but has no interest in savers’ activities once retirement age is reached. “There’s no annuity market!” said Dreyer. “Everyone saves for retirement and then gets a lump sum paid out to them.” Super was driven by unions bidding for the largest possible salary packages for their members – and they got employers to dock up for retirement contributions – but simply forgot to ask what happens at retirement!
What can the South African insurance industry take from the Australian example? Dreyer said we can take heart that compulsory retirement savings don’t marginalise insurance. He said the success of the Australian insurance industry is part due to continued warnings about the dangers of underinsurance… “When I looked at the objectives of insurance listed for our own reform it becomes quite clear that access and risk pooling are the major concerns,” he said. South Africa needs to address the risk pooling issue given the number of insurers acting independently in the market at present.
How should South Africa proceed?
South Africa can learn a great deal from Australia’s superannuation system too. The lesson learnt ‘down under’ is that individuals are reluctant to make provision for their own retirement. People follow the path of least resistance, rather shelling out for a holiday in the Bahamas than committing to a monthly savings plan. They need a push in the right direction. In Australia this ‘push’ comes from government which has made gradual changes to retirement legislation over time. “A big bang approach will destabilise the working population and could have unforeseen consequences on the existing retirement funding industry,” said Dreyer.
Government’s eventual reform solution should not circumvent the existing private sector savings infrastructure. Instead they should provide an enabling platform by handling the ‘Tier I’ functions, using SARS as a collection agency and paying pensions through existing social grant pay points.
Editor’s thoughts: If you want a great ‘early stage’ retirement reform solution then look no further than Australia. Bolt on a ‘what to do at retirement’ facility and their superannuation fund is just the ticket – with one lingering concern… Is a retirement system that relies on employer contributions the right fix for a country with high levels of unemployment? Add your comment below, or send it to gareth@fanews.co.za
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