Dramatic pension reform but no big bang, says Liberty
Planned pension reform may be dramatic relative to what went before, but this does not imply government will take a big-bang approach. Consultation, phased change and built-in flexibility are more prudent and likely than sudden demolition and a fresh start from ‘Ground Zero’.
That’s the view of Liberty Corporate, a leading pension fund administrator and developer of employee benefit packages for a wide range of companies.
The stance is supported by a strategic appraisal by Baron Furstenburg (pictured), head of pension reform strategy at Liberty Corporate. He is a former director: financial markets at National Treasury.
Policymakers are investigating the introduction of mandatory social security contributions for everyone from a certain earnings level, backed by a tier of supplementary retirement savings for those in higher pay grades.
“Currently, South Africa is missing a mandatory contributory pillar of pension provision,” says Furstenburg. A structural gap exists for purposes of old age income security between the social old age grant of R930 a month and tax-incentivised savings.
“Policymakers will obviously look to close a gap like this, which implies structural reform but in a phased-in, orderly manner Ordinary members will have plenty of time to make their voices heard during the reform process.”
He says 2010 timelines were always ambitious and will probably not be met, but the major shape of reform will be apparent by then.
“Significant legislation like this takes time to pass through Parliament,” says Furstenburg. “The process will require a re-write of the Pension Funds Act and negotiation and discussion at Nedlac.
“Panic within the pension fund industry is unwarranted and inappropriate. Full implementation will take a number of years, and vested rights will be protected.”
He predicts an important role for the private sector going forward and a new environment characterised by tighter regulation, a reduction in the number of funds, stiffer industry competition and higher levels of competence within boards of trustees.
In addition, demographic and lifestyle changes will encourage a degree of flexibility in design by policymakers.
Furstenburg explains: “It is no longer automatic for a person to move straight from full-time employment to retirement without work. Many work part-time or run small businesses.
“Government may therefore be flexible in system design, perhaps by encouraging work beyond 65 by allowing a flexible age for annuitisation.”
He believes stakeholder engagement is essential to foster achievement of policy goals. Reform objectives include:
- Improved funding efficiency
- Cost containment through economies of scale
- Greater pension industry competition
- A social security net for those who lose their jobs or retire
- Less ‘leakage’ (caused by spending pension money when changing jobs)
- Promotion of personal saving
- Greater entry into the formal economy by informal business
- Professionalisation of trustees
- Improved governance of umbrella funds
- Better regulation as fewer funds are easier to oversee
“On a strategic level, it’s good for the industry and members that structural flaws are corrected,” notes Furstenburg.
“Little is done to encourage saving at low income levels and the means test acts as a disincentive to save. We tax-incentivise the retirement saving of the rich and middle-income earners, but don’t seem to do much for the poor. Inconsistencies like this have to be addressed.
“Change is both threat and opportunity. The mindset will be key for industry players looking to survive and thrive in the new landscape.”
