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Finding solutions to low savings and preservation

25 October 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

How much should you save toward retirement? Should we introduce mandatory preservation for retrenchments and resignations? And can South Africa successfully implement a National Social Security System (NSSS)? Each of these questions cropped up at a recent Old Mutual event, which tackled the diverse topics Consumer Protection Legislation and Investment Risk Management for Retirement Funds. Following Standard Bank’s decision to lay off some 2 000 workers last week we decided to focus on retirement issues – more specifically those raised by Peter Dempsey – deputy chief executive of the Association of Savings and Investments SA (ASISA).

ASISA exists – began Dempsey – to find ways to foster a culture of savings in the domestic economy. The organisation does this in close collaboration with government, labour, regulators and members of the long-term savings industry. Unfortunately South Africa falls way short of its international peers in the savings department. Our national savings rate – made up of government, corporate and household savings – currently stands at around 15% of GDP. If we consider households in isolation this total drops to just 1.5%, well short of the 4% to 5% average for developed countries and the impressive 20% in Turkey and 38% in China. “Savings in the economy is not growing at the rate it should,” said Dempsey, “which means capital creation is not at the level we’d like it to be,” said Dempsey.

A country that isn’t growing its capital struggles to fund development from internal resources. As a result of our poor savings performance we have become too dependent on international funds… It’s imperative for us to address our poor saving rate to lower the reliance on international investors.

Don’t be fooled by the AUM in the local retirement industry

Retirement is a numbers game. The local retirement industry is dominated by retirement funds (some 13 000 of them) which service approximately eight million retirement fund members and manage an impressive R2 trillion. These funds have to be invested according to the guidelines set out in Regulation 28, meaning they’re typically in cash, government and corporate bonds or equities. The regulations currently require the bulk of these investments to be held domestically.

It’s important to realise the R2 trillion held and managed by pension funds and the various administrative structures isn’t readily available. These funds are typically invested in long-dated financial instruments with suitable risk-return profiles – and being retirement assets the risk profile is predominantly conservative. It would be extremely difficult (and costly) to make radical changes to how these funds are invested. Any major re-shuffle would have a tremendous impact on the underlying fund members.

Key challenges for the retirement industry

NSSS has one flaw in common with many of government’s ambitious social interventions. The system it hopes to improve or expand on has plenty of problems which need to be ironed out. As things stand the retirement industry is afflicted by the double-edged sword of low savings and preservation. Not enough people contribute to retirement funds, and those who make contributions don’t save enough. And retirement fund members tend to draw out their benefits each time they change jobs, whether due to resignation or retrenchment. Dempsey reminded the audience the issue of poor preservation had been identified as early as 1980, when proposals to introduce mandatory preservation were shot down by trade unions.

Another major issue facing the retirement savings industry is longevity. Medical science makes it possible for individuals to live longer and healthier lives. Ironically the “medicine” which makes longer life possible is also one of the major reasons a lengthy retirement is unaffordable. Medical costs tend to increase at rates well in excess of inflation, and end up eating through huge chunks of monthly retirement income.

South African will also have to address numerous issues which are best described as legacies of an overpopulated pension funds space. There are simply too many pension funds to allow for cost efficiencies at member level. As regulation tightens up the compliance burden on individual funds – for example in the area of appointing professional trustees – becomes unbearable.

Big picture problems to tackle too

South Africa Inc has problems too. If we want first world solutions like NSSS and National Health Insurance (NHI) then we have to tackle issues such as poverty, unemployment, transformation and rural development first! “Capital and skills are migratory and they go where they’re treated well,” noted Dempsey. Dempsey believes an NSSS is exactly what South Africa needs, but warns against pulling any levers (making any major changes) without first studying the likely consequences. With six million taxpayers funding approximately 16 million welfare recipients the challenge is to make the changes necessary to reverse this disparity.

Editor’s thoughts: Thousands of South Africans have been retrenched since recession hit in Q3 2008. I’ve chatted to three or four people who’ve been made redundant and know for sure most of them have elected to take their pension benefits in cash. How do we balance the survival need during periods of unemployment with the need to preserve retirement capital? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by jongster, 01 Nov 2010
can u assist me in finding solutions for low savings in south africa
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Added by Wynand, 26 Oct 2010
Gareth I am 25 years in the industry. We have a serious problem that we are all aware off. We can only save once we have our domestic expenses under control. We need to created jobs, we have 640 000 matriculants wrting exams. Where are they going to get work. Annually we produce many Matriculants, but they have never learned to start their own businesses. They expect to get a job somewhere in a market, that is not creating jobs. I have been retrenched tow years ago, struggle for more than a year to get FSB license and had to draw on my retirement savings to survive. I know it is not the ideal, but if you applied for more than 250 jobs, but all they want to give you is consultant job. No management jobs, because you do not fit the profile. The profiles does not create jobs. They all downsize to get more profits to get more investors. And so the cycle goes on. When are we going to move beyond race as a criteria to run and start businesses. I can not get loans to finance my business because you do not fit the profile. Somehow we all have to make a living. The trick is how to do it. How do we encourage the average South African to start a business and employ staff. I advise businesses on various things, and the most common comment from SMME's is why should I bother employing staff? We still have tons of work to do. I believe senior managers and directors, CEO's should get paid more in line with their staff. If you take one million from a CEO getting R12 mil a year, you can fund at least 33 employees at R30 000 per Annam. We can half the employment problem in a number of years by closing the gap that is currently between the lowest and highest paid individuals. Have a great week.
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Added by Stanley, 26 Oct 2010
Pensioners do take cash when they resign orretire because they adress their previous wishes when they were stiil employed earning lower salaries that were not sufficient to address those needs and wishes. I say let us first adress the imbalnces efficiently then in future we will be able to come with drastic changes.
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Added by sceptical, 25 Oct 2010
Increasingly people will opt to emigrate to countries that offer them a secure retirement and services for their taxes paid, rather than struggle to build up their pension locally.
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Added by Stewart, 25 Oct 2010
Good Day Gareth. Entertaining article...but Dempsey mentions nothing that I have not heard before. In my opinion it comes down to education once again. The assurance industry has taught me over the past 14 odd years, that to earn a decent living one needs to sell products and if you elect, as I have done to focus on education and paying off debt before one saves...well you frankly starve. I have tried to market my financial workshops that deal with this very issue for four years now and find the interest from the employers rather poor or they are under the falls pretence that the group pension / provident schemes are addressing this issue. Regards Stewart Managing Member of Financial Workshop Gauteng www.fws.co.za
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