Finding solutions to low savings and preservation

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