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Crisis tears the heart out of pension savings

12 November 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Every action has a consequence. The consequence of shifting liability from the employer to the retirement fund member – by moving from a defined benefit to a defined contribution environment – has been brutally exposed by the global financial crisis. “The

Three years later the industry is still playing catch up. The US has only “recovered” $1.5 trillion of the $3.5 trillion lost through 2008. And despite 6% real returns in 2009 the average retirement saver is worse off than at the 2008 market peak. What can we do to recover? On an individual level the choices are rather stark: you can increase retirement fund contributions, chase higher returns, delay retirement – or die younger! Failure to intervene will result in an ever-declining replacement ratio...

Stuck in a vicious cycle

Masilela’s presentation, Impact of the Crisis from an OECD Perspective, provided a stark “beginning to end” flow diagram of a crisis which started with a financial imbalance. The imbalance developed over a number of years as US financial institutions issued loans against “shaky” assets. When the tower of debt grew too large this imbalance flared out into a full blown asset collapse. We know this collapse as the sub-prime crisis – the point at which banks realised they’d be unable to cover their loans even if they took back the assets these loans were issued against. The security they thought they held was non-existent.

The asset collapse drained liquidity from the system and stymied growth. It makes perfect sense… Neither consumers nor businesses could raise credit – with the result businesses reined in their activities and consumers stopped purchasing motor vehicles, houses and other “big ticket” items. As growth bled away companies had to take more aggressive steps to secure their bottom line. In developed economies such as the US the easiest way to trim overheads is to cut staff. Thus an asset collapse morphed into a growth crisis, which triggered an unemployment crisis.

Early this year Time Magazine reported the risk had shifted from banks to countries. So instead of Lehman Brothers teetering on the brink of bankruptcy the global economy was faced with genuine concerns of entire countries (most notably the PIIGS – Portugal, Italy, Ireland, Greece and Spain) going to the wall. This fear forced countries in Europe to make massive cutbacks in public sector expenditure, pushing the unemployment crisis into the realms of a full blown social crisis. Today, noted Masilela, we’re facing a structural crisis. If countries don’t get their fiscal and monetary policy decisions right we could be in for more pain.

Healing the world

The immediate challenge for governments is to restore economic growth. Latest macroeconomic data suggests most economies have achieved this, but there are some serious structural problems which could hamper the recovery. South Africa has at least five problems requiring immediate attention:

Problem 1: Debt remains at historically high levels despite interest rates being at record lows...

Problem 2: Fiscal constraints – in terms of the amount of money government can throw at the problem – remain of concern.

Problem 3: The inflexibility of the local labour market limits South Africa’s response. Masilela pointed to recent strike action and wage demands as totally out of synch with the economic cycle. While workers in the US and Europe were taking pay cuts to save jobs, local workers were demanding (and getting) real increases of 8%, 10% or more! “South Africa has among the worst flexibility indicators in the labour market worldwide,” said Masilela. “It’s very concerning when you see what’s happening in negotiations between employer and employee… [Under existing economic conditions] wage demands should be around inflation or less!”

Problem 4: The massive decline in fixed capital expenditure in South Africa is cause for grave concern. Experts predicted this decline after the FIFA 2010 World Cup, but statistics show the decline actually started in the last quarter of 2009.

Problem 5: South Africa’s poor savings base – with a savings rate of some 5% versus 30%-plus in countries such as China and Turkey – makes it extremely difficult to power ahead post-recession.

Time for South Africa to look inward

How can South Africa solve the problem? Masilela believes we should be asking a range of questions… Are we serious in creating and preserving sustainable jobs? Are we moving fast enough to establish the requisite institutions to deal with retirement? Have we exerted sufficient effort to preserve trust and certainty in the industry? And is it time for a social compact?

“There is a genuine chance we’ll see a reversal of intent (or a significant slowdown in the intent) to move on our way to social security / retirement reforms,” said Masilela. We know we have to do something about the national savings situation, but cannot agree on the roadmap to get there. The answer could come from the “social compact” alluded to in finance minister Pravin Gordhan’s latest mini-Budget speech. Said Masilela: “We are going to change the way in which we do things – when we make decisions everyone has to be held accountable – and when we agree on something everyone must live up to their part of the bargain.” If business, government and labour agree to this “social compact” South Africa will benefit from predictable and consistent policy design and implementation going forward.

Editor’s thoughts: There are only three ways to improve the capital available to you upon retirement. You can increase your monthly contributions – change your investment option to a higher inflation-plus target – or work longer. Every stakeholder in the retirement fund industry should be communicating these facts to members – face to face – to ensure those currently saving for retirement get it right. Are you worried about the apparent disappearance of social security from government’s agenda? Add your comment below, or send it to


Added by Bidnis Man, 15 Nov 2010
If those plans were defined benefit there would be a lot more business filing bancruptcy. Defined benefit is the lesser of the two evils - see General Motors and Chrysler requiring US taxpayer bailout.
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