Despite the silence Retirement Reform is still on the agenda
In recent months the discussion around government’s proposed National Social Security Scheme (NSSS) has all but dried up. There haven’t been any new communications from National Treasury and most of the industry presentations we’ve attended simply rehash
The vehicle is the same; but the environment is very different
Instead of wading through what we already knew, Masilela changed tack. He chose to talk about the impact of the recent economic downturn on the pension funds industry. And he addressed how the meltdown would affect the implementation of government’s proposed (though clearly delayed) retirement reforms. His one-liner on the topic is one of the best we’ve heard: “If the economy is not on your side any design will fail.”
The South African government – already hard pressed to find funds for various social objectives – will fail dismally if recession sets in. Masilela notes that even a simple 40% retirement replacement ratio would prove a step too far. “The impact of a slowdown in the economy is that it compromises your ability to save and it compromises the performance of your pension funds,” said Masilela. This is particularly worrying in a country like South Africa, where the small percentage of the population covered by retirement funding structures quickly dwindles. Between 2005 and 2008 South Africa has experienced a worrying decline in pension fund participation in the formal sector, from 61.73% to 56.63%.
This trend will accelerate due to the strong correlation between savings, investment and growth. Countries with better savings ratios grow faster and prove more resilient through economic downturns. Government is already adapting some of its policies for slower growth. If you look at the latest National Budget Review you’ll notice fewer targets and an absence of timeframes. These have been replaced with themes, the most dominant being that of growth and employment. Under these conditions the NSSS implementation is continuing behind the scenes, but Masilela says government will probably tackle its implementation gradually over time.
Will things get worse?
The domestic economy has already fallen hard. Masilela pointed out that “the current crisis is deeper than anything we’ve seen in the recent past.” The Organisation for Economic Cooperation and Development (OECD) leading economic indicator is deep in the red, while the South African Reserve Bank’s measure has fallen below its 1982/1983 level. And because this recession was triggered by a banking system failure, the recovery could take longer than we think. A study of factors causing economic downturns confirmed that, in all cases, bank-originated crises hit economies harder and for longer than other crises.
Proactive stakeholders can streamline a difficult process
Masilela pointed out that retirement reform was “one of the most difficult reforms in any economy.” Chile – a country often used as a model for the South African NSSS system – is already in its fourth cycle of reform. And the model of European efficiency, Sweden, is busy with its sixth iteration. Masilela says the real challenge for South Africa is to learn from these countries and consolidate decades’ worth of international experience in a three to four year implementation locally.
This will require buy-in from all stakeholders in the long-term savings environment. He observes that the reform process is a bit like a journey. We know where we want to go and we have a good idea what the state’s requirements are. It’s now up to industry to be proactive and begin implementing the changes that are certain to be legislated down the line. “If we are not proactive we are exposing ourselves to a government that’s going to say: ‘the industry doesn’t want to play ball, therefore I am going to make decisions, regulate and let them taste the poison!” It sounds a bit harsh – but Masilela makes a good point. The private sector is better off building its own path to the inevitable outcome than following a path that government dictates to it.
“We don’t sell commodities – we sell trust,” said Masilela. Financial intermediaries sell a product that someone will consume thirty years from today. The entire industry is built around relationships – between clients, product providers and regulatory bodies. Retirement reform will be a great deal easier if implemented in the knowledge that each role player is fundamentally important.
Editor’s thoughts:
In our experience, private companies welcome change provided it doesn’t impact negatively on the bottom line. Although the industry has a good idea of the type of system government wants they also know the implementation will ‘cost’ a fortune. Do you think the financial services industry will take significant steps towards retirement reform without government cracking the whip? Add your comments below, or send them to [email protected]
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