Making the National Security System work

Sanlam hosted the Johannesburg leg of their 2007 Employee Benefits Symposium at the Sandton Convention Centre on 28 June 2007. The event is an opportunity to share some of the insights gained from Sanlam's 2007 Employee Benefits survey, which is conducted

Presenters at the symposium included Anet Ahern, CEO of Sanlam Multi-Manager International, Dr Johan van Zyl, Sanlam Group CEO, Deon Booysen, Head of Client Solutions at Sanlam Employee Benefits, Elias Masilela, Executive Head of Stakeholder Strategy and Johan van der Merwe, CEO of Sanlam Investments.

The keynote address was delivered by Dr Jos Pinera, a world renowned Chilean Social Security Reform architect. Dr Pinera was invited to share some of his experiences in reforming the Chilean retirement environment a process which he was instrumental in starting in 1980. To read more about Dr Pinera's address, be sure to sign up for our free newsletter [click here to subscribe]

In today's article we will comment on Elias Masilela's presentation titled: Recasting an Eye on the Reform Process.

Government has thrown down the gauntlet

FAnews Online was impressed with the positive tone of all the presenters at the symposium. The consensus seems that the social reform process is now irreversible. Industry is best served by working with government to ensure an ultimate solution that creates a legacy every South African citizen can be proud of.

As Masilela said, "Very little is known about what is going to happen in the future. However, what we do know is that government has thrown down the gauntlet. It is saying to the private sector that government is not the only one who can drive this reform process. It has to be a shared initiative."

Sanlam is in the unique position of being able to use the annual Sanlam Employee Benefit survey to assist in establishing what the industry's hopes and fears are where the social security reform process is concerned. This information assists in formulating opinion and strategy which can be conveyed to government going forward.

South Africa can be proactive rather than reactive

Masilela stressed that the situation in South Africa at present made it possible for the government, and the retirement industry at large, to be proactive rather than reactive. Over the last 12 years governments professional fiscal stance has created a solid foundation to assist society in walking the path to pension fund reforms.

This should allow government to take steps to prevent the acute social imbalances in the country from spiralling further out of control. They are in a position to tackle the existing public grants which provide a means tested Social Old Age Pension (SAOP) and results in many thousands of individuals slipping through the pensions net. And they will be able to mend a fragmented public services sector to provide better and more far reaching pension relief to all South Africans.

The two major considerations when implementing the system will be affordability and risk. When sitting down to fine tune the working model that will eventually be adopted, the impact of the system will have to be considered on a number of fronts.

Masilela identified these as fiscal policy, the shifting and sharing of risk between government and individuals, the intended impact on poverty, the knock-on effect on the labour market in terms of flexibility and productivity and the impact on employment and efficiency in industry as a whole.

Getting the thresholds right will be a key success factor

Perhaps the greatest danger to the pension fund industry in implementing social security reforms will be the level of government's proposed salary threshold. Masilela included a number of slides to demonstrate the impact of this threshold. If government sets the threshold for mandatory contribution to the National Socials Security Scheme at a level of R60, 000 per annum, the retirement industry could lose as many as 60% of its current members.

However, this 60% does not include the additional loss which will occur when individuals earning slightly more than the threshold opt out of their existing schemes. If a percentage of people earning R70, 000 or R80, 000 per year also drop existing savings options the impact on the industry could be substantially higher.

The result of setting the threshold at the wrong level could lead to most of the smaller pension funds offered by industry and unions being rendered extinct.

The new industry is starting to take shape

Many questions remain as to the exact structure the new retirement industry will take. What will the thresholds be? How will tax changes be structured? How many members will migrate from private funds to government solutions? How will the low income segment be served? And how will the unemployed be brought into the net?

There are also some definite solutions the industry can focus on. These include the fact that government has thrown down the gauntlet. Reform will happen, and it is up to the industry to engage government and ensure the implemented solution has the lowest possible impact on the industry.

"Increased savings, increased insurance coverage in terms of risk and a complete change in the structure of the market," concluded Masilela.

Editor's thoughts:
Most discussion documents on the Social Security Reform process suggest that mandatory contributions be made to government's social security fund up to an annual salary of R60, 000. It will probably make sense for individuals earning slightly more than the threshold to throw all their retirement savings into the same pot. How much more than the threshold will an individual have to earn before a separate private pension fund becomes financially viable? Send your comments to gareth@fanews.co.za.