No quick fixes

New min­i­mum stan­dard should en­cour­age bet­ter sav­ings mind­set

Finweek English Edition - - Focus on the life offices’ association (loa) -

THE IM­PLE­MEN­TA­TION OF new min­i­mum early ter­mi­na­tion stan­dards rep­re­sents an im­por­tant turn­ing point for the life in­dus­try and could well serve as a stim­u­lus to bet­ter sav­ings lev­els in South Africa.

Lizé Lam­brechts, CEO of San­lam Per­sonal Fi­nance and LOA chair­per­son, be­lieves the more reg­u­lated en­vi­ron­ment and height­ened con­sumer con­fi­dence in its range of prod­ucts should ac­tively en­cour­age a bet­ter long-term sav­ings mind­set.

Ac­cord­ing to the SA Sav­ings In­sti­tute, an or­gan­i­sa­tion founded with the aim of fos­ter­ing na­tional sav­ings, the na­tional sav­ings rate is sit­ting at 13% of GDP, a dis­mal level com­pared to in­ter­na­tional av­er­ages of closer to 20%. At the same time house­hold debt as a per­cent­age of dis­pos­able in­come stands at its high­est lev­els ever. Given Gov­ern­ment’s am­bi­tious cap­i­tal ex­pen­di­ture blue­print and the need to raise the in­vest­ment ra­tio to achieve the tar­get 6% growth rate, a de­clin­ing na­tional sav­ings rate raises se­ri­ous con­cerns.

Lam­brechts says that the life in­dus­try has long played an im­por­tant role in hous­ing the na­tion’s sav­ings, and in this re­spect

re­mains its largest cus­to­dian through con­trac­tual in­vest­ment and as­sur­ance prod­ucts with more than R1 tril­lion un­der man­age­ment. “Sim­ply put, the pri­mary role of the in­dus­try is to en­cour­age an im­proved long-term sav­ings en­vi­ron­ment of­fer­ing, through fairer charges and greater prod­uct trans­parency,” she says.

Lam­brechts also sug­gests that the in­dus­try as a whole would look favourably on any re­tire­ment fund re­form that in­cluded a com­pul­sory sav­ings el­e­ment, thereby broad­en­ing cov­er­age of the re­tire­ment fund sys­tem to the in­for­mal and con­tract sec­tor of the em­ployed, and even re­duc­ing de­pen­dence on State oldage pen­sions.

In the lat­ter in­stance, there are ap­prox­i­mately 2m peo­ple draw­ing State pen­sions in SA, and Fi­nance Min­is­ter Trevor Manuel has in­di­cated that it would be prefer­able to get those who were in a po­si­tion to con­trib­ute to their own re­tire­ment to do so. Pro­pos­als for a com­pul­sory so­cial se­cu­rity scheme have also been mo­ti­vated by a prac­ti­cal need to im­prove sav­ings and eq­uity.

Lam­brechts says that how­ever it’s struc­tured, both sav­ings and in­vest­ments need to be looked at from a long-term per­spec­tive: “A life as­sur­ance in­vest­ment rep­re­sents a long-term con­tract, and pol­i­cy­hold­ers are ef­fec­tively bound to pay­ing a pre­de­ter­mined amount that will re­main in­vested for a fixed pe­riod. If the con­tract is ter­mi­nated early, pol­icy val­ues are likely to be re­duced so it’s im­por­tant to buy into an af­ford­able and eas­ily man­aged prod­uct.”

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