De­sign­ing pen­sion prod­ucts bet­ter suited for our so­ci­ety

Most re­tire­ment sav­ings prod­ucts are aimed at peo­ple with a con­sis­tent in­come and who work in the for­mal econ­omy, thereby ex­clud­ing the vast ma­jor­ity of South Africans. By ad­dress­ing this, the bur­den on the state can be de­creased and the well­be­ing of the

Finweek English Edition - - COLLECTIVE INSIGHT - By Nthabiseng Moleko

eco­nomic es­ti­ma­tions show that the size of the in­for­mal econ­omy is ap­prox­i­mately 7% to 12% of our en­tire econ­omy. Those within the in­for­mal econ­omy com­monly face ex­clu­sion from fi­nan­cial mar­ket ac­cess. This is not just with re­gard to ac­cess to ba­sic fi­nan­cial ser­vices, but in re­la­tion to prod­ucts that will ben­e­fit house­hold fi­nan­cial sta­bil­ity in the long run.

Sta­tis­tics South Africa at­tributes al­most a fifth of to­tal em­ploy­ment, or 2.4m jobs, as com­ing from the in­for­mal sec­tor. Char­ac­ter­is­tics of work­ers in this sec­tor in­clude in­con­sis­ten­cies in in­come streams, lim­ited fi­nan­cial lit­er­acy lev­els, and lim­ited, if any, ac­cess to pen­sion or prov­i­dent funds.

The cur­rent pen­sion bur­den and cash trans­fers the state makes is 3% of GDP, or R128bn in 2016. Much of this is to­wards old-age grants, the high­est con­tribut­ing fac­tor at R53bn, or nearly half of the state’s com­mit­ment. It has grown sig­nif­i­cantly in the last nine years, up from R21bn in 2008. Sim­ply put, more house­holds en­ter­ing into re­tire­ment are re­liant on the state for sup­port. This is un­sus­tain­able in the en­vi­ron­ment of low growth, high un­em­ploy­ment and fis­cal con­sol­i­da­tion.

But look­ing at the sup­ply side of the mar­ket, one has to ques­tion whether there are prod­ucts that a do­mes­tic worker, se­cu­rity guard or sea­sonal farm worker can make use of for long-term sav­ings to­wards re­tire­ment. Do fi­nan­cial ser­vices com­pa­nies place enough em­pha­sis on de­vel­op­ing flex­i­ble and rel­e­vant sav­ings prod­ucts for re­tire­ment? There is cer­tainly noth­ing sim­i­lar to the fu­neral poli­cies de­vel­oped and strongly mar­keted to mid­dle- and low-in­come house­holds, with the fo­cus on tomb­stones, coffins and air­time or gro­ceries when a loved one dies.

The ex­ist­ing prod­ucts range from prov­i­dent or pen­sion funds that are suit­able for the for­mally em­ployed sec­tions of the econ­omy, to re­tire­ment an­nu­ities with their tax ben­e­fits. This leaves low-in­come house­holds or in­for­mally em­ployed masses of peo­ple out in the cold. Th­ese are the same in­di­vid­u­als who will likely seek state sup­port in the medium to long term, heav­ily bur­den­ing the fis­cus and fu­ture gen­er­a­tions. The fi­nan­cial ser­vices sec­tor needs to con­sider of­fer­ing mi­cro-pen­sions to en­able ac­cess to fi­nan­cial prod­ucts for those who are not in­cluded in the for­mal econ­omy, as well as low-in­come house­holds in the for­mal sec­tor. Th­ese are typ­i­cally pen­sions that are struc­tured for in­di­vid­u­als with ir­reg­u­lar in­come, small amounts, and aimed at savers with lim­ited fi­nan­cial lit­er­acy fac­ing even lower chances of ac­cess­ing con­ven­tional fi­nan­cial prod­ucts to save for re­tire­ment.

The role of the state in this re­gard is to cre­ate not only a con­ducive en­vi­ron­ment, but pol­icy en­cour­ag­ing the de­vel­op­ment of mi­cro-pen­sions. Af­ter all, it is the state that will foot the bill of non-savers in the end. It is likely to be funded by the non-con­trib­u­tory pil­lar of pen­sion schemes, fur­ther putting pres­sure on the fis­cus in the next 30 to 50 years.

At the cur­rent R128bn cost of cash trans­fers, pro­jec­tions of how this could in­crease with wors­en­ing growth pro­jec­tions, height­ened pres­sure on un­em­ploy­ment and in­creased in­equal­ity does not bode well for bal­anc­ing fis­cal pres­sures in the long run.

We also have in­ad­e­quate sav­ings to fi­nance (or bol­ster) in­vest­ments re­quired to boost over­all eco­nomic growth. As a coun­try we re­main and are re­liant on highly volatile

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