South Africa’s pension system assessed

The pension system should prioritise the needs of the elderly and working poor

An assessment of official documents on social security published since the 2002 report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa shows a remarkable level of consistency in the recommendations put forward.

These papers include the 2012 National Development Plan of the National Planning Commission, and a range of policy papers, financial reviews or budget documents issued by the department of social development and national treasury.

Agreements across these publications have the following broad conclusions:

• the constitutional mandate to provide access to social protection and the obligation on government to meet this mandate;

• the requirement to consider social protection holistically;

• the role of the private sector, within the framework of government’s responsibility, to contribute to the delivery of social protection;

• the regulatory weakness of the supervisory authority responsible for overseeing private provision of retirement saving;

• the inefficiency or wastefulness of the structure or vehicles through which private-sector retirement saving is achieved;

• the broad, deep inadequacy of outcomes for participants in privatesector retirement provision; and

• the potential for objectives to be achieved through the progressive implementation of appropriate policies.

Where differences exist they are largely in the details of the proposed design of the systems intended to deliver on social protection goals, rather than in the objectives themselves. The World Bank has developed a method for describing the elements of a system of provision for old age, which may be summarised as follows:

• Pillar 0: universal or means-tested social pensions, funded from general government revenue;

• Pillar 1: pensions provided on a centralised basis, funded by the contributions of participants or their employers and usually with an element of redistribution from highincome to low-income participants;

• Pillar 2: pensions provided on a decentralised basis through privately- managed arrangements, funded by mandatory contributions of participants or their employers, and more commonly without redistribution;

• Pillar 3: supplementary provision through private or occupational arrangements, funded by contributions of participants or their employers that are not mandated by policy;

• Pillar 4: all other means of provisions or typically through non-financial saving vehicles such as property, or through family support structures.

South Africa is part of a small but growing group of countries that provides (nearly) universal old-age pensions funded from government revenue. It thus provides an effective Pillar 0 benefit. It does not, however, provide benefits under Pillar 1 or Pillar 2. Though it has a substantial market for occupational and individual pension provision, it does not mandate membership of these arrangements. As a result, the country depends to a disproportionate degree on the effectiveness of Pillar 3 and Pillar 4.

Perhaps the most important insight of the review of the set of carefully drafted policy papers is the urgency with which problems ought to be addressed. The papers reviewed confirm a number of problems with the existing retirement fund industry, specifically, that:

• the overall outcomes of Pillar 3 are unsatisfactory;

• fees and charges are high; • members seldom preserve accumulated saving until retirement, contributing heavily to the overall inadequacy of outcomes; and that

• few members select an appropriate product at retirement to give themselves the best chance of a comfortable retirement.

While other research confirms the broad effectiveness of Pillar 0, little is understood about the effectiveness of Pillar 4 mechanisms.

In summary, old age grants for the poor may be criticised on the grounds of financial sustainability, but a sound body of research confirms the overall effectiveness of this vehicle for meeting the needs of the poorest. The system of occupational and individual products has significant flaws that need to be addressed, but these flaws impact mostly those workers falling into middle- and higher-income groups.

The most important problems with the systems at present are that it wholly excludes those who work in the informal economy and substantially excludes low-income workers in large parts of the formal economy.

This problem is unlikely to be addressed by completing the system as defined by the World Bank descriptions. Mandatory membership and contributions would most certainly not address the needs of those working in the informal economy, because these people would continue to be excluded.

Hope that such an approach would positively impact lower-income employees in the formal economy should be regarded with care, because compulsory contributions to a pension system of any kind could well drive workers and companies currently in the formal sector to its informal counterpart.

The wage subsidy may mitigate this possibility, but introducing a mandatory contributory system into a fragile labour market is very risky.

A second serious concern with the existing system is that, though it stimulates the financial sector and the private capital markets that benefit from this, concentration of assets within existing strong institutions is concerning. Not only are fees and charges to customers very high, but investments continue to benefit established participants in the financial services industry.

A final concern raised is that policy is frequently ineffectual or downright damaging if it is not supported by an honest assessment of need.

Policymakers too often make the mistake of assuming that they know what is best for those affected by their policies. Since these policymakers are usually members of the wealthy elite, this creates the risk of a system that misses the primary needs of those whom it seeks to benefit.

Finally, through interviews of a representative sample or professionally managed focus groups, efforts should be made to understand:

• the specific experience of individuals and households from the perspective of income and expenditure management;

• insights on all other survival strategies;

• perceptions on the needs for longterm saving;

• exploration of incentives that might make an inclination to save for the long term more likely.

This work would not need to be carried out from scratch: substantial insights have already been gained from existing research.