Planning for the future needs robust
The first priority of government and the private sector should be to get the economy growing and create jobs
The Institute of Retirement Funds Africa (IRFA) put forward four questions to industry role players for its Analysis — Social Security and South Africa’s Retirement Funding Sector to provide in-depth consideration on the likely impact of government’s proposed social security reforms on South Africa’s retirement funding sector and present readers with a range of opinion. The following are some of the answers to the que stions.
Q1. What role do each of the various stakeholders in the retirement fund industry have in achieving a safety net that covers all South Africans, e.g. what is the role of government, the private sector and trustees of retirement funds?
Natalie Phillips, head of SA institutional at Investec Asset Management says:
“The challenges facing the South African retirement fund industry are everyone’s problems and all stakehold- ers need to be more proactive in taking ownership for this. With South Africa’s poor savings record it is a big challenge and should be a priority for us all. South Africa is unfortunately faced with huge economic challenges and high levels of unemployment for our population of about 56-million people.”
She says a lot of work also remains to be done to build an appropriate outcomes-based attitude in order to ensure that shepherds of their clients’ capital can meet the specific needs of members, so that they can retire with some degree of dignity.
“Of critical importance is training and education across all stakeholders, so that pension fund members understand the risk profile strategies in which they have invested and the implications for their pension outcomes.
“There should be an emphasis on education, which should be directed at ensuring members are fully aware of the implications of the options they choose will result in people making better informed decisions and receiving better outcomes, particularly in the defined contribution environment that we have in South Africa’” says Phillips.
“It is also imperative for trustee boards to ensure that they have a proper governance structure in place. A professional trustee board, with a number of independent representatives who have proven industry skills can add value where specialist skills are required for certain decision-making.
“This is especially important in a defined contribution environment, given that funds have up to half of the trustee board comprised of member representatives who don’t necessarily have investment, actuarial or administration skills, and who are therefore not necessarily as well-equipped to make effective decisions relating to their retirement funds.
The appointment of independent, specialist investment advisors and administrators who follow global best practice, can also allow for more informed and balanced outcomes,” says Phillips.
Richard Carter, head of product development at Allan Gray, says when you think of a “safety net for all South Africans”, the obvious problem is current income security for a large part of the population. How can you plan for retirement if you don’t have a job today?
He says the first priority of government and the private sector should be to get the economy growing and create jobs.
“I would like to see government supporting small businesses and getting this to be the easiest place in the world to do business on the World Bank rankings. If the economy was growing, and jobs were being created, a safety net for all would become more attainable.
“Beyond that, government should set clear rules and promote a stable environment where other role players can do their jobs well. They should work to remove stumbling blocks to saving. The private sector needs to bring solutions to South Africans that are worth investing in — delivering products that meet the needs of savers,” says Carter.
“Trustees play a crucial role in safeguarding the interests of their members. Saving for your future can be a daunting, though often-overlooked task, and trustees need to make sure that their funds and all their service providers are doing the best job for their members.”
Michael Prinsloo, executive: institutional research and product development at Alexander Forbes, says the future working population is characterised with needing flexibility in their benefit offerings, with potential periods of time where participation might not be possible, and portability. Systems must account for the changing world of work.
He says each stakeholder has a role to play and benefits to derive in making the system work.
“The National Development Plan (NDP) shows that the government fully appreciates the role that a good social protection system can play in meeting the twin goals of eliminating poverty and reducing inequality. Within the context of employee benefits, the specific role of the government is to provide the framework, including regulating, providing incentives, making certain actions compulsory and guiding the financial education framework. Over the last few years, the national treasury has been focusing specifically on retirement reform and improving outcomes within this sphere.
“The key benefit for the government if it manages to get this sphere right is to reduce dependency on government and its fiscus when individuals reach pensionable age.
“Various aspects of the retirement reform process — including tightening the rules around preservation, mandating enrolment to capture unenrolled employees and creating options for vulnerable workers — should increase the pools of patient capital available for the economy’s development.
“The government is also focusing on the implementation of a National Health Insurance system, which is aimed at ensuring that everyone in South Africa will have access to appropriate, efficient and quality health services.”
Prinsloo says the role of employers has changed substantially as part of the shift from the defined benefit to the defined contribution framework. In some ways, this has blurred their stake in getting employee benefits right, as they no longer directly bear the burden of getting it wrong. Yet they still remain the central point for providing access for many individuals to the tools needed to protect their standard of living through employee benefits.
“We identified four components of employee benefits in Benefits Barometer 2013: healthcare benefits, financial education, risk benefits and retirement funding. It is still clearly in the interests of the employer to provide some of these. Health related benefits and employee wellness systems, including financial education, that seek to maintain individual productivity, have a clear-cut link to the employer’s operations. As long as the cost of the benefits and systems that maintain productivity are less than the costs of lost time and employee turnover, this makes clear economic sense.
“When individuals value employee benefits, this makes a strong case for the employer providing them, as it assists with employee attraction and retention. But where individuals see employee benefits as infringements on their take-home pay, this motivation is weakened. Employees often appreciate risk benefits, and not offering these benefits can have reputational implications for the employer. Getting retirement funding right across the economy is good for employers — a vibrant economy with robust spending power is good for firms.
“We need employers at the table, and getting all of this right will benefit them in the long term.”
According to Prinsloo, the central objective of social protection is to make households sufficiently secure.
“Many South African households seek this security through other nonfinancial, informal arrangements. They also often have different priorities and see more security in a house or a welleducated child than they do in a retirement pot. As research from the World Bank and Organisation for Economic Co-operation and Development showed, this is neither irrational nor unfounded. But it does complicate matters for employee benefits.
“What further complicates this is that households seldom represent themselves at the table. Instead, they are represented by various agents in different phases of the development of employee benefits.
“This use of agents may be eminently sensible. Many of the decisions raised by employee benefits are both cognitively complex and clouded by multiple behavioural biases. However, where it can complicate matters is when the interests of households and their agents are not entirely aligned,” says Prinsloo.
As a stakeholder in the private sector, a more inclusive and sustained growth path should be eminently valuable to the financial services industry, but as social protection, especially employee benefits, evolves to close gaps and