JOHN ANDERSON: There are better ways to further improve matters in retirement funding industry

The department of social development has released a green paper on comprehensive social security and retirement reform for 2021. We note that it is largely similar to previous proposals dating back to 2012.

In brief, the proposal is to create a centralised National Social Security Fund managed by the government. This fund intends to provide basic benefits for all qualifying citizens up to a threshold, including all employees from within the private sector. In addition, citizens can choose to top up their retirement benefits using an occupational or individual arrangement.

In practice, this means most existing members will become dependent on government through the National Social Security Fund for their retirement and insurance benefits, rather than through an occupational or individual scheme as is currently the case. We argue that such a route may result in reduced benefit security due to a number of deficiencies in the proposed system:

• It removes competition, to the detriment of members. The proposal removes agency and the power of self-determination from employers, bargaining councils and unions. Currently, members benefit from the competitive pressures applied to services providers to improve service levels, innovate and control costs. The proposal would result in an effective monopoly and monopsony within the retirement funding space with no freedom of choice.
• SA has already made significant progress in enhancing retirement funding. This has been achieved through improved competition, governance, regulation, transparency, innovation and reduced costs since 2012. None of this has been factored into the paper. The reforms proposed may be misinformed by outdated data, rendering them inappropriate.
• Participation in retirement schemes is voluntary for employers in the current system. Employers have the discretion on how to structure their compensation packages in a bespoke manner for the needs of their employees. The proposal does not account for the flexibility required by different employee groups or the ability of low-income earners to afford such contributions.
• The proposed scheme requires substantial technical expertise to administer. The envisaged scale benefits are therefore unlikely to be achieved. Government would need to establish new and unproven capabilities to administer the structure with little evidence to suggest greater efficiencies or service standards over existing private sector administrators. The substantial transition and opportunity costs of the new system relative to the existing framework need to be fully appreciated. Significant ambiguity still needs to be resolved on the practicalities of the approach.
• The proposal introduces unfunded benefits in the National Social Security Fund. The challenge with unfunded benefits is that these are future benefit promises being made by government with no accumulated asset values backing them. Hence the benefit security for existing individuals would be reduced. In contrast, the benefits are fully funded for members of defined contribution funds. These funded arrangements have specific ring-fenced accumulated assets to provide the required benefits per individual member.
• It introduces material systemic risk to South Africans’ retirement funding aspirations. Any failures, inefficiencies or irregularities within the centralised structure will affect all income earners. In contrast, the effect of any failure by a single entity within the current diversified retirement funding industry is limited to the clients of that entity.
• Higher taxes from contributing members would subsidise the contributions of low-income earners. Against the backdrop of SA’s economic trajectory, existing high tax rates, the funding dilemma of National Health Insurance and discussions on the basic income grant, we are sceptical that the small proportion of income taxpayers in SA will be able to afford such an increase in taxation.

There are less disruptive and more effective means to improve matters further in the retirement funding industry, building on significant improvements made over the last few years. The single biggest interventions to improve outcomes are: auto-enrolment; compulsory preservation of a portion of retirement savings (as proposed recently by the Treasury, with the possible introduction of a two-bucket system); and scrapping the means test for the state old age pension.

Separate interventions should be thoroughly explored for the informal sector, taking the specific dynamics of this sector into account to ensure a sustainable and pragmatic solution. To improve outcomes for retirement fund members, Alexander Forbes will continue to engage through industry bodies and directly with policymakers.

This is a matter of public interest. Substantive comments can be submitted to: GreenPaperCSS@dsd.gov.za.

• Anderson is executive for investments, products and enablement at Alexander Forbes.