The importance of a “weatherproof” investment strategy

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By John Anderson

The Department of Social Development has published a Green Paper on Comprehensive Social Security and Pension Reform for 2021. We note that it is broadly similar to previous proposals from 2012.

In short, the proposal is to create a centralized national social security fund managed by the government. This fund aims to provide basic benefits to all eligible citizens up to a certain threshold, including all private sector employees. In addition, citizens can choose to supplement their pension benefits under an occupational or individual scheme.

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

It removes competition to the detriment of members

The proposal removes the agency and the power of self-determination from employers, bargaining boards and unions. Currently, members benefit from competitive pressures on service providers to improve service levels, innovate and control costs. The proposal would result in an effective monopoly and monopsony in the retirement finance space without freedom of choice.

South Africa has already made significant progress in improving pension funding

This goal has been achieved through improved competition, governance, regulation, transparency, innovation and reduced costs since 2012. None of this has been captured in the document. . Proposed reforms can be misinformed by outdated data, making it inappropriate.

Participation in pension plans is voluntary for employers in the current system

Employers have the discretion to structure their compensation programs in a way that is tailored to the needs of their employees. The proposal does not take into account the flexibility required by different groups of employees or the ability of low-income people to pay such contributions.

The proposed scheme requires substantial technical expertise to administer

It is therefore unlikely that the advantages of scale envisaged will be achieved. The government would need to establish new and unproven capacity to administer the structure with little evidence to suggest greater efficiency or service standards compared to existing private sector administrators. The substantial transition and opportunity costs of the new system compared to the existing framework must be fully appreciated. An important ambiguity still needs to be resolved on the practical aspects of the approach.

The proposal introduces unfunded benefits into the National Social Security Fund

The challenge with unfunded benefits is that they are promises of future benefits made by the government without any accumulated asset value backing them up. As a result, the security of benefits for existing persons would be reduced. In contrast, benefits are fully funded for members of defined contribution funds. These funded agreements have specific accumulated assets restricted to provide the required benefits per individual member.

It introduces a significant systemic risk in the retirement funding aspirations of South Africans

Any failure, inefficiency or irregularity within the centralized structure will affect all employees. In contrast, the impact of any single entity failure within today’s diverse pension finance industry is limited to that entity’s clients.

Higher taxes on contributing members would subsidize contributions for low-income people

Against the backdrop of South Africa’s economic trajectory, current high tax rates, the national Medicare funding dilemma, and discussions over the Basic Income Subsidy, we are skeptical of the fact. that the small proportion of South African taxpayers will be able to afford such a tax increase.

There are less disruptive and more effective ways to make things better in the pension finance industry further, building on the significant improvements made in recent years. The most important interventions to improve outcomes are:

  • automatic registration
  • compulsory retention of part of retirement savings (as recently proposed by the National Treasury, with the possible implementation of a two-compartment system)
  • abolition of the means test for the state old age pension

Separate interventions should be explored in depth for the informal sector, taking into account the specific dynamics of this sector to ensure a sustainable and pragmatic solution. In order to improve outcomes for pension fund members, Alexander Forbes will continue to engage through industry bodies and directly with policy makers.

John Anderson is a senior investment, product and enabling executive at Alexander Forbes.

PERSONAL FINANCES


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