SOCIAL SECURITY & PENSION REFORM
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SOCIAL SECURITY & PENSION REFORM
Baron Furstenburg
Head: Pension Reform Strategy
Liberty Corporate
8 & 9 September 2009
STRUCTURE OF PRESENTATION
(1) Treasury position – 2007
(2) Dept of Social Development – 2007
(3) The World Kept Turning ...
(4) Process
(5) Areas of agreement ?
(6) Possible impacts & issues
TREASURY – FEB 2007
Core proposals:
• Introduce National Social Security Fund (NSSF)• mandatory contributions to bridge gap between social old age grant and tax
incentivised retirement savings
• DC as opposed to DB
• Individualised accounts
• Caters for savings and basic risk benefits
• Silent on “opting-out”
• Additional mandatory contributions to private occupational arrangements
• Supplementary voluntary savings
• Complement with a wage subsidy
DEPT OF SOCIAL DEVELOPMENT – 2007
Core proposals:
• The National Social Security Fund (NSSF) should be:
• Totally DB (based on average career earnings) or 50% DB and 50% DC split
• Individualised accounts
• No “opting out” up to for instance R150 000 p.a. (but threshold debatable)
• Additional mandatory and voluntary contributions to “accredited retirement institutions”
• Essentially a fully portable, individual environment much like Chile
• Remove tax incentives and redeploy the revenue gain to other social needs
• Wage subsidy debate should be seen separately
• Most of 2008 spent on conducting research work and reconciling conflicting departmental viewpoints: trying to find a “meeting of the minds”
• Different ideological positions
PROCESS
• People resigning to access retirement funds
• People divorcing to access retirement funds
• Some employers delaying implementation of a scheme
• Why? Financial crisis, uncertainty of the national scheme, both?
• Most people are staying the course though
ON THE GROUND ...
• Despite the Press: Don’t act on rumour and speculation
• Optimistic scenario:
• Finalisation of proposals end 2009.
• Commence drafting of legislation and passing through Parliament 2010/11.
• Implementation phased-in from 2012.
• The elections have come and gone ...
Who will be responsible for policy .....?
PROCESS
• Substantially revise “means test”
• Farm out asset management of national fund to private sector
• Improve governance and regulation (accreditation process)
• Improve disclosure and restrict charges – restricting the types of permissible charges (1st best) or charge caps (2nd best)
• Retirees need a pension for life, so some form of compulsory annuitisation, but not 100%.
• Review role of “living annuities”
AREAS OF AGREEMENT
AREAS OF AGREEMENT
• Compulsory preservation on merely change employ & assistance mechanisms integrated with UIF given loss of employ.
• Increase competition in the pension funds space (ie. open up to banks, CIS)
• Limits to individual choice to prevent confusion. Possibly ... • No / little choice in the national fund
• Limited choice in accredited funds
• Greater choice in the individual retirement fund environment
• Limit switching
• “A little learning is a dangerous thing” Alexander Pope (1711)
• Debate continues on “one stop shop” (independence)
STRUCTURE OF SYSTEM
Social
Grants
System
National
Scheme
Occupational
or
Accredited
Funds
Individual
Retirement
Funds
Pillar 0 Pillar 1 Pillar 2 Pillar 3
Voluntary Mandatory Mandatory PAYG
Participation
• Allow “opting out” for savings into accredited arrangements, but not basic risk
• Allow the NSSF to serve as benchmark / default fund
• DC with a guarantee much more realistic than an obscure DB model
• Opting out more viable & Unions wont like a “loss of control”
• Possibility of auto-enrolment
• Members can get additional top-up risk cover in their accredited arrangement
• Require mandatory contribution but only up to some earnings level, beyond which participation is voluntary
POSSIBLE IMPACTS AND ISSUES
Participation
• Additional top-up savings through “individual retirement funds”
• Essentially RAs in fully portable form
• Limit on tax deductibility
• Collections done by SARS? Central clearinghouse? [eg. Sweden, Mexico]
• De-linking of the wage subsidy debate from social security:
• Wage subsidies are usually targeted and tweaked over time but ...
• Pensions are long-term
• Thinking around co-contributions likely
• Large cost of wage subsidy vs benefit
POSSIBLE IMPACTS AND ISSUES
Assets
• Larger pool of retirement assets. Growth of national fund will be exponential.
• Govt will seek increased participation of black asset managers
• SRI debate in the SA context still to be had
POSSIBLE IMPACTS AND ISSUES
Regulation & Governance
• Continued move towards umbrella and industry funds (but issues: conflicts of interests and transparency)
• Fewer funds implies better regulation & disclosure.
• Little chance of a Chilean system – ie. one totally based on individual choice. SA not ready for it, but the model is not totally out the window just yet
• Fewer trustees required – a greater role for independent trustees & greater “professionalization” of the trustee role
POSSIBLE IMPACTS AND ISSUES
Annuitisation
• Compulsory annuitisation implies innovation in the annuity market;
• “The first marriage is to please one’s parents, the second marriage to please oneself” (Chinese idiom)
• Possibility joint life annuities for married people
• Likely prescription of an inflation-linked annuity
• Circumscribed scope for living annuities (don’t provide longevity insurance; possible Govt may require a conventional annuity up to a point, then more individual freedom thereafter)
• Will a national fund provide annuities? How?
• Chile: SCOMP system
POSSIBLE IMPACTS AND ISSUES
POSSIBLE IMPACTS AND ISSUES
Advisors: food for thought
• Diversify sources of income?
• As-and-when commission implies building a book of clients even of greater importance
• Service and service partners increasingly important
• Continuing professionalism
• Regulatory change
There is no pensions blue-print ...
We will have a home-grown, tailored solution ...
... And its going to take some time...
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