2016/07/21 1 BUILDING A BREAKTHROUGH BENEFITS MODEL Hot Topics Summit 2016 Deon Viljoen Group Chief Executive (Interim)
2016/07/21
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BUILDING A BREAKTHROUGH BENEFITS MODEL
Hot Topics Summit 2016
Deon Viljoen
Group Chief Executive (Interim)
2016/07/21
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2013
2014
2015
2016
alexanderforbes.co.za/research/benefits-barometer
Follow us on Twitter
2016/07/21
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Anne Cabot- Alletzhauser
Head: Research
Institute
Dr David Knox
Senior Partner at
Mercer
2016/07/21
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Ayabonga Cawe
Founder & chairman of
Rethink Africa NPC
Megan Butler
Senior Actuary
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Let’s look at the facts
If choice = reduce pensionable pay & contributions
Less than 5% of members > 75% replacement ratio
Reform process has been halted
Less than 10% preserve when changing jobs
People don’t see retirement as their priority – mortality reality
Trust is low: in financial services; in government
IN SPITE OF YEARS OF PROMOTING A SINGULAR FOCUS
ON RETIREMENT SAVINGS WE ARE NOT WINNING THE
HEARTS AND MINDS OF MEMBERS
Private-public partnership
Private sector
retirement schemes
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Fragmentation is the root of the failure to deliver
What it takes to get it right
What people need
How the focus has evolved
From employer to trustees From employer to umbrella fund
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The research journey
2013 2014 2015
Assessment of the effectiveness of the EB system
How to get employers and employees to re-engage
Need to address the whole financial journey for individuals
What’s require to shift the focus to financial well-being
These critical insights led us to the following questions?
Is it us, or them?
We know that employee benefits provide effective conduit for
personal savings & family protections, but do the employers &
their members?
Problem seems to rest with a singular focus on retirement
savings as the central theme for long term savings
We believe it’s the whole financial journey that matters
Securing financial wellbeing is the goal – but how?
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The Singapore Central Provident Fund
Government fund 1965 –
Policy decision not be a
welfare state
Asset-based development
strategy – key to self-
determination & financial
capability
Minimum for annuitisation
Employee decides on
priorities
Does it only have to be about retirement?
Employer
contribution
20%
Employee
contribution
20%
Central
Provident
Fund 40%
Ordinary 30%
Medisave 4%
Special 6%
Housing
Education
Approved
investments
Retirement
savings & top ups
Hospital costs
Old age
Contingencies
The Singapore Central Provident Fund
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The Singapore Central Provident Fund
Highest savings rate in the world at 24%
Consumer delinquency rate of 5.97%
Ranks highest in financial literacy
Compulsory savings
Employer & employee contribute 20% - total 40%
Family considerations
Lifecycle for savings
Could a similar model work for SA?
Probably not as a
government
initiative
‘Plug & play’ option
Would employees
want it?
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What is it that South Africans require most?
SA has a different demographic pyramid from the US, Europe & northern Asia
SA’s problem isn’t retirement – it’s about social mobility for its’ youth
WHAT DO OUR MEMBERS WANT?
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Needed to understand:
1. How people view their benefits
2. Needs & how benefits respond
3. What changes are needed to the
benefits framework
Poor engagement with long-term savings
WHY?
What questions did we pose?
1
2
3
What do people really want, and what can the financial services
industry and other role players do to assist individuals and
households along their financial journeys?
Is it really meaningful for the average South African to focus so
doggedly on retirement savings, when there has been so little
focus on an individual’s overall financial journey? Could there be
other ways to rethink this?
What might people be prepared to save for over the long term, and
what would incentivise them to do so? What other key aspects
beyond monthly income could employee benefits fund?
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Methods used to answer our research questions
1. Hypothesis
development
2. Online survey
3. Interviews
4. Focus groups
But there were some limitations & biases
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Research question 1
About 80%
ranked long-
term
savings as
being very
important
Research question 1
Financial
services
ranked 1st ,
followed by the
individuals
themselves
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Focus group insights
Role of
employer
provided
benefits
Research question & 2 3
Cover family funeral costs
Get a lump sum at
retirement
Get access to emergency
funds
Buy or build a house
Pay for education
Pay for medical expenses
Protect family from loss
of income
Get a monthly income in
retirement
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Research question & 2 3
No restriction, but no tax or
matching benefit
Matching contributions from
my employer or government
A tax break
Focus group & interview insights
The role of informal
institutions as key
access points for
financial services
The importance of
income in the
absence of ‘assets’
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Focus group & interview insights
incentives
reform biases
perceptions
mistrust
innovation
Insights from ‘vox pox’ exercise
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Where to from here?
Health
Education
Housing
Emergency
funding
Retirement
savings
Income
protections
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Where to from here?
Coordinating
interventions
Moving beyond
replacement ratios
Holistic models &
approaches
Role for employers
PENSION SAVINGS AROUND THE WORLD
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MERCER 45 21 July 2016
Agenda
• The World Bank multi pillar approach
• Melbourne Mercer Global Pension Index
• Different systems around the world
• Some principles for an Ideal Retirement System
• Some concluding remarks
MERCER
What is the ideal retirement system?
WORLD BANK | MULTI-PILLAR APPROACH
Basic public
pension
Public mandatory contributory system linked to earnings
Private, mandatory
, fully-funded system
Voluntary fully-
funded system
Support for the elderly outside
pensions
0 1 2 3 4
Poverty alleviation
Often pay- As-you-go
Often DC based
Many forms
Formal & informal
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MERCER
What is the ideal retirement system?
WORLD BANK | MULTI-PILLAR APPROACH
Basic public
pension
Public mandatory contributory system linked to earnings
Private, mandatory
, fully-funded system
Voluntary fully-
funded system
Support for the elderly outside
pensions
0 1 2 3 4
Yes No No Yes In part
South
A
fric
a
MERCER
Melbourne Mercer Global Pension Indexs.
ADEQUACY
SUSTAINABILITY
INTEGRITY
“What do you get?”
“Can it keep delivering?”
“Can it be trusted?”
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MERCER
Calculating the Melbourne Mercer Global Pension
MERCER
0.0 20.0 40.0 60.0 80.0 100.0
IND
KOR
JPN
CHN
IDN
ITA
MEX
AUT
BRA
ZAF
POL
USA
FRA
DEU
IRL
SGP
GBR
CHL
CAN
FIN
CHE
SWE
AUS
NLD
DNK
Index value
B Grade
C Grade
D Grade
B+
A Grade
C+ C+
Overall 2015 results
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MERCER
The different systems around the world
1. Predominantly Social Security (pillars 0 & 1)
51 21 July 2016
Country Net
replacement
rate (average)
Pension assets
(% of GDP)
Austria 91.6 6.0
Italy 79.7 7.6
South Africa 11.8 82.5
MERCER
The different systems around the world
1. Predominantly Social Security (pillars 0 & 1)
2. Compulsory and funded savings (pillar 2)
Who is covered?
52 21 July 2016
Country Coverage
(% of working age)
Pension
assets
(% of GDP)
Denmark 83.7% 168.9%
Netherlands 88.0% 160.6%
Australia 68.5% 108.2%
Singapore 64.0% 71.2%
South Africa 23.4% 82.5%
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MERCER
The different systems around the world
1. Predominantly Social Security (pillars 0 & 1)
2. Compulsory and funded savings (pillar 2)
3. Auto enrolment (with opt out) arrangement
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Country Contributions Opt Out Schemes
United Kingdom 2% rising to 8%
employer &
employee
Available NEST plus
New Zealand 3% from employer Available Automatic
MERCER
The different systems around the world
1. Predominantly Social Security (pillars 0 & 1)
2. Compulsory and funded savings (pillar 2)
3. Auto enrolment (with opt out) arrangements
4. Voluntary arrangements (often with employer) (pillar 3)
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Country Coverage
(% of working age)
Pension
assets
(% of GDP)
Canada 49.8% 98.9%
USA 47.1% 117.6%
Japan 32.9% 48.2%
Ireland 29.3% 64.4%
South Africa 23.4% 82.5%
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MERCER
The different systems around the world
1. Predominantly Social Security (pillars 0 & 1)
2. Compulsory and funded savings (pillar 2)
3. Auto enrolment (with opt out) arrangements
4. Voluntary arrangements (often with employer) (pillar 3)
5. Non-pension savings (pillar 4)
Family reliance
Informal sector
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MERCER
What are the objectives of a savings system?
• Retirement
• Emergency needs
• Housing
• Health
• Education
through formal or informal arrangements?
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MERCER
Two examples of a compulsory savings system
Item Malaysia (EPF) Singapore (CPF)
Contribution rates Employer: 11%
Employee: 12%-13%
Employer: 20%
Employee: 17%
Use of savings Retirement: 70% of
conts
Other: 30% of conts
Ordinary: 21%-23%
Medisave: 8%-9%
Special: 6%-7%
Permitted uses of Other Housing
Education
Medical
Age 50
Ordinary – housing
Medisave- medical
Special - retirement
Benefit format Lump sum
Monthly drawdowns
Combined accounts
CPF Life
Investment choice Limited
20% > basic level
Ord acc. with some
limits
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MERCER
Principles for an Ideal Retirement System
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MERCER
Principles for an Ideal Retirement System
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MERCER
Principles for an Ideal Retirement System
60
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MERCER
Principles for an Ideal Retirement System
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MERCER
Principles for an Ideal Retirement System
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MERCER
Some concluding remarks
• Private saving for retirement is a necessity, but …
• Many individuals want to save for other purposes, therefore …
• The community needs to accept the long term direction, and …
• Employers have an important role to play, together with …
• The gradual introduction in to any new arrangement, that …
• Covers as many of the working age population as possible.
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PANEL
Time for a break
SEE YOU AFTER
THE BREAK
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Michael Prinsloo
Executive Head:
Institutional Research
& Product
Development
Lettah Mpanza
Product Development
Leader
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Matthew Nell
Founding member of
Shisaka & director of
the South African
Housing Club
HOW RESILIENT ARE SOUTH AFRICANS TO FINANCIAL CRISIS?
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What do South African’s require most?
Need to expand the ambit
of savings
Social mobility for the
youth
Private sector
How do we help individuals
manage the tight rope?
Role of the employer as
part of the building blocks
Ability to cope with unforeseen expenditure
Source: Old Mutual Savings and Investment Monitor, July 2015
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Ability to cope with unforeseen expenditure
Source: Old Mutual Savings and Investment Monitor, July 2015
How South Africans save
Source: FinScope South Africa Consumer Survey
People do save: 36% use both formal & informal savings products
52% use informal savings products
So what’s compelling about the informal sector?
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How South Africans save
The challenge:
no aggregate
view of savings
Searching for the answer
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Emergency savings help weather the storm
How do we make
emergencies less of a
surprise?
How do we introduce a
framework that
incorporates long-term &
short-term savings goals?
What role can the employer
play in creating an enabling
environment?
Better outcomes
Options
Rewarding
prudent
savings
behaviour
Help employees to help themselves - workplace stokvel
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What would it take?
Pre commitment by the employees & employers
Payroll set up
Ongoing sight of aggregated short-term & long-term saving picture
Ease of access to funds in case of an emergency
Access to financial planning & guidance
Replenishment of saving pot as- and-when required
If we could save for one thing that would transform South Africans
Education
The foundation
for social
mobility
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Your biggest bang for buck
Start investing in the early years of education as this would provide the
greatest payoff
Educational inequalities start as early as primary school
2/3rds of children cited lack of fund as the main reason for not attending
school
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What would it take?
Pre commitment
Determine level of education and funding requirements in how many
years and over what period
Set contribution rate (Employer matching program?)
At end of saving period, contributions reallocated to retirement
savings
The key is to maintain a constant savings rate that allocates to
different priorities over time.
HOUSING AS A STEPPING STONE TO FINANCIAL WELL-BEING
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Why investment in housing is important
A savings priority
Biggest default savings
interventions
Substantial retirement
asset
Contributes to financial
wellness
How can retirement funds be leveraged
to improve housing investment by
employees as an important part of the
retirement package?
How employees earning R7 000 to R25 000 live
46%
38%
6%
5%
4%
own formal houses
rent formal accommodation
have shacks in an informal settlement
have formal or informal dwellings in backyards
have traditional dwellings often on tribal land
Source: Census 2011
Overall there is sever overcrowding
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Housing Market segments
Subsidy Market Gap Market Affordable
Market
Normal Market
Income <R3.5k
Price <R180k
Income R3.5k – R12.5k
Price R180k – R370k
Income R12.5k – R17.5k
Price R370k – R500k
Income >R17.5k
Price >R500k
Formal housing delivery
Incremental housing delivery
Subsidy housing
delivery
How is housing financed?
Housing delivery
Housing subsidies
Private housing
finance
Subsidy housing delivery
Government housing &
basic services subsidy
(40m² give away house)
Personal savings
Unsecured micro loans
Incremental
housing delivery
No government subsidy
Personal savings
Unsecured loans
Pension backed loans
Formal
housing delivery
FLISP sliding scale subsidy
for incomes of up to R15k
pm linked to mortgage loan
Personal savings
Mortgage backed loans
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Key constraints
The success rate of securing
a home loan for households
earning between R3.5k – R16k
is about 1 in every 32
households
Poor creditworthiness – Over-
indebtedness & tainted records
Inadequate access to housing
stock
Difficulty in accessing mortgage
loans
Lack of knowledge & experience in
housing market
How is housing accessed?
Ability depends on affordability, creditworthiness & accessibility to housing
opportunities
Housing investment is an integral part of socio-economic development &
survival strategy - don’t invest in 1 place
Most practical way of becoming acquiring a reasonable quality house is to:
Access land & build in stages
Upgrade & extend house already acquired (often from government)
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Employer supported investment in housing
Success of a
business is linked
to the performance,
commitment &
well-being of its
employees
Finding a balance
Accommodation is a personal decision
Extent of employer support varies
Aim should be to support effective housing investment
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Different types of housing support
Information, advice &
transactional support
Access to housing loans
through scheme
arrangements
Building & providing
accommodation
Housing allowance
Housing grant or subsidy
linked to housing
transaction
Structuring employee housing support
Housing support should: Personal circumstances
Increase leverage in
housing market
Proactive & accountable
housing decisions
Financially sustainable
Support should include: Advice
Creditworthiness &
affordability
Housing transaction
Ongoing Home ownership
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Pension-backed housing loans are key
Access to home loans
where mortgage loans
are not available
Supports owner building
of new houses
Supports upgrading &
extensions of existing
houses
Legislative framework
Enabled through the Pension Funds Act
Key elements:
Apply for loan through administrator
Normal credit criteria apply
Portion of retirement savings is pledged as security
Deduct loan instalments directly from payroll
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Risks & mitigating factors
Fund credit values could
be reduced
Death & disability
Resignation or
retrenchment
Leakage – loans not
used for housing
Divorce
Home ownership is dependent on & contributes to financial well-being
Employees earning less than R25 000 need housing support
Empowered home owners make more effective housing investments
Pension-backed housing loans are a critical enabler
Concluding thoughts
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PANEL
So what did the modelling reveal?
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The priorities
Retirement funding
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Dealing with emergencies
% of pay
Retirement 12.5%
Emergencies 10.0%
Target
number of
salaries = 6
months
Housing
% of pay
Retirement 12.5%
Emergencies 10.0%
House 45.0%
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Education
% of pay
Retirement 12.5%
Emergencies 10.0%
House 45.0%
Education 20.0%
Medical health during retirement
% of pay
Retirement 12.5%
Emergencies 10.0%
House 45.0%
Education 20.0%
Healthcare 3.1%
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Risk benefits
Benefit dependent
Assumed 3%: basic
death, disability &
funeral cover
% of pay
Retirement 12.5%
Emergencies 10.0%
House 45.0%
Education 20.0%
Healthcare 3.1%
Risk benefits 3.0%
Total picture is scary
% of pay
Retirement 12.5%
Emergencies 10.0%
House 45.0%
Education 20.0%
Healthcare 3.1%
Risk benefits 3.0%
Total 86.6%
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Clearly there is a problem
Funding all priorities in full, at one time, is not typically possible for most
Lifecycle theory provides some hope – sequencing helps manage the cost
But it requires individuals to stay the course
Which is difficult if the system does not meet immediate needs as well as
long term needs – so individuals cash out!
So who will help individuals stay on track?
Xxx
An integrated lifecycle savings programme significantly improves the
probability of meeting lifetime goals
A NEW APPROACH TO
SOLVING FOR SAVINGS
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Can we have it all?
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What did we learn
46.2% lifetime contribution to
approximately meet all objectives
Levers to lower the overall contribution
Power of time
Subsidisation
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46% reduces to 36% starting 2 years earlier
Subsidisation
Removing education (subsidised at lower levels), the required
contribution drops to 20%
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The effect
Assuming a 30% total contribution is acceptable, subsidisation of
education ranges from 60% to 9% & lower as salaries rise
The new benefits model should…
provide a meaningful array of key financial & social protections
provide individuals with at least core benefits
be flexible enough to prioritise certain savings contingencies above others &
switch priorities through time
provide guidance & appeal to all employees
be simple to understand, cost-effective & doable
limit the administrative burden on the employer & employee
leverage economies of scale to provide cost advantages
be mandatory, or a condition of employment
The employer’s EB programme provides a guided architecture for an
individual that allows them to address a lifetime of financial needs.
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PANEL
It would require 4 broad pillars
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But, aren’t we undoing our good work?
At the heart of it all this is a trade-off
problem
Is it better to get 5% of people
past 75%, or 50% of people to
50%?
Are there challenges with this benefits model?
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We believe this…
is better than the current set up, &
doesn’t rely on government
would engage more people
would strengthen the EB offering
hugely with associated benefits to
employers
would go some way to
addressing the more immediate
needs of the people – one of the
impediments to reforms aimed at
longer term savings
Closing comments
THANK
YOU