Issue: March/May 09
Editorials

FUND REFORM

Better safe than sorry

SA’s process of retirement-fund reform is taking so darned long. ELIAS MASILELA, who was instrumental in drafting National Treasury’s first discussion paper, explains why the original 2010 target date for implementation is no longer feasible.

Any reform is complex. SA’s retirement reform is especially so. It has to deal with psychologies of society, real issues relating to empowerment and the ability to save -- as well as institutional and policy behaviour to take account of people’s different abilities, not to mention different welfare levels.

Start by asking what’s meant by social security. It embraces “… an institutional arrangement, driven by the state to secure the welfare of members of society through securing a certain amount of minimum income during their productive years and in retirement. It is a system that prevents destitution in the case of members of society faced with incapacity and unemployment. It is a highly distributive institution that relies on the principle of solidarity amongst the income capable and the less income capable…”

Any policy design should take account of these operative terms (italicised above) for social security to be seen as comprehensive, credible and sustainable. However, the design of such a system varies from society to society depending on underlying philosophies and circumstances.

This reform process is preceded by decades of debate, research and commissions of enquiry. The most recent restart of our debate, in August 2004, was marked by National Treasury’s first discussion paper. The number of issues and their complexity caused Treasury to lay out a programme that would take about six years to conclude; thus the target date of 2010.

But government quickly realised it was inadequate and inappropriate to confine the much-desired reform to retirement-related issues only. This would have confined reform to the employed and to the able person who saves for retirement. A much broader approach had to be undertaken. It resulted in the 2007 draft policy on social security and retirement reform.

It swung open all the doors for debate because this form of policy would affect every sphere, sector and aspect of society. In an attempt to answer the many questions that were thrown up, research followed. It has resulted in an avalanche of new knowledge and exposure of sometimes misconstrued facts.

So a joint forum was created as an industry body to develop common positions in the engagement with government. Many of these issues are being tested from a private sector/service provider perspective. This is essential to ensure the ultimate design is sufficiently balanced and preserves the value developed over decades in the private sector.

Such an avalanche is not unique to SA. Several countries have trodden a similar path. All have gone through the process of trying to define an optimal social objective. For each of these countries it took about a decade to arrive at what was seen as a social consensus.

For many, reform has become an every-year thing. Chile, for instance, is going through its fourth reform cycle since its first attempt in 1924. Each dealt with a different set of objectives. That it’s impossible to get right the first time indicates why careful thought is so crucial.

Chile has changed several features of its system, ranging from investment rules to worker choices, to basic solidarity principles and application, to gender equity, and to competition levels….

Just to name a few. Some changes may mean a reversal of policy, as in Argentina. It is rolling back various changes made towards defined-contribution funds and more towards pay-as-you-go, the system from which it initially reformed. For political reasons, and to ensure continued acceptability of the system, Chile is also investing resources to legitimise individual accounts.

Learning from other countries’ mistakes will make it easier for SA to avoid pitfalls. But can we really learn from these mistakes? Are circumstances the same? Are we reforming the same thing and in the same direction?

Since 1994, the World Bank has assisted over 80 countries to reform. SA is doing it without any formal outside assistance.

SA is a robust democracy. Our labour market is highly unionised. We operate in an environment that has evolved into a culture of optimal consultation. Guided by state and non-state institutions such as Nedlac, the process can be expected to be more complex, more painful and slower than elsewhere. No longer is 2010 feasible for implementation, or even for legislation to be introduced.

A convergence paper is expected from government to inform the negotiation process among social partners in Nedlac. It can take six to nine months for a standard piece of legislation to be negotiated. And that’s before you have a set of principles, or before you can envisage a process of legal drafting, followed by an additional period for the legislation to be processed through parliament.

We need to ensure the first step is the right one. If not, it may be advisable to delay, or even to undertake piecemeal interventions, as has been happening over the past 18 months.