Issue: September/October 2006
DOWN UNDER ON THE UP. IT'S "SUPER"!
Writing from a conference of the Investment & Financial Services Association in Australia, Investec Asset Management strategist Michael Streatﬁeld ﬁnds useful trends to help inform South Africa’s imminent reform of pension funds.
Name a southern hemisphere country that is a commodity producer, is sports mad and has a great climate. Australia has many things in common with South Africa, an innovative financial services industry being one. Compared with here, what’s it like to retire there?
In Australia, retirement funds are known as superannuation funds (which they call “Super”). As we are about to embark on our own reform of the retirement-fund system, there are several observations for our trustees from this market.
Aussies have three distinct issues of interest:
Being resourceful - Compulsory contributions
The Australian government requires all working Australians to contribute nine percent of salary before tax (up to an annual cap) to a Super. They are encouraged by tax breaks to make further provision beyond this level. For low-income earners, where tax saving is less of an incentive, government has a co-contribution system whereby it will match additional contributions. With this system, the state is looking to ensure that the great majority of Australians will retire with their own savings as longevity increases.
In South Africa, our compulsion situation is significantly different. We are compelled to join a fund only if an employer offers a retirement fund. This leaves many workers without a retirement platform.
Given that South African households are saving less than ever, and the number of South Africans drawing social security benefits is rising more than ever, adequate retirement provision is a burning issue (see table). And because of our high unemployment rates, we need a flexible system to handle those who are in occasional employment.
Freedom of choice
Many South African funds have gone through the hurdle of member investment choice, but the Australian market has crossed another major hurdle – that of choosing the “employer” as well! The “choice initiative” allows members not only to make investment choice but also to choose where they can place their retirement money. (It’s worth checking www.superchoice.gov.au for detail.)
This effectively breaks the link between employer and fund. Although many employees can and do stick with the default Super option offered by the employer, irrespective of whether this is a selected platform or an industry fund, they do have the choice to go elsewhere. So although the forced nine percent contribution sounds prescriptive, this ability to choose where you can place it allows for great flexibility and competition by service providers. Choice has been a remarkable success in the Australian market. The Super industry now tops A$1 trillion (R5,2 trillion). Its compound growth is expected to reach an estimated A$3 trillion (R15,6 trillion) within the next 12 years.
Next steps for DC As our own defined-contribution market develops, it is interesting that the Australian government is trying to help Australians understand what investments they now have. The state, assisted by investment industry association IFSA, has set up a long-term investment education programme. (Check out www.understandingmoney.gov.au to see how they do it.) Through this they hope to raise financial literacy. It’s an even hotter issue for South Africa. On the investor front, the government and funds are looking into how they can offer guidance on the amounts Australians should be saving. Helping members understand how much is needed at retirement is crucial in a DC environment. The exercise is a real wake-up for fund members to save while they can, during their working lives, for what they’ll need on retirement. On the investment front, Supers are looking to provide adequate diversification to members. Like the JSE, the ASX has significant large-cap resource concentration. To spread this risk through diversification, wider investment options are available. There is increased appetite for international exposure as well as strong interest in boutiques and novel approaches to investing.
What can trustees expect here in South Africa? Some ideas might cross the Indian Ocean to us; some will not. Nevertheless, it’s instructive that Australia has tackled the building of inclusive retirement provision through compulsion on one hand and greater choice on the other. Fund members are empowered to find the right investment and administrative solution – whether it be employer recommended, personal plans, or into non-profit industry funds.
In such a dynamic environment, market competition and openness keep costs competitive and allow members to right- size the solution they trust to secure their long-term retirement future.