Issue: September/October 2007

NSF suggestions

Michael-John Albert, partner in the financial institutions services team at Deloitte, draws on UK reports that could assist in South Africa.

“Millions of people today are not saving enough for their futures. And our pension system suffers from structural problems.” Sound familiar? It was said by John Hutton MP in his foreword to the UK Department for Work & Pensions white paper Security in Retirement: Towards a New Pensions System published last May.

He could as well have written the foreword to our National Treasury’s retirement fund reform discussion paper. I’d like to focus on one aspect of its proposal for a National Savings Fund (NSF), namely who should deliver on it, with reference to the UK Pension Commission reports where lessons may be learned.

Creation of a National Pension Savings Scheme (NPSS) was recommended to encourage more private savings for everybody in the workplace. Key mechanisms are:

  • Employees automatically enrolled into the NPSS, but able to opt out;
  • Employers forced to contribute to individual member accounts (i.e. minimum contribution levels set);
  • Limited investment options available with a default portfolio for members who do not exercise choice;
  • Premiums collected through existing PAYE system;
  • Funds administered centrally.

Some concerns raised:

  • This would place an expense and administration burden on smaller or informal-sector employers who have not traditionally offered pension benefits to their employees;
  • Either it will not be possible to pass on additional costs to the consumer or price increases will occur;
  • In Australia, the minimum contribution required by statute has become the norm with employers not offering more incentives for retirement than those imposed by the state.

Investigation into costs of indicated:

  • Neither the individual nor the employer chooses between providers of account administration services;
  • Central fund will choose service providers from competitive providers of operational services who would bid for contracts to run the system;
  • Longer term, a centralised fund or single system will have the lowest cost;
  • Total costs estimated around 30bp, based on premise that most members choose passive index-tracking funds. If true, investment admin fees around 10bp are expected.

These costs are not unreasonable considering that the NSF might also adopt limited investment choice. The appropriateness of a one-size-fits-all investment approach, with a bonus for remaining in the fund until retirement, will require further discussion. Perhaps a step-by-step approach is required in South Africa. Once people are in the savings net and have started to build up capital, we can consider the appropriateness or suitability of their investment choices.

The final point considered in the UK is the significant operational set-up risks and costs. Establishment and roll-out of the fund therefore requires careful planning. The risks here favour use of existing structures, such as insurers, for NSF administration.

Hopefully the UK recommendations can help fuel debate from a South African perspective. Meanwhile, some suggestions of my own on how the process for determining delivery should be handled:

  • Transparency and proper governance in the operation of all aspects of the fund are crucial to secure and maintain public confidence;
  • NSF should be governed by people with high standing, independently of government;
  • The fund should be administered solely to safeguard members’ retirement savings;
  • All alternatives should be evaluated against a transparent and objective set of criteria, including consideration of non-traditional retirement service providers;
  • In setting up and managing the NSF, further thought should be given to combining administration of the proposed unclaimed benefits fund with the NSF.
  • It is necessary to establish how compliance will be policed and enforced.