Edition: September / November 2015
Editorials

RETIREMENT REFORM 1

Double standards

Households must be encouraged to save, save, save.
But government continues to splurge, splurge, splurge.

Plans for retirement-fund reform set out to provide a better deal for savers. There’s heavy emphasis on costs, levied by service providers, to ensure that charges don’t unduly erode member benefits. Proposals for improved market conduct, and less opaque products, are proposed too (see next article). These are all within the purview of regulation. Outside this purview, in an entirely separate silo, is the factor that more fundamentally impacts on the deal for savers. It’s investment performance of equity and bond markets, in turn impacted by the rand’s external value. They’re inextricably linked to fund members’ ultimate benefits. Much as government wants to improve retirement outcomes by regulatory reforms, it’s good intent on the one hand is negated by socio-political ferment on the other.

It cannot regulate the latter, but it can do a whole lot more to change investors’ perceptions for the better; particularly foreign investors who own over 30% of SA equities and bonds. When these investors enter with hard currency and exit after conversion from local currency, where hedging for downside protection comes at a cost, they cannot take with equanimity the fall in value of rand-denominated instruments.

Respect for the rule of law (think Bashir), adherence to the Constitution (think mining and property rights), infrastructure constraints (think Eskom), resolution of labour disputes (think Marikana), questionable expenditures (think Nkandla), inefficiency of state-owned enterprises (think SAA, SABC, SAPO, Prasa etc) and bureaucratic nonsenses (think travel visas) are amongst the headline-grabbers.

The “Mandela premium”, from which SA once benefited, has reversed into a “Zuma discount”, reflected in a fall to the lower end of emerging-markets favour. Apportionment of blame to extraneous factors, such as the slowdown in China and the weakness in commodity prices, disguises SA’s ability to score own goals. Vital too are the “twin deficits”. There’s the trade or current-account deficit showing that SA imports more than it exports. There’s the fiscal deficit showing that government revenues (excluding monies borrowed) fall short of its expenditures. Neither would necessarily be harmful if they were temporary and capable of rebalance, but both are trending in the opposite direction.

SA has averted a downgrade of its bonds to junk status. Were it to have happened, the outflow of foreign funds would have been immediate in tandem with international portfolios’ risk-aversion mandates. Interest rates would have had to shoot upward with consequences for the economy and jobs that are fearful. That it hasn’t happened offers a respite, not a solution.


"Example set by government..."

For interest rates will have to start climbing less moderately than they have already. There’s an inevitability about it: first, to protect the rand so that (amongst other reasons) foreign and domestic investors won’t view it as a one-way downward bet; second, because the US Federal Reserve has called an end to the worldwide orgy of cheap money.

Also on the cards for SA are tax increases, one way or another, as foreshadowed by the Davis committee. They will further dampen already-weak economic prospects. It’s perverse because lower growth in company profits and household incomes means lower tax revenues at current rates. The costs of a burgeoning public service and a ballooning socialsecurity programme need to be funded.

So far, SA has had a good time. It has automatically gained from institutional investors’ appetite for emerging markets. Once viewed as a homogenous asset class, this has begun to change.

Increasingly, indications are that big international investors are looking at the particular characteristics of respective countries. They compare say the industrialisation and per capita income of South Korea with that of Rwanda, as well as the divergent progress of the respective BRICS. For emerging markets, investment by algorithm is sliding from the table.

For SA in the global economy, competition for investment will intensify. That’s the only certainty. Prepare for a hard ride.

An alleviation of retirement funds’ costs could pale against challenges that flat markets, derived from a troubled domestic economy, are likely to present for pension liabilities. Throw into the mix a temptation by government to poach funds’ assets, for below-market returns on projects that the fiscus lacks the capacity to finance, and the good intentions of retirement reform will be further obstructed.

Everybody wants a better deal for savers. Targeting service providers’ techniques for profit generation is in the sights of National Treasury, which is aware of possibilities for “unintended consequences”. Tightened regulation inevitably involves higher costs, while lessened potential for profit will probably mean lessened capacity to provide service; alternatively, a weakening in savings institutions’ capital adequacy.

Moreover, a better deal for savers is conceptually relative. Taken in isolation of government’s responsibility for macro-economic management, the proposals are a restricted and not necessarily effective means to achieve it.

Viewed holistically, it boils down to a question of whether SA is a benign destination for domestic and foreign investment. The decline in local business confidence and the hammering of the rand offer a sobering answer.

How to change SA’s dismal “savings culture”? It begins with the example set by government leaders.