Edition: September / November 2015
RETIREMENT REFORM 1
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
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
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
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
"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
For SA in the global economy,
competition for investment will intensify.
That’s the only certainty. Prepare for a
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
How to change SA’s dismal “savings culture”?
It begins with the example set by government