Issue: Oct 2010/Jan 2011

Policy Conundrums

The saving of savings

Crunch time has arrived. The financial industry is taking a critical initiative to address the pathetic level of household savings. A radical re-think is required.

By now South Africans would have heartily overdosed on a diet of scare stories about the dangers they face through inadequate savings, not only for their own pockets and futures but also for the national coffers on which infrastructure spending and job creation rely.

The scares don’t diminish the stories. The undertone of looming penury doesn’t make them less credible. Facts, as they say, is facts. And facts there are aplenty in, for instance, the well-publicised research surveys compiled by Sanlam and Old Mutual.

Unfortunately but realistically, the overdose can inure a backlash of disbelief – that the problems are insurmountable, so carry on as before – rather than offer the necessary shock treatment to reverse SA households’ dismal savings performance. When confronted with truths intended to jolt people from their comfort zones, dire warnings are inclined to fall on deaf ears.

The message is too nasty to hear. Financial projections and their consequences have been loudly and repeatedly spelled out. To no discernable effect. Spend, spend, spend, say the advertisers. Okay, okay, okay, say the consumers. Present consumption trumps deferred consumption any day of the week. That’s the SA way.

The upshot? Household debt is around 80% of disposable income. After routine living expenses, like buying food and paying school fees, it’s hard enough to get shot of existing loans. Which doesn’t leave much discretionary income for longer-term household savings. Which is why their level is frighteningly low. At a mere 1,5% last year, it’s one of the world’s worst.

The bottom line is that SA, and South Africans, face a crisis in retirement funding potentially as severe in its social impact as the HIV/Aids pandemic. Even for salary earners who haven’t cashed in their pensions on each occasion of changing jobs – a rare species – the proportion likely to enjoy comfortable retirement is minute.

Enjoying access to first-world private medical care, longevity has increased to the statistical probability of at least one spouse reaching into their late-80s or early-90s. They might be in retirement for as long as they’ve worked, which means . . . Dare one say it?

Peter Doyle, president of the Actuarial Society, points to a rule-of-thumb that a comfortable retirement at age 60 needs savings equivalent to 12 times annual salary for one spouse and 15 times for both. This assumes that, on retirement, they’re free of debt (without such commitments as children’s education and mortgage repayments). For example, to avoid eating into capital, R6m in savings and investments is needed to generate a pre-tax monthly income of R15 000 for living expenses.

R6m! Think then of the legions in the informal and semi-formal sectors, of the unemployed and the irregularly employed, and of the multiple dependents that a single breadwinner is supposed to support. Social grants are all well and good, so far as they go, but they can’t go far enough because the resources of the state to provide them are limited by anaemic savings levels.

Thus does the wheel turn full circle, the fine talk of “solidarity” in retirement-fund reform notwithstanding, with the decreased longevity for this category a callous consolation. Most are statistically destined for death by age 49, well before retirement age at 60, but the absolute number of elderly citizens and residents qualifying for state old-age pensions will still run into many millions.

It’s against this sombre background that the Association of Savings & Investment SA (ASISA) – which represents life offices, collective investment schemes and the like – has put together a high-level think tank. It’s chaired by Afena Capital chief executive Tebogo Naledi.

This savings forum is an effort to find practical solutions that will help grow SA savings. As ASISA chief executive Leon Campher recently told a workshop of the Savings Institute, a priority is to identify the blockages in the savings pool as the necessary precursor to unblocking them (see chart).

Fair enough. Proper research is needed to find the proper drivers for appropriate policies. Fair enough, too, that there’ll be an emphasis on improved techniques for communication and education on the need to save.

But there must also be an intent for the representatives of the financial-services industry, who’ll comprise the forum, to look not only outwards for a better-informed public and for proposals to government. There’s equally a need for them to look inwards at themselves also. The involvement in the research of “respected academic institutions” will help to keep the industry representatives honest.

Tebogo Naledi

Naledi . . . hot seat

For the industry itself isn’t blameless. The quality of financial advice is often poor and sometimes conflicted, despite the best efforts of FAIS to make it otherwise. The intelligibility of unnecessarily complex jargon is lacking, making it difficult for consumers to understand and compare what they’re being sold. The access to financial products is bureaucratic, to the extent that it’s easier to buy a lotto ticket than a unit trust.

More than this, there’s the confidence factor. Over recent years the industry has been maligned for miss-selling, for excessively high cost structures, for benefit deliveries that fall short of promises and expectations.

Standing in for Finance Minister Pravin Gorhan, National Treasury deputy director-general Ismail Momoniat told the Institute of Retirement Funds annual conference in September that the financial industry is good at making money: “The problem is that they’re good at making money for themselves but certainly not for their clients.”

There’s also the hangover from the financial crisis. Noting that trading volumes in many asset classes have tumbled, esteemed commentator Gillian Tett has suggested in the FT that the crisis has left a loss of trust: “It seems that nobody really understands how the basics of the equity market work any more. It is hard to trust that the stock markets are a good destination for your money . . . Most retail investors remain terrified of putting their money into stocks, due to a corrosive loss of trust.”

While investors in the US have been pulling out of equity mutual funds, a similar trend is noticeable in SA. According to quarterly statistics released by ASISA for collective investment schemes, at end-June some 48% of their R789bn assets under management was invested in fixed-interest unit trusts and only 23% directly in equity funds.

Not that unit trusts necessarily represent long-term savings. Investments can easily be pulled from them for other purposes, like short-term exigencies and big-ticket purchases

Across the world, investors are nervous: of massive unemployment and sky-high indebtedness in the developed economies, of a double-dip recession, of currency wars, of spooks in sovereign debt and banking weakness (Ireland being the latest) not yet played out, of a real-estate bubble in China, of a Japan-type deflationary scenario. SA has its own fissures, encased though they are in the fuzzy sensations of a soaring currency and recovering equity prices that distinguish emerging markets.

History, as Sam Goldwyn might have said, isn’t what it used to be. True, the JSE has experienced a sharp uplift in prices since the late-2008 collapse. In fact, during the decade to end-2009, the JSE produced exceptional above-inflation returns. But now there’s a broad consensus that, during the decade ahead, returns from most asset classes are likely to be significantly lower.

If time in the market is the proven means to accumulate wealth – and it is, for the miracle effects of compounding dividend reinvestments alone, and quite outside capital appreciation – then the twin issue in getting people to save more is in getting them to preserve more.

But how to achieve this will require a huge change in behaviour patterns and far more coercion than entertained in the present system that’s spoiled for choice, both on whether to save and on options for withdrawal. There’d have to be some radical innovation, with buy-in from government, for people to be saved from themselves.

Clearly, for household savings to improve requires more than easily accessible and understandable products with a few here-and-there tax incentives. Fundamentally, a different attitude must be promoted: for the merits of saving to be appreciated as a superior alternative to spending; for real value to be perceived and derived; for the approach that government will provide to be overturned.

Because higher savings and higher economic growth go hand-in-hand. The resources for investment in public infrastructure and corporate expansion, which create jobs and hence the propensity to save, don’t fall from the clear blue sky.

To turn the circle will require as much out-of-the-box thinking from the financial-services sector, whose own future depends on it, as on government setting firmer examples of frugality and efficiency, which aren’t amongst its current hallmarks.

Wish them success. Unless they together lead from the front, in the devil’s own job of effecting a behavioural transformation of what’s euphemistically described as a “culture” that should take root in primary-school classrooms, their exhortations will leave the decades of savings neglect in the orbit of hot air.

It wouldn’t be sufficient merely to bang on about better awareness. Simplistically, it will be for the industry to improve its value proposition and reduce its cost base. It will be for government, if not to offer sweeteners for the take-home yield, then at least to provide assurances that savings won’t be nicked by prescriptive devices for populist projects that the tax base cannot sustain.

Too much to hope? Not yet, giving the industry and government the benefit of the doubt. For them to encourage the longer-term responsibility of others, best that they exhibit it themselves.