Issue: Oct 2010/Jan 2011

Retirement Reform

Simplicity itself

Industry proposals, awaiting inputs from government and labour, are the start for a pensions product that can satisfy the needs of lower-paid workers – even those in irregular and semi-formal employment.

Softly and slowly will do it. Despite the evident enthusiasm with which delegates to the recent ASISA/Actuarial Society seminar on retirement-fund reform greeted announcement of the proposed “Gap” product, to plug the gap of lower-income earners for whom the existing pensions system doesn’t cater, it’s far from ready for launch.

Most immediately, there’re details still to be worked out; amongst them are who will administer the fund and how the administration costs will be minimised. Simultaneously, the participation of such key stakeholders as government and organised labour must be arranged.

The one step goes hand-in-glove with the other because, to the industry’s credit, it is not seeking to present a fait accompli focused on its own enrichment. Unilateral action could only diminish the chances for success and, on the basis of skeletal principles so far outlined, optimal success is highly desirable.

That said, it’s to be hoped that the launch won’t be unduly delayed. As Andrew Donaldson of National Treasury noted after the seminar presentation, the gap has been identified in government discussion papers for the past six years. He sounded appreciative that the private sector had taken the lead in putting tangible proposals onto the table.

The Gap fund is best compared to the Fundisa fund, an ASISA / Department of Education initiative to encourage saving for children’s higher education, says ASISA chief executive Leon Campher: “As with Fundisa, the Gap fund will only work if it’s accepted by all stakeholders and run in partnership with government.”

The product of exhaustive effort by an ASISA working group, key features of the fund are:

  • Low-cost, unitised investment savings account;
  • Administered in the name of the member;
  • Catering for both regular and irregular matching contributions;
  • Offering reliable long-term inflation-beating returns;
  • Providing limited liquidity (access to savings), regardless of the member’s age;
  • A death benefit.

Since almost a million workers have lost their jobs in the recession of the past year, it’s difficult to estimate the possible number of Gap fund members. Making the presentation on behalf of the working group, Johan Schreuder of Investec Asset Management reckons it could be anything between one and two million.

The proposed fund will operate similarly to the Unemployment Insurance Fund. Employers will be responsible for enrolling their employees, deducting from their wage a 1% employee contribution and making an additional 1% employer contribution. It’s been mooted that government (i.e. taxpayers) provides a further 1%.

As a step-by-step example, take a member who earns R60 000 a year. There’s a 15% contribution to the fund, calculated from his annual earnings, from age 30 to 60. At age 60, he enjoys a “contribution booster”. Before age 60, he withdraws R100 000. The remaining R150 000 buys a R1 000 monthly pension and, provided government scraps the means test, he’ll continue to receive the social old-age grant from age 60.

It’s trying to be what Schreuder describes as a “simple pensions remedy” offering economies of scale. In a one-size-fits-all approach, investments will only be in a unit trust of inflation-linked bonds. Withdrawals at any stage won’t require motivation, say for housing or school fees (often diverted into consumption), but merely capped. Premium rates for life cover, from multiple providers, will be standardised.

Moreover, enrolment will be via employers or members individually and contributions (which can be allowed from multiple and irregular employers) made compulsory. Ad hoc contributions could also be allowed from any source. The fund, administered in the name of the individual member, would therefore be portable (staying with the individual as he or she changes employers). And there’d be regular reporting by administrators to members by sms.

As always with such proposals, the devils are in the details. May they be quickly resolved, for the urgency of the social need requires no reiteration.