Issue: September 2012 / November 2012
Editorials

COVER STORY

Put it to the people

Last time, they weren’t asked whether they supported pensions preservation. This time, they should be. It’s a way to avert politicisation, and to trigger the most extensive consumer financial-education programmes that ‘culture change’ requires.


Yup! And please on pensions too

Here are two suggestions, unsolicited and pretentiously submitted, for consideration by National Treasury. Both relate to its proposal for introduction of mandatory pensions preservation.

The principle should be a no-brainer; not necessarily so, however, with prospects for its acceptance and implementation. That much is probably anticipated. At time of writing in early August, there was still no release of the discussion document that National Treasury had scheduled for June (TT June-Aug ’12). Such are the technical complexities, and the political sensitivities, that initiation of the proposal would need diplomatically to invite rather than inflame debate.

An exhaustive consultation process, to which government is committed, will work only to the extent that it’s cool-headed and informed.  The last thing needed is the populist point-scoring of the Sanral variety. Preservation is far too important to be stymied by similarly emotive resistance.

Put bluntly, SA faces a retirement-funding predicament no less significant in its social dimensions than HIV/Aids. Aside from the broad national ramifications of inadequate household savings, an abundance of research indicates that even individuals fortunate to be members of occupational pension funds (to have enjoyed formal employment) are overwhelmingly underprovided for retirement.

Amongst myriad reasons, the predominant tendency to cash in their fund benefits on switching jobs is featured with disturbing and repetitive prominence. There’s an obligation on the state to intervene, at least to minimise the ease of withdrawal, in order that people are protected from themselves. The more they withdraw prior to retirement, the less they’ll have for retirement and the lower their base to accumulate the compound benefits of long-term saving.

That much is basic, but not so basic that it’s sufficiently acknowledged in preventing the temptations to spend whatever cash they can access and whatever debt they can incur. Banks have burgeoning books of unsecured loans and larger retailers heavily push store-card credit.


Little understanding. Little trust. Big noise
Photo: Independent Newspapers
Any day of the week, the propensity to save is trumped by the ability to consume. Mandatory preservation is a bulwark against the popular tide. Nevertheless, it will be limited in its effect because it can apply only to savings in pension funds and because a one-size-fits-all approach is unsuited.

There’d have to be flexibility that accommodates non-preservation, for instance the priority of the poorer to pay for food, shelter and children’s education; similarly of retrenched and debt-burdened employees to meet their exigencies.

Also, there are different longevity projections for different income groups. For example, those who can access private healthcare are likely to live for longer than those who cannot. Some are expected not to reach retirement age and others expected to live for years beyond it. They cannot be treated in the same way.

National Treasury’s job, to offer formulae that will be perceived as fair, demands the wisdom of Solomon. It will need not only to determine for whom and where fiscal incentives will kick in but also to propose cut-offs between no choice and exceptions from it.

And that in turn raises the whole subject of the long-mooted National Social Security Fund. Already, indications from certain unions are that they’ll oppose preservation unless and until the NSSF is in place. The reasoning is akin to having cake and eating it: to taking one’s money when wanted and getting others’ money when needed. There are limits to what the ‘solidary’ envisaged in the NSSF can provide, as there are to the resources from which social old-age grants can be drawn.

This, then, is the first suggestion to National Treasury. It’s to attempt, as best it can, to keep NSSF issues away from the debate on mandatory preservation. Given the pace at which smaller funds are consolidating into larger funds, notably umbrellas, the NSSF might never happen, especially if the umbrellas are able successfully to resolve the cost concerns that National Treasury routinely highlights.

If costs are a function of critical mass, it stands to reason that the greater the critical mass the greater the potential for cost reductions. If there’re to be larger umbrellas, it follows that they’d compete in size with the NSSF. Alternatively, an NSSF will reduce the size of umbrellas in state competition with private-sector financial institutions; not too bad for fund members provided the state is better at cost and service efficiencies.

However, the need for replication of existing infrastructure is not obvious. Neither is a weakening of precisely those institutions, publicly owned, on which the state itself relies for savings products to be sold, distributed and administered.

So if product cost and price are the core issues, then surely the solution is to be found in the innovation of products simplified and standardised to the point that an NSSF cannot do it better. They’re on their way. One is the ‘Gap’ product on which the industry has been working for some time (TT Oct ’10-Jan ’11).

All the while, the industry and government are in productive collaboration. If National Treasury is unhappy with progress, to be welcomed would be its recommendation of appropriate templates that chop the involvement of intermediaries and the layers of fees.

Amidst all these ‘ifs’, another huge ‘if’ looms. It’s if the trade unions will support mandatory preservation without the NSSF in place. Heed the amber light if the Sanral chaos, spearheaded by Cosatu, is not to be repeated. To interminably await an NSSF is unacceptably to delay preservation.

Which leads to the second suggestion. It’s that, to avert the risk, mandatory preservation be put to a vote of pension-fund members. They number eight to nine million. Say each has three dependents. Then the 24m or so people who stand to be directly affected roughly equate the size of the entire electorate in SA’s democracy.

Before the idea is dismissed as outlandish, consider this:

  • A referendum will require a run-up of comprehensive public education on what savings are all about, and specifically to explain a concept that few understand, in the same way and on the same scale that a voter-education programme preceded the 1994 general election. Or similar to the shareholder-education programmes that accompanied the Old Mutual and Sanlam demutualisations, also voted on, in the mid-1990s. If there’s a better way to promote awareness of savings, as a matter of the nation’s and individuals’ vital interest, let’s hear it;

  • When government last attempted to introduce mandatory preservation, in 1979, the first whiff of it was followed by years of worker protest. There were strikes and boycotts. There were widespread street marches, sometimes turning violent, and masses of savings withdrawals. Eventually, to prevent further withdrawals, the savings institutions themselves opposed it. The attempt at introduction was abandoned;

  • Back then, the dispute was highly politicised in the anti-apartheid struggle. Today, on the obnoxious Sanral precedent that undermined National Treasury, there’s a danger of similarly opportunistic mobilisation in the ruling alliance’s factional power struggle;

  • Putting it to a vote doesn’t necessarily mean that members tick a ‘yes’ or ‘no’ box on whether they’re in favour of a predetermined package. Neither does it mean, depending on how the question is framed, that preservation stands or falls. It does mean that they’re included in the process. In 1992, when white voters were asked whether they supported the negotiated reforms begun by then President F W de Klerk, they sanctioned a principle that sanctified the detail.

  • Preservation “will be phased in over a number of years, following thorough consultation”, says National Treasury’s in its May document Strengthening retirement savings. But consultation with whom? Such putative representatives as the industry? Employers? Organised labour? Trustees? What if some don’t want it at all, others want modifications that others don’t, and yet others insist that it isn’t considered until there’s an NSSF? What if consensus is unachievable?

There can be no more thorough consultation than with those affected. Or, by the consumer education that’s its essential adjunct, to kick-start the change in culture from spending to saving for which Finance Minister Pravin Gordhan has so far searched in vain.

PRESERVATION DEFINED

Preservation is the requirement that money saved for retirement through a pension, provident or retirement annuity fund should remain in such a fund or be rolled over into a similar savings vehicle without incurring taxes or penalties until the person retires in the normal course of his or her career, reaches the age of 55 or retires on grounds of permanent disability.

-- National Treasury policy document,
A safer financial sector to serve South Africa
better
, February 2011.