Issue: December 2012 / February 2013


Heads up

It’s in a complex socioeconomic climate that attempts to stimulate savings
take place. The private sector can still come out tops. Much depends on how
proactive it will be, not only in aligning its interests with initiatives of National
Treasury but also in implementing objectives of the Financial Sector Charter.

National Treasury wants to introduce mandatory pensions preservation, but the consultation process is off to a rocky start. On the one hand, there are those who argue that preservation must be compulsory without exceptions making it too porous to work. On the other, the mere principle of compulsion is resisted on grounds that it shouldn’t even be contemplated until a government-run National Savings & Social Security Fund (NSSSF) is in place.

An illustration of extreme sensitivities was in the Marikana situation of fired mineworkers. Thousands had resisted reinstatement – risking not only their jobs but also their accrued pension benefits for death and disability -- so that they could immediately pocket lump sums to pay off debts. What’s National Treasury supposed to do?

It proposes improved inducements for long-term savings. But escalations in living costs and consequent squeezes on disposable incomes cause families to prioritise short-term exigencies for food, transport and shelter. Where family members have jobs, that is.

It seeks to reduce the cost of financial products and introduce additional tax incentives, so that net returns are enhanced, but a protracted period of lower economic growth will make it all the harder for investments to replicate what the bull markets of the past decade have delivered. The disadvantages of a less favourable investment environment might barely offset the advantages of lower product costs and higher tax breaks.

Unhappily, good results don’t necessarily flow from good intentions. While there’d be broad consensus around the reform proposals set out in the series of National Treasury discussion documents, and the principles widely supported by the financial sector, they cannot be excised from the politically-fraught environment.

To meet the goals will be an uphill struggle. Attempts to make savings more attractive are fundamentally undermined by attempts of Cosatu, amongst others prominent in the ruling party, to introduce prescribed assets. Higher returns on savings are defeated by lower returns on below-market investments that prescription implies.

As if the adverse odds weren’t sufficient, government contributes to their stacking. It isn’t as though the spending patterns of cabinet ministers, including the President, universally offer a frugality model for the nation to emulate. Ditto the beneficiaries of unpunished corruption, privileged largesse and widening pay gaps who flaunt egregiousness.

Splurging by the few, with access to the trough, cannot promote a culture of saving amongst the many battling to make ends meet. The stuff of anti-apartheid struggle is now exacerbated by expectations unfulfilled. Marikana is so far its most explosive manifestation.

In turn, Marikana has coincided with (and possibly contributed to) the downgrade of SA sovereign debt. Numerous reasons are cited, none sanguine for economic prospects and the future costs of service delivery. One, highlighted by rating agency Moody’s, is “uncertainty as to whether the policy decisions being devised ahead of the December leadership conference of the ANC will be helpful or detrimental to the country’s growth and competitive outlook”.

It notes that the ANC’s policy conference in June called for “more radical policies and decisive action to effect through-going socio-economic and continued democratic transformation”. This suggested that increasingly interventionist strategies were highly likely: “To the extent that such strategies would deter private investment and incoming capital to SA, they could further diminish its growth potential at a difficult period in the global economy.”

Irrespective of what the New Growth Path and National Planning Commission have recommended – government has so many strategy documents that’s it’s impossible to guess which one applies – the biggest bugbear not laid to rest is nationalisation. Whatever that means.

It’s kept alive by populist sloganeering, and more. Cosatu general secretary Zwelinzima Vavi argues for an “activist interventionist state”. A proposal at the ANC elective conference in December is for the state “to regulate a substantial part of retirement and life insurance funds to be invested in stateowned enterprises and/or development financial instruments”.

Subsequent to the 1955 Freedom Charter, ANC constitutional proposals in 1988 and the early 1990s advocated a mixed economy. A mixed economy is what SA has. The question worrying investors, domestic savers and aspirant savers included, is how much more mixed it’s to become. They look askance at the performance of stateowned enterprises and take fright.

Singled out by the Freedom Charter, for an ownership transfer “to the people as a whole”, are mineral wealth and banks. Susan Shabangu, Minister of Mineral Resources, is the outstanding critic of such crude mines’ nationalisation. With good reason. What she has is better.

In place is the Mining Charter. It commits the mining houses to a schedule for the transformation that government seeks. Also in place is a state-owned mining company. It can compete directly with them for new-order rights. Should the mining houses not meet the Charter’s stiff targets by 2014, a prospect which looks increasingly remote, state competition can become severely robust.

Running in parallel with the mines are the banks or, of wider relevance, the financial-services industry. In place is the first phase of the Financial Sector Charter, also to advance industry transformation, but not yet the second phase. With the closing date for comments having passed in May, it’s gazetting should be imminent.

Not yet in place is the state’s proposed NSSSF, envisaged as the first pillar in wholesale reform of retirement-fund structures. If and when an NSSSF eventuates, it could compete with the industry by capturing swathes of existing private-sector business.

Under this Charter, amongst other things the banks and insurers variously become committed to allocate targeted amounts by specified dates to debt financing, credit extension or equity investments to help overcome economic-development backlogs.

These include:

  • Projects that support under-developed areas and contribute towards equitable access to economic resources e.g. road and rail transport; telecommunications; water, waste water and solid waste; energy; social infrastructure such as health and education; municipal infrastructure and services;
  • Agricultural support for black farmers;
  • Affordable housing;
  • Black-owned small, micro and medium-sized enterprises;
  • Safety and security, such as building police stations and prisons;
  • Parastatals and public entities;
  • Financial intermediaries such as the Development Bank and African Infrastructure Investment Fund;
  • Private companies and participants in public-private partnerships.

Phase 2 introduces empowerment financing and access to financial services. There’s also a provision for consumer financial education where, says the draft, “products and services will be closely aligned with (those) developed and maintained by the Financial Services Board as designated owners of consumer education by National Treasury”.

For consumer education alone, the scorecard requires measurement against an annual target of each institution’s retail net profit after tax. It was put at 0,25% of net taxed profit for this year, 0,3% for next and 0,4% for 2014. On present guesstimates, the eventual amount could approach R100m annually.

Clearly, for scorecard purposes in meeting all targets, the monies to be assigned overall by the financial institutions can be multiples of this amount. Bring in the infrastructure investment by pension funds – they can go up to 100% of their assets in bonds issued or guaranteed by the SA government – and the amount shoots up exponentially.

There’s no shortage of need, of projects waiting to be detailed and of financing packages to be structured. Neither is there likely to be a shortage of money so long as savings institutions thrive to provide it.

A few key determinants are:

  • How the money that has to be spent on targeted investments will be well spent, not diverted into state or replicated bureaucracies;
  • How banks will manage the new sets of lending risk coming their way;
  • How the non-bank institutions will be impacted by an NSSSF;
  • How savers will respond to stimulation measures offset by prescribed assets and the subsidisation of social security in the NSSSF, should they be introduced;
  • How effective over the longer term will be institutional investment in consumer financial education to deepen and broaden the savings pool.

The latter, in particular, cannot be sufficiently emphasised. The more the educational initiatives succeed, in tandem with discretionary incomes that rise with economic growth, the more South Africans are cushioned from later-life penury; the more their stake in the economy is seen by them to increase; the more SA’s current account turns from reliance on volatile inflows of short-term foreign capital, and the better for future prosperity.

From the self-interest perspective of the institutions themselves, there’s the opportunity for expansion of their customer base by greater inclusion of the populous lower-LSM categories. It comes hand-in-glove with the series of National Treasury proposals for tax incentives and cheaper products better understood. And it might just cause the Damocles swords, in the shapes of prescribed assets and an NSSSF, not to fall.

Crucially, get right a spirited implementation of the Charter and the interventionist case collapses. The state becomes more reliant on the private sector, not the other way around, and a firmer societal base is established for the transformation that must happen. Or else.

Rating agency Standard & Poor’s based its sovereigndebt downgrade on anticipated consequences of “SA’s underlying social tensions”. The Economist, in a recent cover story, warned that on its present trajectory “SA is doomed to go down as the rest of Africa goes up”. What happens with savings will demonstrate whether they’re wrong.