Governments need to encourage people to save for retirement and to save for longer, an international conference of pension supervisors in Cape Town heard this week.
Although the person who said this was criticised for stating the obvious, his sentiments were echoed throughout the two-day Global Forum on Private Pensions, as speaker after speaker addressed different countries’ inability to ensure that their older citizens received adequate pensions.
The conference was hosted by the Financial Services Board (FSB), the Organisation for Economic Co-operation and Development, and the International Organisation of Pension Supervisors.
While there was much debate about the best way to address the problem of pension provision, Deputy Finance Minister Nhlanhla Nene made it clear that one of the ways in which South Africa will improve its pension coverage will be by forcing you to keep your retirement savings until you reach retirement age.
“In our recent policy discussion document titled ‘A safer financial sector to serve South Africa better’, we are proposing the urgent introduction of mandatory preservation,” Nene said in a speech delivered on his behalf by Olano Makhubela, the chief director at the National Treasury.
“This is not because the government seeks to expropriate the hard-earned retirement savings of individuals, a perception which tends to float out there.
“Instead, the proposal seeks to ensure that South Africans who are currently working can be able to look after themselves during retirement, and not rely excessively on the government,” he said.
Jurgen Boyd, the deputy registrar of pension funds at the FSB, said up to 70 percent of fund members who leave their jobs do not preserve their retirement savings.
Nene noted that the main challenge to South Africa providing pensions is its high unemployment rate – 26 percent if a conservative definition of unemployment is used, but as high as 38 percent if a more liberal definition is used.
Nene said that because of the country’s high rate of unemployment, the government will allow some restricted withdrawals from the retirement savings that you will be forced to preserve until your retirement date.
“Individuals will be able to withdraw their pension savings, up to a certain amount, subject to fulfilling certain conditions, like being retrenched,” he said.
The deputy minister also said the government wants to encourage you to convert a major portion of your retirement savings into a regular pension (annuity).
Rather than allowing you to withdraw a lump sum at retirement or at a certain age after retirement, Nene said “annuitisation should protect against instant gratification, longevity and excessive drawdown risk” (the risk of withdrawing amounts that are too large from your retirement savings and depleting them before you die).
And dispelling the idea that there will always be an age to which you will be required to work, Nene said “we must ask ourselves whether the notion of a formal retirement age is still valid in this age, when people are experiencing longer lives, especially post retirement”.
Nene said the government is consulting relevant stakeholders, trade unions and industry on its pension reform proposals.
The Medium Term Budget Policy Statement released this week says the next discussion paper on the reform of South Africa’s social security and retirement-funding arrangements has been prepared and will be released before the end of the financial year.
The paper’s central focus will be the inclusion of a pension in the contributory social security system, the policy statement says.
Changes to the regulatory framework that governs retirement funds will also be proposed, the policy statement says.
AFRICAN STATES BACK MANDATORY PENSION SYSTEMS
African pension regulators made a strong case in favour of mandatory pension fund systems, Andrew Donaldson, the deputy director-general of public finance at the National Treasury, said at this week’s Global Forum on Private Pensions.
In a mandatory pension system, all those in formal employment are required to join a pension scheme. This is to prevent people depending excessively on the state for an income in their old age.
South Africa’s proposed retirement reform includes the introduction of a mandatory national pension fund – the National Social Security Fund.
Kenya, Nigeria, Swaziland and Zambia all have mandatory systems, although Swaziland and Zambia are reforming theirs. Namibia is investigating implementing a compulsory fund.
Many African speakers raised the problem of how to get workers in the informal sector, the largest segment of the labour force in many developing countries, to provide for their retirement.
Kenya has introduced an innovative scheme for labourers in the informal sector, Nzomo Mutuku, the manager of research and development at Kenya’s Retirement Benefits Authority, says.
Mutuku says her country has developed a scheme that enables people in the informal sector to use their mobile phones to make contributions to the fund, as and when they can afford to do so. Members are encouraged to contribute 20 Kenyan shillings (R1.50) a day.
COMPULSORY, ONGOING TRAINING ON THE CARDS FOR FUND TRUSTEES
The National Treasury is considering introducing a statutory requirement that trustees should be sufficiently trained within a year of being appointed, and receive ongoing training for as long as they are trustees, Nhlanhla Nene, the deputy Minister of Finance, said this week.
The abilities of retirement fund trustees again came under the spotlight at the Global Forum on Private Pensions conference in Cape Town this week.
In his speech, Nene said trustees need the qualifications, skills and experience to make investment decisions in the best interests of pension funds and their beneficiaries.
“If you think about it carefully, as a trustee you are expected to be an actuary, investment manager, lawyer, accountant and compliance officer. Managing pension funds is not a simple task,” Nene said.
In response to the concerns about trustee training, the Financial Services Board (FSB) recently launched a toolkit for trustees.
Jurgen Boyd, the deputy registrar of pension funds at the FSB, said the toolkit is the most cost-effective means of reaching the country’s trustees, estimated to number up to 25 000. The toolkit is a free interactive online program that makes use of case studies and is designed to allow trustees to learn at their own pace and assess themselves, Boyd told the conference.
The response from trustees has been positive, signalling just how much trustees themselves feel about the need for such a training. So far, over 1 000 trustees have registered for the toolkit.
Wilma Mokupo, the head of prudential supervision at the FSB, said there is a need for better governance in retirement funds.
“Trustees know what the right thing to do is, but they need to go the distance in taking the right decisions at the right time. The law can only do so much,” Mokupo said.
PENSION POLICIES MUST ADAPT TO NEW REALITIES OF WORK AND FAMILY STRUCTURES
Every country should consider providing a government pension funded from general taxes, rather than from contributions to a fund, because this alleviates poverty, an international pensions conference heard this week.
Such a pension is necessary because working patterns and family life have changed, Nicholas Bar, the professor of public economics at the London School of Economics, told the Organisation for Economic Co-operation and Development/International Organisation of Pension Supervisors Global Forum on Private Pensions conference.
Bar says there is not one best pension system, and in each country the objectives and the constraints differ.
Pension policies in Europe and North America were drawn up in the 1950s and were based on the assumptions that employment was generally full time and long term, international mobility was limited, people lived in stable nuclear families with a male breadwinner and a female care-giver, and skills, once acquired, were life-long, Bar says. The breadwinner worked for many years, contributed to a pension fund and then retired with a pension sufficient to support himself and his wife, he says.
None of these assumptions holds true today, because patterns of work are more diverse, and so problems arise when contributions to a pension fund are tied to employment, Bar says.
Also, because family structures have become more fluid and participation in the labour market by women has increased, there are problems with basing a woman’s pension benefits on her husband’s contributions, he says.
In 1950, men in the United Kingdom spent on average 14.1 years receiving an education, 53.1 years working and 10.8 years in retirement, Bar says. In 2004, men spent 16.2 years receiving an education, 47.6 years working and 20.1 years in retirement.
The shorter working lives mean the average man in the UK contributes for a shorter period, but his retirement savings are expected to fund a much longer period in retirement, he says.
Elias Masilela, the chief executive officer of the Public Investment Corporation, pointed out that in South Africa the problem is more severe, because the average number of years during which people contribute to a retirement fund is much shorter, at about 20 years.
Bar says there are three ways for a government to provide a pension within budgetary constraints: change the size of the pension, change the age at which the pension is paid and, possibly, introduce an affluence test.
The pensionable age should rise with life expectancy, but such a change should be announced a long time in advance, Bar says. It should not be assumed this would increase youth unemployment, as it was not true, he says.