The South African retirement fund industry ranks among the largest 15 internationally, with some 8-million members and assets under management of close to R2-trillion.
These statistics, from a recent study into pension scheme administration, were released in Johannesburg on 12 October at a one-day Retirement Reform Seminar, hosted jointly by the Association for Savings and Investment South Africa and the Actuarial Society of South Africa. The seminar was attended by representatives of Government, Labour, Civil Society, the actuarial profession, and the savings and investment industry interested in and involved with work related to retirement fund reform.
The independent study by Compass Management Consulting was commissioned by the savings and investment industry with the aim of providing much needed information on the administration cost of pension schemes to help inform the retirement reform debate. It was one of several research pieces and thought-provoking proposals presented at the seminar with the aim of prompting dialogue among stakeholders in South Africa’s retirement and social security reform process.
Apart from providing the most up-to-date statistics currently available on retirement fund members and assets in South Africa, the study also shows that, taking into consideration constraints unique to South Africa, local standalone pension fund schemes appear to be managed on a more cost-effective basis than is the case internationally, especially where schemes have less than 10 000 members.
However, umbrella funds, on average, do not appear to have reached economically viable levels of operation. According to Anton Davies, the actuary behind the study, the South African umbrella business is made up of many small disparate schemes, often with their own sets of rules. The proliferation of these small funds is the result of South Africa’s unique economic landscape, which has resulted in a magnitude of small entrepreneurial companies. In addition, for many umbrella funds, investment in IT infrastructure in anticipation of an increase in membership numbers has not yet paid off as numbers remain low.
The study clearly highlights some of the strengths and weaknesses of the South African retirement fund industry, which often stands accused of being inefficient and expensive. While this study, which is work in progress, shows that South Africa compares well internationally, it also highlights areas that can be improved. But, most importantly, it shows that by closing the retirement coverage gap, the industry will actually be in a position to reduce costs to the benefit of clients.
Creating momentum through dialogue
Ongoing dialogue, informed by credible research and accurate projections, is crucial in providing South Africa’s retirement and social security reform journey with the momentum it requires.
But, in order to find practical solutions that will work for all South Africans, the savings and investment industry, Government and all the other stakeholders first need to reach common ground. Reaching common ground requires transparent and frank dialogue and this is why we are here today. To share with all stakeholders recent research and thinking relevant to South Africa’s proposed retirement reform efforts.
This cannot be achieved without ongoing support from the actuarial profession in South Africa, as represented by the Actuarial Society.
We rely heavily on the actuarial profession for research and thought leadership in the understanding, modeling and management of financial and other measurable risk when it comes to retirement funding. One of these risks comes in the form of life expectancy. Increased life expectancy is recognised as a major risk in retirement provision debates around the globe.
The Society of Actuaries in the United States, for example, has been presenting triennial seminars on the topic ‘Living to 100’ since 2002, as longevity is increasingly becoming a major problem for some social security systems.
While of serious concern, longevity and the impact on retirement savings in South Africa is unfortunately not as high on the agenda as it should be, because the country is grappling with more pressing issues like HIV/Aids, tuberculosis and malaria.
In fact, South African actuaries have to deal with the unique situation where people that fall into the low risk category tend to live even longer than previously anticipated due to greatly improved healthcare and people that are classified high risk are dying even younger than before as a result of HIV/Aids, tuberculosis and malaria.
As actuaries, we welcome the opportunity to use our unique skills to assist stakeholders in understanding the implications of any proposed changes to the broader social security system.
Closing the Gap
Research and models presented at the seminar are an indication that the private sector is willing to come to the party with workable solutions. With the Gap Fund, our industry is putting forward a transparent, cost-efficient and accessible concept aimed at helping to address the current retirement and social security provision gap experienced by low-income earners not part of the pension system. The proposed fund is best compared to the Fundisa Fund, which is a joint ASISA /Department of Education initiative aimed at encouraging South Africans to save for their children’s higher education. As with Fundisa, the Gap Fund would only work if accepted by all stakeholders and run in partnership with Government.
Key features of the proposed Gap Fund include:
- Low-cost, unitised investment savings account administered in the name of the member
- Catering for regular and ad hoc contributions
- Offering reliable long-term inflation-beating returns
- Providing limited access to savings regardless of age
- A death benefit
Finding a workable solution in partnership
The savings and investment industry, together with the actuarial profession, support the policy objectives of the proposed social security and retirement reform initiative. Government, as part of its extensive efforts to finalise a workable social security and retirement reform framework, continues to engage regularly with key stakeholders including civil society, labour and business.
We are part of this process at the invitation of government and continue to engage on a broad front with all stakeholders.
The seminar was also addressed by Professor Vivienne Taylor, Head of the Department of Social Development at the University of Cape Town, and Edward Whitehouse, Head of Pension Policy Analysis at the Organisation for Economic Co-operation and Development (OECD).
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