7 September 2007
The Department of Social Development has released four further studies that
provide details on the way in which South Africa's retirement system will have
'to shape up or shake out'. There is no doubt that the rigour with which the
research was undertaken will give fresh impetus to the intense and ongoing
debate on our pensions system and the financial services industry. These
studies relate to the options of removing the means test to the old age grant,
proposals to introduce mandatory defined benefit and defined contribution
savings schemes, a system to accredit pension funds and a proposal to save for
healthcare needs. Key recommendations include a significant reduction of
administration costs, which eat away our savings, to 10% compared to the
current costs which could exceed 40%, and product disclosure that do away with
dubious small prints in product offerings.
"The studies will be submitted to the Inter-Ministerial Committee that
Cabinet has set up last year, with a mandate to undertake further social
security reforms, especially in respect of our retirement system," says Zola
Skweyiya. The Minister for Social Development added: "we have thoroughly
investigated the need to do away with the means test which, in our view, causes
unnecessary hardship to many older persons and to provide the old age grant to
all South Africans from the point of view of equity and solidarity."
The second study on the design of the benefits system proposes a combination
of a defined benefit and defined contribution savings arrangement. This is a
unique arrangement. According to the Department's Director-General (DG), Vusi
Madonsela, "South Africa needs a quintessentially South African benefit design
that responds to our distinct situation." According to the DG, two opposing
recommendations have emerged. On the one hand, there is a view that proposes a
pure defined benefit system in which government must make an up-front
commitment to the amount of benefit people will receive after 30 to 40 years of
savings. On the other hand, many are proposing an individual account of a pure
defined contribution nature, in which case people save but the performance of
the Market will determine the benefit they will receive. Vusi Madonsela says:
"We think we need to opt for a balanced approach that combines the two
extremes. Therefore we take the view that we must pursue an option that
enhances our sense of social cohesion, social solidarity and pool risks. At the
same time, we must ensure the link between contributions and benefits." The
model developed by an actuary is the first of its kind and project a savings
model for the country covering a period of 75 years.
The third study is a proposed accreditation framework that will, no doubt,
change the rules of the game in respect of regulation and supervision of the
retirement industry. According to the Minister Skweyiya, "because the
Department is proposing that people should be free to opt out in respect of the
defined contribution component of savings, we cannot leave them entirely at the
potential risks of fund failures, fraud, corrupt practices, poor governance and
risky investment decisions". Minister Skweyiya indicates that "in its simplest
form, the accreditation framework is aimed at achieving simple, standardised,
low cost pension savings products and consistency across providers."
It is the accreditation framework that will spell the death knell for many
pension funds as they may not be able to live up to world-class standards.
According to the Deputy Director General for Comprehensive Social Security,
Selwyn Jehoma, the accreditation approach proposed for regulation and
supervision of the market differs considerably from the approach used in the
country today. Jehoma argues that "what is missing is a supervisory philosophy
that is proactive and comprehensive, more regulatory independence and an
enhancement of the capabilities of the current regulatory structures." In terms
of the proposals on minimum product standards, the research proposes that
administration charges, often the main reason for the low returns on savings,
be reduced through structural interventions such as centralised collections,
doing away with the commission structures, and upfront, clear disclosure of
services standards which must be monitored by a supervisory authority.
The fourth study argues that in addition to minimum savings for retirement,
disability and death benefits, South Africans must also provide for post
retirement healthcare. The study estimates that 85% to 95% of companies do not
provide for healthcare facilities during retirement, in stark contrast to the
extent to which many companies carried this risk before 1992. It is proposed
that employees contribute between 3% and 3,8% of their income to ensure a
prescribed minimum benefit package. Jehoma points out that "the reality is that
during retirement people need to cover increasing healthcare cost at a time in
their life when they have significantly reduced income."
According to the department, the proposals will now be discussed within
government technical task team for social security, and later referred to the
Inter-Ministerial Committee. The research forms part of the work on social
security reforms contemplated by government. The full document can be accessed
on the department's website http://www.dsd.gov.za
Enquiries:
Lakela Kaunda
Cell: 082 782 2575
Selwyn Jehoma
Cell: 084 515 4592
Issued by: Department of Social Development
7 September 2007
Source: Department of Social Development (http://www.dsd.gov.za)
