J Swanson-Jacobs: Institute of Retirement Funds Annual
Conference

7 September 2007

Programme Director,
Executive members and,
Leadership of the Institute of Retirement Funds,
Distinguished guests,
Ladies and gentlemen:

Let me express my appreciation for this singular honour and opportunity to
join you at this annual conference. It is indeed a pleasure for me to share
with you some thoughts on the current debate on Social Security Reform, with a
particular focus on the reform of the retirement system.

South Africans agree that we face a range of challenges of which the
unacceptable levels of chronic poverty and destitution, suffered by millions of
our people, are perhaps the most daunting. Linked to these levels of poverty is
the scourge of HIV and AIDS which is ravaging parts of our society. Millions of
our people still lack access to basic services such water, sanitation and
electricity. Given the multi-dimensional nature of poverty, it is not strange
that there is a high correlation between the manifestation of poverty and
inequality, the disconcerting levels of crime, and alcohol and drug abuse that
costs us billions of rands in social costs.

These ongoing challenges have demanded that we think afresh about how to
provide universal and adequate social protection. In the challenging context of
persistent and stubborn poverty, inequality, deprivation such as we have
inherited, the growing consensus in government was that social security was
essential to sustaining social and economic development. Amarthya Sen, the well
known development economist and Nobel Laureate, makes a poignant point when he
argues that, the reason why people in the rich and developed countries of the
United Kingdom and continental Europe do not starve, is not because they are
rich, but because of the comprehensiveness of their social security
systems.

The Department of Social Development was tasked to lead the process of an
inquiry into a system of comprehensive social security system in 2001.

Government has subsequently adopted a framework of comprehensive social
security that covers three pillars.

Pillar one encompasses the provision of income support, or social assistance
and the social wage, otherwise referred to as the basket of free basic services
that include free water, sanitation, electricity, free education, housing and
healthcare.

The second pillar is a system of mandatory social insurance. For those who
can afford to, there must be arrangements for contributions to risk assurance
such as unemployment, old age, sickness, injuries, diseases, disability, and
income support for dependents in the event of the breadwinner's death.

The third pillar involves voluntary choices for additional retirement
savings and top-up healthcare, over and above the first and second pillar
arrangements.

Ladies and Gentlemen:

Let me briefly outline the progress that the government has made in the
realm of social security over the last decade or so, and then I shall, at a
strategic level, talk about remaining gaps and the envisaged response by
government.

Since 1994, the democratic government has worked to enhance solidarity,
individual and social well-being, social justice, and equality. We have
perhaps, of all countries, made the most rapid progress in the expansion of a
social assistance system. It took most countries decades just to build social
assistance provision. More than 12,9 million South Africans currently receive
income support or social assistance benefits. In 1997, the government, removed
the racial child maintenance system, provided to less than 70 000 children, and
introduced the child support grant. To date more than 8,6 million children
living in households with no or little income, receive a child support
grant.

Over 2,2 million of our older persons receive the old age pension, which is
well targeted and often support other members of their households. In respect
of those living with physical, mental and other incapacities, we provide the
disability grant to more than 1,4 million people.

The democratic government can be credited with perhaps the most rapid
response to addressing the legacy of social backlogs. In this regard the
Provision of the Social Wage which encompasses water, electricity and
sanitation stand out as major achievements. Included here is the access to
primary healthcare to all those who are vulnerable and lack income. The roll
out of the policy of no fee schooling is advancing.

Ladies and Gentlemen, we can also record, albeit in a limited fashion
progress in the second pillar. Here we count the expansion of the Unemployment
Insurance Fund (UIF) to domestic and farm workers as a significant advancement,
over and above the determination of decent minimum wages by the Minister of
Labour.

The prohibition that government has placed on the risk selection by medical
schemes has led to increases in medical scheme membership, and more
significantly, the setting up of the Government Employee Medical Scheme will
provide a solidarity pool which, overtime, will provide for an additional 250
000 people and their families.

The strengthening of the capability of the Medical Schemes Council as an
independent regulatory body has strengthened consumer protection, strengthening
both the second and third pillar achievements.

Ladies and Gentlemen:

While we must recognise the progress we have made as a country, government
is aware of the remaining gaps which, if not addressed, pose threats to our
hard won freedom and democracy.

In respect of the first pillar, we need to find innovative and sustainable
measures to support significantly more people of working age, who are
unemployed, and for who work opportunities through the Expanded Public Works
Programmes proves limited. Here we count the youth who must make the transition
from education to employment, vulnerable caregivers of dependent children who
perform a social function without receiving income and the millions who have in
recent years become unemployed as the labour market continues to render their
skills obsolete.

Government's intervention, namely the Accelerated and Shared Growth
Initiative for South Africa (AsgiSA), driven by the Deputy President, and the
Joint Initiative on Priority Skills Acquisition (JIPSA) programme should
considerably respond to the needs of unemployed, vulnerable individuals.
Moreover, for unemployed people, government continues to develop strategies to
link social grants to poverty alleviation, sustainable livelihoods and other
economic opportunities.

Ladies and Gentlemen:

Government is on record for pointing out the gaps in our second pillar of
social security, social insurance, and the remaining inadequacies. A sizable
proportion of people are excluded from unemployment insurance such as civil
servants and foreign contract workers, while the benefits itself may not be
sufficient to maintain people until they get to the next job. Millions of our
people also do not have access to savings schemes for retirement, health
insurance, death and disability benefits, occupational injuries and
diseases.

The inherited values and spirit of Ubuntu encompass the idea of social
solidarity. Also in the context of almost every religion or faith there is to
be found social teaching of solidarity as "a firm and persevering determination
to commit oneself to the common good; that is the good of all and of each
individual, because we are all really responsible for each other." The basis of
solidarity is mutual obligation. This is mainly expressed through reciprocity,
or exchange. "Balanced reciprocity" occurs where people make a direct return
for the things they receive. Often, though, reciprocity is "generalised"; there
is no simple balance, but people give because they have received something in
the past, or because some future reciprocity is possible.

This spirit of solidarity and risk pooling must be core to the social
insurance reforms we are embarking on. Before I outline some of the key
recommendations, let me list some of the gaps in the current system of
retirement provisions.

Over 6 million working South Africans do not contribute to retirement
savings and will over time become dependent on the state provided old age
pension. For those who do qualify, the quality of benefits accrued proves to be
insufficient.

The generous subsidies provided to middle and high-income groups are not
only unfair and inequitable, but results in a regressive tax regime. Contrary
to popular and fallacious assumptions, subsidies do not incentivise savings.
This was proved by World Bank research and local empirical studies.

The charge costs of retirement products in South Africa are the highest in
the world and reduce savings.

Many retirement savings products do not provide adequate disability,
survivors and post-retirement medical benefits.

Although our legislative instruments are deemed to be amongst the best
internationally, our ability to ensure compliance is compromised.

The members of the Inter-Ministerial Committee, having considered the
shortcomings in the current system, will have to apply their collective minds
to a number of policy options for reforming the pensions system.
 
There is general agreement that the means test to the old age grant creates
problems of perverse behaviour not to save in order to get the benefit. In
addition, the means test creates a poverty trap, is often not properly applied
and is inefficient. There is agreement that we either need to remove the means
test in its entirety, or increase the income threshold significantly.

There is general agreement that the country should introduce a mandatory
retirement savings scheme that provides the employed from a certain income
level to save for retirement. It is being debated to what extent we should have
defined benefits and defined contribution savings schemes. This is an important
debate as the decisions we make today will affect our future as well as that of
generations to come. The issue of retirement savings scheme is of profound
economic, social and political significance. It remains important that,
whatever the design, the importance of risk pooling, risk sharing and a level
of redistribution remains important for schemes to ensure social
solidarity.

Notwithstanding a world-class regulatory system, we must acknowledge that
scandals, such as the Fidentia debacle, are indicative of shortcomings in our
oversight of pension funds. We would abdicate our responsibility if we leave
people, who put away a share of their hard-earned savings, entirely at the
potential risks of fund failures, fraud, corrupt practices, poor governance and
risky investment decisions. We should have a framework that, in its simplest
form, is aimed at achieving simple, standardised, low cost pension savings
products and consistency across providers.

The approach to regulate and supervise the pension fund market may have to
differ considerably from the approach used in the country today. We are in need
of a new supervisory philosophy that is proactive and comprehensive, with more
regulatory independence and an enhancement of the capabilities of the current
regulatory structures.

The Committee will have to debate the extent to which we should introduce
minimum product standards, with significantly reduced administration charges
that are often the main reason for the low returns on savings. We need
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.

There is general agreement that a debate is required in respect of the
provision of tax expenditure subsidies to middle and high-income groups. The
proposals on the table range from a total removal of the subsidies to proposals
to cap them at a certain level. This is a complex issue. While the research
suggests that there is no evidence to support the notion that tax subsidies
provide incentives for savings, we must acknowledge that most countries in the
world provide them.
The emerging consensus is that a review is needed on the matter of tax
subsidies.

In view of the withdrawal and decrease in benefits over the last 15 years,
government recognises the need to provide for ancillary risk cover with the
retirement package such as disability and survivors' benefits. In addition, a
part of the debate will have to include the need for post retirement healthcare
contributions, as the evidence indicates that those in retirement are finding
it difficult to finance the increasing escalation in healthcare costs. From
about 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.

Government will discuss the extent to which employees must save a part of
their income to ensure a prescribed minimum benefit package during retirement.
It is an unfortunate reality that, during retirement people must cover
increasing healthcare costs at a time in their life when they have
significantly reduced income.

Ladies and Gentlemen:

The discourse on retirement reform will have to be underscored by guiding
principles. As we engage in the debate, we need to make sure that we work
towards the extension of social insurance coverage to all members of the
population. The theoretical basis for retirement savings is not, and I
underscore, it is not to ensure that we have a pensions industry, but rather
that we ensure protection against poverty in old age, during disability or on
death of the wage earner for all members of the population. Whether government
or the private sector provides it is another debate. We must be committed to
the provision of an income, and replacement of lost earnings as a result of
voluntary or involuntary retirement for all those who have contributed.

The income that we thus want to ensure must adjust to take account of
inflation and, at least to some extent, of the general rise in living
standards. A final principle requires the creation of an environment for the
development of additional voluntary provisions for retirement income.
Government is therefore committed to the existence of a vibrant and competitive
private pension fund industry that is accessible and benefits from the economic
growth of this country.

Ladies and Gentlemen:

In closing, let me make the point that, given the profound economic, social
and political implications of social insurance reforms, we should as a
collective ensure debate extends beyond those with vested interests. In fact
whether the benefit system is arranged to a flat rate nature, earnings related
or based on cumulative contributions is neither here nor there. However, the
process of collective discussions, engagement, and consensus is a matter of
considerable significance. While many governments have in the past, such as
Chile, adopted unilateral approaches to making choices about their systems,
South Africa has to build on its rich cultivated tradition of public
consultation, which eliminates the risk or the desirability of unilateral
government action on a matter as important as pension reform. Government
remains committed to an inclusive process of public consultation and
debate.

I thank you.

Enquiries:
Lakela Kaunda
Tel: 012 312 7653
Cell: 082 782 2575

Selwyn Jehoma
Cell: 084 515 4592

Issued by: Department of Social Development
7 September 2007