Posted on November 11th, 2010 in Industry News
The latest available public documents on Social Security and Retirement Reform are still National Treasury’s Second Discussion Paper and the Department of Social Development’s Feasibility Study, which both date back to 2007. Since then, an Inter-Departmental Task Team (IDTT) has been appointed to produce a proposal that unifies the views of the different government departments. The IDTT is advised by representatives of many stakeholders and industry bodies. While we are waiting for the announcement of the IDTT’s reform proposals, the reform debates continue amongst various interest groups.
One alternative, presented at the Retirement Reform Seminar [http://asisa.org.za/index.php/events/retirement-reform-seminar.html], hosted by the Association for Savings and Investment South Africa (ASISA) and the Actuarial Society of South Africa (ASSA in October, presents some interesting options and has served to fuel the reform debate. This solution, called the GAP Fund, was a design proposal from private sector which is an alternative to the much debated National Social Security Fund (NSSF ). The GAP Fund proposals were put together by ASISA based on research undertaken by that body, and sketch out a mandatory contribution tier that complements our existing retirement funding infrastructure rather than replacing it.
Reform Proposal Recap
Current Design
A Social Old Age Grant is available to South Africans older than the State Pension Age (now equalised at age 60) and is subject to a means test. Employed South Africans are also eligible for disability benefits from the Workmen’s Compensation Fund and unemployment benefits from the Unemployment Insurance Fund (UIF). For the latter, employers are responsible for enrolling their employees, deducting a 1% employee contribution and making an additional 1% employer contribution.
Reform Proposals (2007)
- Continue with Social Grant at appropriate level but remove means test.
- Introduce Mandatory Contributions via state vehicle, ie the NSSF.
- The NSSF has an earnings ceiling: contributions related to salaries above the ceiling are made to an alternative fund in the private sector.
- Preservation measures are implemented.
- Private sector funds have to be accredited.
- Criteria for opting out of NSSF are still under debate.
- Voluntary private provision is possible over and above State and Private mandatory provisions.
The GAP Fund
Focus
The GAP Fund is an alternative proposal developed by ASISA as a potential solution to South Africa’s retirement challenges. The plan is not accepted or endorsed by the Inter-Departmental Task Team working on the reform proposals; however, it will hopefully feed into their debate in the future.
There are 9.3m formally employed South Africans (excluding agricultural workers) of whom 5.8m have some sort of formal retirement provision arrangement. Of the 3.5m without provision, 1.75m fall in the R12 000 to R75 000 annual salary category. The majority of the balance fall in the lower than R12 000 annual salary category and would receive a relatively high replacement income from the social grant (without means test) at retirement. The GAP fund intends to close the provision gap and focuses predominantly on the 1.75m group.
Features
The proposed GAP Fund would take the form of a low cost unitized savings account, administered on individual member level for regular and ad hoc contributions. A centralized multi-managed investment fund would mainly invest in inflation-linked government bonds, thus offering reliable inflation-plus returns. Administration services could be provided by existing well known brands which will offer economies of scale, diversification and portability.
Contributions could be made compulsory and enrolment may take place via the employer or individually with contributions permitted from various sources. The intention is for the administrators to “pull” contributions via debit orders, for example, as opposed to employers or individuals “pushing” contributions to the administrator.
It is anticipated that leakage will be managed through limited access to capital on withdrawal regardless of age. Annuitisation will be optional from age 60 and compulsory on attaining the age of 75.
Death benefits could take the form of a contribution booster, i.e. the expected contributions from date of death up to retirement age.
Government incentives are optional but could take the form of a co-contribution to encourage savings.
Quarterly reporting could be provided via SMS.
Comments
Although it is quite clear that this proposal demonstrates survival bias towards the private sector and that it is well marketed to government given the investment strategy, the design has a number of positive elements:
- The South African retirement fund industry is well established and competes very well globally – the GAP Fund will preserve this.
- The GAP Fund bypasses concerns regarding the NSSF administration, e.g. dis-economies of scale related to concentrated administration service providers.
- There would be little or no need for regulatory change.
- It addresses the main focus area of the NSSF, i.e. it includes formal workers who have no retirement provision in place.
- The risk benefit design effectively offsets the savings element and considers loss of future savings potential. It is therefore more aligned with individual needs and probably more affordable.
Given that this was the first time that this alternative design for mandatory provision was widely presented to the public, it would be premature to jump to conclusions regarding the extent by which it will be considered by the IDTT. It is recognised that this is by no means a complete proposal and that there is potentially much room for improvement once different stakeholders begin debating the alternative.
For the moment, we continue to wait for the IDTT proposal find its way through Parliament before it goes public. Constructive debate amongst the various stakeholders will continue throughout this process.
We will keep you informed of any further developments via future newsletters.
