The Department of Social Development published a green paper on comprehensive social security and retirement reform on Wednesday (18 August).
In brief, the proposal aims to create a centralised National Social Security Fund managed by the government, said John Anderson, executive of investment, products and enablement at Alexander Forbes.
Under proposals contained in the green paper, employers and employees would have pay up to 12% of their earnings into a state-run national social security fund.
The contributions would be between 8% and 12% of earnings, up to the current Unemployment Insurance Fund (UIF) ceiling of R276,000 annually.
This fund intends to provide basic benefits for all qualifying citizens up to a threshold, including all employees in the private sector. Citizens can also choose to top up their retirement benefits using an occupational or individual arrangement.
“In practice, this means that most existing members (of retirement funds) will become dependent on government through the National Social Security Fund for their retirement and insurance benefits, rather than through an occupational or individual scheme as is currently the case,” said Anderson.
“We argue that such a route may result in reduced benefit security due to several deficiencies in the proposed system.”
1. It removes competition to the detriment of members
The proposal removes agency and the power of self-determination from employers, bargaining councils and unions, said Anderson.
“Currently, members benefit from the competitive pressures applied to services providers to improve service levels, innovate and control costs. The proposal would result in an effective monopoly and monopsony within the retirement funding space with no freedom of choice.”
2. South Africa has already made significant progress in enhancing retirement funding
This has been achieved through improved competition, governance, regulation, transparency, innovation and reduced costs since 2012, said Anderson.
“None of this has been factored into the paper. The reforms proposed may be misinformed by outdated data, rendering them inappropriate.”
3. Participation in retirement schemes is voluntary for employers in the current system
Employers have the discretion on how to structure their compensation packages in a bespoke manner for the needs of their employees.
“The proposal does not account for the flexibility required by different employee groups or the ability of low-income earners to afford such contributions,” said Anderson.
4. The proposed scheme requires substantial technical expertise to administer
Anderson said the envisaged scale of benefits is unlikely to be achieved.
“Government would need to establish new and unproven capabilities to administer the structure with little evidence to suggest greater efficiencies or service standards over existing private sector administrators.
“The substantial transition and opportunity costs of the new system relative to the existing framework need to be fully appreciated.”
He added that there is also significant ambiguity that still needs to be resolved on the practicalities of the proposed approach.
5. The proposal introduces unfunded benefits in the National Social Security Fund
The challenge with unfunded benefits is that these are future benefit promises being made by the government with no accumulated asset values backing them, said Anderson.
“Hence the benefit security for existing individuals would be reduced. In contrast, the benefits are fully funded for members of defined contribution funds.
“These funded arrangements have specific ring-fenced accumulated assets to provide the required benefits per individual member.”
6. It introduces material systemic risk to South Africans’ retirement funding aspirations
Any failures, inefficiencies or irregularities within the centralised structure will affect all income earners, said Anderson.
“By contrast, the impact of any failure by a single entity within the current diversified retirement funding industry is limited to the clients of that entity.”
7. Higher taxes from contributing members would subsidise the contributions of low-income earners
“Against the backdrop of South Africa’s economic trajectory, existing high tax rates, the funding dilemma of National Health Insurance and discussions on the basic income grant, we are sceptical that the small proportion of income taxpayers in South Africa will be able to afford such an increase in taxation,” said Anderson.
Anderson said that there are less disruptive and more effective means to improve matters further in the retirement funding industry, building on significant improvements made over the last few years.
He said that the single biggest interventions to improve outcomes are:
- Compulsory preservation of a portion of retirement savings – as proposed recently by National Treasury, with the possible introduction of a two-bucket system;
- Scrapping the means test for the state old-age pension.
“Separate interventions should be thoroughly explored for the informal sector, taking the specific dynamics of this sector into account to ensure a sustainable and pragmatic solution,” he said.
“To improve outcomes for retirement fund members, Alexander Forbes will continue to engage through industry bodies and directly with policymakers.”