Pensions

1
Pensions savings

• Reform efforts in South Africa

Institute for Financial Management
Research Centre for Insurance Risk Management
2
Suggested pathway

• Environmental uncertainty

• Challenges for South Africa

• Progress

3
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

4
The world is changing
Population over sixty years old

35
30
25
20

• Key determinants
• Mortality
• Fertility
• Immigration

15
10
Source World Bank (1994) Averting the Old Age
Crisis Oxford University Press ASSA AIDS
Model Standard assumptions
5
0
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
5
The world is changing
6
The world is changing
Source UN World Economic Social Survey 2007
7
The world is changing
Population over sixty years old

35
30
25
20

• Key determinants
• Mortality
• Fertility
• Immigration

15
10
Source World Bank (1994) Averting the Old Age
Crisis Oxford University Press ASSA AIDS
Model Standard assumptions
5
0
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
8
South Africa is changing
9
South Africa is changing
10
South Africa is changing
11
South Africa is changing
12
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

13
Environmental uncertainties

• Personal income per province, 2008 (adults)

14
Environmental uncertainties

• Personal income per population group, 2008
  (adults)

15
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

• Barometer GINI
• Wildcard immigration

16
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

• market openness
• social protection focus
• some vague in-between
• key policy issue

• Barometer labour policy
• Wildcard political responsibility

17
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

• market openness
• social protection focus
• some vague in-between
• key policy issue

• what does for the people mean?
• market regulatory policy
• that key again

18
Policy alternatives for long-term saving
Redistribution
Saving
Mandatory
Voluntary
I
II
III
I. Social security disproportionately benefits
the poor
II. Occupational funds or individual accounts
III. Additional provision
19
Policy alternatives for long-term saving
Redistribution
Saving
Mandatory
Voluntary
I
II
III
I. Social security disproportionately benefits
the poor
II. Occupational funds or individual accounts
III. Additional provision
20
Policy alternatives for long-term saving
Redistribution
Saving
Community
Mandatory
Voluntary
Non-contributory
Contributory
0
IV
I
II
III

• Context

• Flexibility

• Diversification

21
The S African system in 5-pillar language
Redistribution
Saving
Community
Mandatory
Voluntary
Non-contributory
Contributory
0
IV
I
II
III

• Context

• Flexibility

• Diversification

22
System framework
23
PAYG systems Germany
? New Zealand
24
Individual account systems Chile
? Australia
? Nigeria
25
South Africa
26
South Africa policymaker problems
27
Putting it another way
28
Putting it another way
29
South Africa policymaker problems
30
Policymaker dilemmas
Which objectives are the most important and how
should they be evaluated?
Participant security
Sustainability
Solidarity
Cost control
Poverty alleviation
Investment returns
Coverage
Replacement ratios
Public confidence
Capital market development
Economic stability
Health coverage
Labour incentives
Supply side effectiveness
31
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

• market openness
• social protection focus
• some vague in-between
• key policy issue

• what does for the people mean?
• market regulatory policy
• that key again

32
SA private sector system a summary
Providers of product
Retirement funds
Intermediaries advisers
Regulator
33
SA private sector system a summary
Regulator
34
Environmental uncertainties

• age distribution
• education and skills
• wealth
• equality

• Demographic change
• Economic alternatives
• Policy alternatives

• market openness
• social protection focus
• some vague in-between
• key policy issue

• what does for the people mean?
• market regulatory policy
• that key again

35
Low-end issues
36
Low-end issues

• Six hurdles to rational saving by LSM 1-5
• Short-sightedness
• Affordability constraints
• Community motivation
• Automatic and means-tested income
• Unattractive vehicles
• Opportunity cost

37
What are the likely developments?
Reducing certainty

• Continuation of SOAG
• removal of the means test
• policy statement on increases (?)

• Mandatory contributions
• to a central fund

• Mandatory contributions
• to a central fund
• private alternatives

Parameters

• Participation incentives
• wage or explicit subsidy

Reduced tax concessions
Annuitization issues
Nature of accredited private sector vehicles
?
Risk benefit provision
Transition rules
38
Pensions savings

• Reform efforts in South Africa

Institute for Financial Management
Research Centre for Insurance Risk Management
39
Regulatory rationale

• Reactive approach
• Proactive approach
• Market mechanism

• Dependent on
• independent monitoring
• credible deterrents

Trustee

• Characterised by
• few, large providers
• strict structural standards
• stringent regulations
• pre-empting problems
• strongly resourced regulator

Provider
Customer

• Competitive differentiation

40
Product provisions

• Need for minimum standard
• Current framework focused largely on financial
  soundness
• Customer protection paramount in mandatory
  environment
• Providers will be very powerful
• Cost-efficiency is crucial
• Consumer comprehension facilitated by simplicity
• Portability enhanced by standardisation

41
Policy lessons from Australia
? Chile
Source APRA Annual Superannuation Bulletin 2005
42
Policy lessons from Australia
? Chile
Source APRA Annual Superannuation Bulletin 2005
43
Policy lessons from Australia
? Chile
Source APRA Annual Superannuation Bulletin 2005
44
Policy lessons from Australia
Source APRA Insight, special edition 2007
? Chile
45
Policy lessons from Australia
Source APRA Insight, special edition 2007
? Chile