There is an unusual silence around the future of pension reform, even though it will both reshape the pensions industry and lead to some substantial wealth redistribution.
A social security paper incorporating pensions was released last year. But according to Mike Prinsloo, head of institutional research at Alexander Forbes, the document is light on detail.
The central proposal would have devastating consequences for firms such as Forbes and the employee benefits divisions of life offices such as Old Mutual, Sanlam, Liberty and MMI, as well as for union funds, which would lose virtually all their members. The paper foresees a 12% contribution of all earnings up to the unemployment insurance fund threshold (now about R190,000/year) going into the fund, which is now called the national social security fund (NSSF).
A 12% contribution of all earnings up to the UIF threshold is expected to go into the social security fund
Prinsloo says it is not clear whether this will operate like a defined contribution, where personal contributions are credited to each member, or whether there will be cross-subsidisation. The cross subsidy is often referred to by government spin doctors as defined benefit, though it has little in common with traditional final-salary schemes. A portion will certainly go to death and disability cover, and it might also incorporate unemployment insurance.
The process started as a pensions-only process in 2007, driven by then finance minister Trevor Manuel’s team at national treasury. The tone of the paper was one of co-operation with the private sector, as long as it got its act together on fees and rationalising funds. At the peak SA had an unmanageable 14,000 funds.
Senior treasury officials such as Andrew Donaldson talked of letting people opt out of the national fund, provided their private sector fund met certain governance standards.
There followed years of turf battles with the department of social development, which took a more hostile approach, even talking of abolishing all tax breaks on pension fund contributions. And some of treasury’s key goals have been held up by disputes in the National Economic Development & Labour Council. These include making it compulsory to preserve pensions and forcing provident fund members to buy pensions with their lump sums. Unions have insisted that any further progress on pension reform can take place only when the NSSF is up and running. In answer to questions from the Financial Mail, treasury claims to be on the same page as the department of social development when it comes to the NSSF.
But Old Mutual corporate consulting head Malusi Ndlovu is sceptical, saying there is still a difference in tone between the two departments, and it is not always clear who is responsible for what. Ndlovu says he would like to know whether there will be options for the private sector to take part in administration or investment management of the fund.
“There is a case for a single administrator, for economies of scale, but I believe it would be beneficial to have a diversity of investment managers to make the market more efficient,” he says.
Treasury will say only that provision will be made to ensure that investment of NSSF funds will be subject to a transparent and responsible investment mandate, and under the same regulatory oversight that is applicable to similar financial sector institutions. It is unlikely that the assets will be managed by the Public Investment Corp, as it would then end up owning up to 50% of certain shares and be even more dominant in the bond market.
Ndlovu says there was a proposal that the 1.2m members of the Government Employees Pension Fund should be exempt from joining the NSSF. But, apart from the issue of the hypocrisy of government exempting itself from its own law, the NSSF would need the contribution of government employees to bulk itself up and become viable.
Treasury insists that private sector pensions will continue to exist, though there needs to be further consolidation.
But Mathias Sithole, head of public sector & corporate consulting at Liberty, says there has been an increase in the number of standalone funds moving into umbrellas, with the total number of funds falling from 14,000 to 5,000 at the end of 2015 (statistics are slow to come out). “A small number of large multi-employer participating funds will dominate the industry, driving the necessary economies of scale,” Sithole says.
David Gluckman, head of special projects at Sanlam Employee Benefits, says that umbrella fund assets have
increased by a compound 25.6% over six years and now stand at R272bn.
Competition has increased with the entry of Allan Gray, Discovery and Sygnia.
Gluckman believes that by 2030 there will be 100 employer-sponsored funds, 10 commercial umbrella funds, 20 union-sponsored funds and five industry funds (such as those for mineworkers and metalworkers). Unions exercise substantial influence through their pension funds. They are sure to insist on their survival before NSSF is approved.
By Stephen Cranston for Financial Mail