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KEY THEMES IN A REVIEW OF THE
PENSION FUNDS ACT, 1956
NATIONAL TREASURYNATIONAL TREASURYPresentation toPresentation to
Portfolio Committee on FinancePortfolio Committee on Finance15 February 200515 February 2005
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PROCESS SO FAR• National Treasury pension reform document was released in December
2004, opened up for public scrutiny and comment
• Minister hosted a roundtable with industry players on 24 November 2004
• First presentation was done in NEDLAC 03 February 2005, follow up
discussion 17 February
• Today’s presentation sets the scene for future engagement
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OBJECTIVES• Plan for a regime that will be effective in the long term
• Improve efficiency, equity and fairness of system
• Enable and encourage South Africans to adequately
provide for their retirement
• Ensure that all employees have affordable access to
appropriate retirement funding vehicles
• Protect pension resources against corrosion (costs)
• Improve standards of fund governance
• Promote the adequacy of retirement fund provision
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BACK-DROP• Continued piecemeal amendments no longer desirable
• Worldwide paradigm shift from DB to DC has changed dynamics:
– risk shifted to employee
– education of trustees important
• South African retirement funding system broadly sound
• Growing consciousness for higher national savings
• Need to Take cognizance of recommendations of various commissions (eg.
Taylor, Smith, Mouton, Katz)
• Reconsideration of taxation on pension funds
We have opted for a systematic and holistic approach
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LANDSCAPE• Pillar 1: SOAP of R740 per month (means tested)
• Pillar 2: Large public sector DB funds, and mostly DC in private sector; hybrid funds; and umbrella funds
• Pillar 3: Private provision over and above Pillar 2 (eg. Retirement annuities)
Is this an optimal structure for South Africa’s conditions?
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MACRO BACKGROUND
1994 2000 2004
Unemployment rate (broad)
31.5% 35.5% 41.2%
Gross saving as % of GDP
16.9% 15.8% 14.8%
HH saving as % of disp inc
2.8% 1.2% 1.1%
Informal Sector (mln)
with agriculture
without agriculture
3.33
1.82
2.17
1.83
Employment (mln)
Formal
Total
6.80
7.97
7.43
11.88
8.76
11.98
Social grants as % of GDP
2.00%
(2.9mln)
2.50%
(7.9mln)
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COVERAGE• In total, approx 9 million individual members across
15 000 funds
– GEPF : 1.1 million
– Gauteng Building Industry Fund : 407,000
– Mineworkers provident Fund : 175 000
• Coverage in formal sector estimated between 66%
and 84%. Even the lower estimate is internationally
comparable
• Problem of high unemployment translates to poor
provision in the aggregate, hence greater burden on
the State
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LEAKAGE
• Sanlam surveys suggest 10-12% (net) of earnings
contribution for DC funds in 2004 for retirement,
against a gross of 16.5%
• Costs seem to be increasing (problematic)
• World Bank recommends contribution rate of 10-
13%
• Anecdotal evidence suggests leakage is a major
problem
– Increases future liability on State to provide SOAP for
greater proportion of population
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REPLACEMENT RATIO• Leakage implies replacement ratio at retirement will
be substantially reduced • To give some idea: assuming a net 10% contribution,
over 40 years with a real return of 3%, one would only achieve a replacement rate of approx 55%
• In other words, one cannot escape the numbers:– Staying invested (for a long period of time) is
important– A culture of saving for retirement needs to be cultivated– Investment performance is crucial, particularly for DC funds
• Need to minimise leakage
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Years of contribution
3% real return 4% real return
10 8,6% 9,0%
15 13,9% 15,0%
20 20,0% 22,1%
25 26,9% 30,6%
30 34,9% 40,8%
35 44,1% 53,0%
40 54,5% 67,7%
45 66,6% 85,3%
Assumptions: net of costs 10% of contribution goes to retirement
: R13,80 of capital buys R1 of pension at age 65
ILLUSTRATION
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KEY THEMES AND PROPOSALS
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ACCESS • Basic question: What can be done to increase
access?
• Compulsion on employer to provide a retirement vehicle or payroll facility
• Compulsory preservation on change of jobs
• Consider erratic employment (informal/seasonal)– National Savings Fund
• Costs in general are a concern and may inhibit access to retirement fund provision
– Increase disclosure
– Increase competition
– Explicit regulation of costs
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KEY BENEFITS• Preference for limited lump-sums, with the purchase of
an annuity on retirement – Challenge for provident funds
• Should pension fund offer ancillary benefits (eg. medical, disability)?
– Consistent with SA conditions?– Benefits from scale economies for the individual?– Ring fencing?
• Housing: Only guarantees and not loans from funds• Distribution of benefit upon death in accordance with
nomination of beneficiary form, else his/her will, else intestate succession
– Currently the nomination form only a guide
• Unclaimed benefits– Set up a central fund to trace beneficiaries/dependants– Unclaimed monies eventually revert to the State (SOAP)
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CAUTIONARY
• Success of proposals dependant on good regulation
• Landscape will have to change notably
• Re-engineering of regulatory framework
• Give more powers to regulator
• Significantly increase capacity of regulator
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GOVERNANCE AND REGULATION
• Recover monies removed from funds inappropriately• Power to remove trustees• Educate trustees• Formulate codes of good practice and codes of conduct• Better use of office of Adjudicator• Retain minimum 50% rule for member elected trustees• Deal with conflict of interest issues• Deal with intersection of labour and pension laws• Deal with umbrella funds• Shareholder activism: Exercise voting rights • Sanction investment managers, administrators etc. • Disclosure requirements to members • Permit trustees to be paid - at fund’s discretion
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INVESTMENT• Standard quantitative limits on asset classes
• funds may have own investment strategy that departs
from these limits, if approved by the regulator
• encourage but not mandate shareholder activism
(exercise voting rights attached to shares owned)
• Use of derivatives permitted only for management of
risk / income streams
• Link returns to inflation
• Socially desirable investment
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DISCLOSURE
• Concise, clear and meaningful
• Indicate how much attributed to costs
• Indicate how much is going towards member’s
retirement
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GOVERNANCE• Establish a specialist tribunal (or extension of
Adjudicator’s office) to hear pension fund disputes. – Any appeals against the tribunal’s decision to be made to the
High Court or FSB Board of Appeal
• Funds may only offer limited individual choice – Trustees ensure that majority of fund members can so
prudently elect
• Limit and disclose any potential conflict of interest; and any gifts/rewards or inducements given to trustees
• Trustees must review and monitor the performance of the fund, the mandate granted to the investment manager, and the appropriate investment strategy of the fund, given its membership
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CONCLUSION
• Many features of current legislation will remain
• Approach may conflict with profit maximisation motive
– Balance and objectivity necessary
• Judge outputs on the basis of the objectives set out
• Engagements will have to emphasise sustainability of pension
environment
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WAY FORWARD
• Receive views from the public and stakeholders
– Possibility of a roadshow
• Incorporate views received and revise document, a
final Government position released soon after
• Incorporate tax views, which National Treasury is
currently working on
• Commence drafting of new Act, using the Policy
Document as a base
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