Institute of Retirement Funds Annual Conference

‘The evolving Retirement landscape – shaping inclusive growth”

Update on Reform Proposals

28 September 2011

Selwyn Jehoma

Introduction In 2008 - the need for comprehensive social security

2009- The theme was “A fresh perspective from government on retirement reform in SA” – I then indicated that we have reached agreement

2011 - “Shaping inclusive growth” – flavour of the month

This presentation is about the Status of Reforms

This presentation looks back at where we come from, before presenting the case for change, albeit brief

But before the historical overview - the political economy of social security in SA- we go even further back to just define the nature of my department’s business

Insurance, savings, labour & social security

1. Insurance has its genesis in the Babylonian period – the principle of distribution of loss

2. Life insurance were introduced at time of the Romans – Gaurdian’s Fund – principle of contributions by all to cover the loss of the few in respect of death

3. Savings – France claims credit for being mother of savings banks, a savings bank established in 1765, but it is of record that the savings bank idea was suggested in England as early as 1697 – the principle for protection and generating returns

4. Social security - more recent development – 19th Century

5. ALMP - Labour activation, measures to promote employment were pioneered in Sweden in the 1950’s

Differences

1. Social security refers to public and private, or to mixed public and private measures, designed to protect individuals and families against income insecurity caused by contingencies such as unemployment, employment injury, maternity, sickness, invalidity, old age and death.

2. The main objectives of social security are: (a) to maintain income, (b) to provide health care, and (c) to provide benefits to families. Conceptually and for the purposes of this Code, social security includes social insurance, social assistance and social relief or allowances.

Industrialization Impact

Necessity Social Security• The industrial revolution paved the way for the first forms of

social security as people lost their bond with land to large scale commercial enterprises.

• Bismarckian model of social insurance for employed started in the 1880’s with workers’ compensation, sickness insurance, later came health insurance (‘83), accident insurance (‘84), old age & invalidity in 89.

• The Nordic countries such as Sweden, Norway and Denmark

• Between 1906 and 1914 Anglo America countries followed introducing old age pensions, unemployment insurance and compulsory health insurance.

• Colonies of British Empire followed with basic forms of social security: New Zealand, South Africa, Australia, Canada, India

Great Depression and WWII

• South Africa faced similar challenges • A Committee of Inquiry was set up in 1942• The Smuts and NP governments missed the opportunities and

by 1946 made minimal changes and for decades, as the world progressed, we remained behind.... exception being 1978

Modern Day Reforms

• The Taylor Committee recommendations

• Social assistance: Pillar 1– All social grants belong here– non-contributory and tax funded– Main focus on poor

• Social insurance: Pillar 2– Mandatory Contributory– Focused on income earners

• Voluntary Insurance: Pillar 3

Retirement Reforms

Initiatives in democratic space

• The early 1990’s witnessed several attempts

• The Smith Committee...

• The Mouton Committee explored reforms...

• The 1997 Retirement Committee....

• Health Reforms

• The 2004 National Treasury proposals

Social Development 2006 Review

The DsD review revealed that:• Means test causes problems

• The lack of a mandatory system is an anomaly

• The pensions received or replacement rates are low

• The cost of retirement provision is very high

• The tax expenditure subsidies lacks rationale

• Major regulatory challenges – we decided not to go into the malfeasance conflicts of interests, fund failures, asset stripping, corruption, incentives by brokers and administrators to trustees...

• A set of social security proposals have subsequently been considered under auspices of an IMC since 2007

Recommendations and Agreements • Agreed: • Universalise old age pension, no affluence test, tax rebate

• Introduce a mandatory pension fund - a DB construct

• Partial funding prefered

• Establish a state fund – NSSF from 3 options to one

• Opt out no more an option

• Add DC component for income above artisan level income

• Contribution (not a wage) subsidy to off set cost of labour for low income employees

• The full framework ....

Retirement Benefit Design

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Specific design issues

1. DC arrangements must be based on an approved funds framework – accredit private funds

2. Tax expenditure subsidies will be more equitable

3. Unemployment continuation benefits to ensure preservation of contributions

4. Survivor benefits: Agreed on DB but not on quantity of benefit for disability and survivors

5. A vexing question relate to institutional arrangements, see next slide

Policy and Delivery Consolidation

National Social Security Fund Pension, disability & Survivor BenefitsAccident, Unemployment, Maternity,

Sickness

National Social Security Fund Pension, disability & Survivor BenefitsAccident, Unemployment, Maternity,

Sickness

Unified Social Security PolicyUnified Social Security Policy

SASSA Old Age Pensions

Disability Grants and Children’s Benefits

SASSA Old Age Pensions

Disability Grants and Children’s Benefits

Consolidated Functions

Consolidated Functions

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Disability Assessment

Disability Assessment

Delivery Interface Delivery Interface

InspectorateInspectorateAdjudicationAdjudication

Remaining disagreements

1. Unemployment contributions level must be not increased as it will informalise employment

2. The current Regulator is not independent, focussed and endowed to ensure proactive prudential regulation:

3. Investment: Principles of Efficiency, Governance and Strong supervisory control will and must guide decision. Options : PIC or Internal but PIC as autonomous is not an option

4. Governance of the NSSF

5. Implementation sequence

6. Locating responsibility for pensions - 3 departments, 1 place

Social Security Reform Scenarios

1. Minimalist, Moderate and Radical Reforms

2. Radical reforms could take the character of …, a Defined Benefit scheme on a pay-as-you-go basis, replacement rates of 70% and above, a single fund, an NHI that becomes the sole provider and purchaser of healthcare

3. There is now an opportunity to make rational and sensible choices that lead to an inclusive growth path that is sustainable

Thank you

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