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There is more than one solution to pension reform Karola McArthur / Rowan Burger.

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Presentation on theme: "There is more than one solution to pension reform Karola McArthur / Rowan Burger."— Presentation transcript:

1 There is more than one solution to pension reform Karola McArthur / Rowan Burger

2 A strategic look at pension reform 1.In what form could reform be implemented? 2.Investigating scenarios 3.Impact on the industry as we know it 4.Taking a stance

3 The key aim Reform addresses mainly the introduction of a fund to address the needs of the low income groups and the indigent The further focus is on cost efficiency Existing structure Expected key changes

4 Broadly, the two key delivery decisions are: the extent of the private sector involvement; and the level of paternalism adopted. How will the dice roll? Private Sector Participation Government Run Institution Paternalistic Freedom of Choice

5 Broadly, the two key delivery decisions are: the extent of the private sector involvement; and the level of paternalism adopted. How will the dice roll? Private Sector Participation Government Run Institution Paternalistic Freedom of Choice Large industry umbrellas Individual select provider of choice State provision with opt out option Mandatory social insurance Socialistic state Mixed economyMember choice Industry provision

6 Internationally social insurance is the dominant framework adopted Private Sector ParticipationGovernment Run Institution Paternalistic Freedom of Choice Australia Chile Netherlands Germany South Africa (current) South Africa (current) Japan Brazil Canada China France Singapore Sweden UK USA * This is obviously highly subjective, trying to rank the social insurance component and the supplementary benefits Finland 6

7 How will the dice roll? Move to a system of national social insurance One large DB fund General safety net targeting NRR 40% One size fits all Compulsory membership No tax incentives Comprehensive integrated benefits Private Sector ParticipationGovernment Run Institution Paternalistic Ability to customise for industry specific needs Consolidation of company’s funds Large industry type funds (+/- 12) DB like benefits Compulsory membership Could be facilitated through Industry “joint venture”, industry bodies or unions Least disruption to existing system Ability to run system on a commercial basis Regulation applies Large commercial industry run funds with portability DC like benefits Tax incentivised or subsidised Other social security benefits provided elsewhere Deliver cost efficient benefits to citizens Leverage off scale for saving and insured benefits Maintain existing private sector markets and players Central NSSF but allow opt out Protected DC like benefits Centralised annuity to ensure base benefits protected Individualism Industry driven mega funds Commercial funds Social Insurance National Savings Scheme

8 Industry Mega Funds Industry employment determines fund participation Simple basic benefits on offer with many cross subsidies Replaces existing pension funds Formalisation of employment structures Lack of government underwriting benefits may make it unsustainable Lacks involvement of informal sector

9 Commercial Funds Mandatory, but individual members choose fund Funds governed by independent trustees but controlled by sponsors Intermediary play a role in option selection Initiatives in place to achieve cost efficiencies – eg central collection agency Seamlessly integrate with existing pension funds Strongly regulated

10 National Savings Scheme Large national fund with salary bands determining participation Allow opt out if minimum standards are met (costs, benefits) to accredited providers SARS the central collection agency Simple largely passive investment options Core death and disability benefits provided

11 Social Insurance PAYG DB fund targeting 40% replacement ratio Compulsory membership for all salary earners Integrated with other social security benefits Contributions 6% to retirement benefit, 4% to death & disability (Capped at UIF top salary level) Significantly crowds out existing funds – only top up schemes to remain

12 Social insurance 12 Defined contribution

13 The advantages of each... Private Sector ParticipationGovernment Run Institution Paternalistic Individualism Industry driven mega funds Commercial funds Social Insurance National Savings Scheme 1.Solidarity 2.Access to All 3.Mandatory Participation 4.Collective Funding Affordability? 1.Collective Funding 2.Mandatory Participation 3.Solidarity 4.Adequacy  Access to All 1.Equity 2.Adequacy 3.Affordability 4.Transparency Robustness? 1.Efficiency 2.Sustainability 3.Robustness 4.Equity  Solidarity

14 The end of the world as we know it No private sector participation in mandatory schemes Top up schemes – private sector focus turns to higher income segments; investments in ELM sector lost Funeral products may survive Passive investment Loss of private sector employment Private Sector ParticipationGovernment Run Institution Paternalistic Consolidation of individual pension funds into +/- 12 industry funds – scale benefits Fewer trustees and pension administrators Passive investment Role of IFA for top up schemes only No tax incentivisation above mandatory contributions Acceleration of regulation (RDR and mass market participation) Stemming leakage – capped fees, yield / cost ratio Increased competition Survival of employment sector Accredited players – who will make it and what are the criteria? Low margin business requires scale – consolidating industry players Mixed economy – can the state achieve sufficient scale? Individualism Industry driven mega funds Commercial funds Social Insurance National Savings Scheme

15 Taking a stance We all agree that government’s priorities must be to increase national savings levels by improving the quantum of savings and the number of individuals saving. We believe that the private sector has a key role and strategic ability to help deliver the policy imperatives. There are a number of clear deficiencies in the system which if addressed will significantly improve the access, efficiency and adequacy of benefits the current system provides. However, we do believe that whole-scale changes to the system will be detrimental. Many incremental improvements will deliver the same desired outcomes. In certain areas government is better placed to deliver solutions. We aim to partner and assist them in creating the optimal solution. We are however also cognisant of the impact on employment practices any scheme may have and caution against an approach that would increase the cost of employment.


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