Transcript Document
PENSION REFORM …Fundamentals of Presentation to the Pencom Conference Elias Masilela Theme of conference Investment…? Basic fundamentals remain important i. Retirement system can never be over-mature ii. It cannot be implemented in isolation of other reforms iii.Investment is an intermediate step, yet an important one - It assumes that money has been saved and available for investing - Savings are inadequate in SA… - Savings performance has been a global concern in the past Aim of presentation Highlight the importance of a sound retirement design Identify the importance of sound regulation Interrelationship between retirement saving, investment and growth Road map Why retirement funding Social objective function (SOF) Hurdles to SOF – value chain Why reforms Other social considerations Role of sound investing Role of regulation in investment environment Balancing financial and social returns Conclusions Why retirement funding? Role of retirement savings (1) Consumption smoothing Deal with household vulnerability Poverty alleviation amongst the elderly Income redistribution Manage long term fiscal risk Adequacy of savings At macroeconomic level, improve saving/investment balance Deal with a rising passivity ratio Role of retirement savings (2) Source of long term savings Financial market deepening Enhanced intermediation Catalyst for efficient trading and settlement system Influence corporate governance i. Particularly under mandatory regime ii. PIC in SA Conditions for success Investment policies are critical i. Buy and hold has minimal impact on liquidity ii. Dynamic trading related to short-term speculative positions Geographical limitations i. Exchange control restrictions Implications of poor saving Higher cost of capital Low investment thresholds Increased fiscal costs and reduction in social and economic delivery Poor growth More difficult to deal with poverty Household vulnerability Saving decisions Source: Eighty20, 2007, The Savings Market for the Poor Short term savings leading % 60 50 40 30 20 Savings/ Transaction Stokvel Retirement Annuities Pension/ Provident fund 10 0 1 Source: Finscope South Africa 2006 2 3 4 5 6 LSM Social objective function Multi-pronged objectives Saving for retirement cannot be the only objective Policy should deal with all other societal objectives Income distribution is major challenge i. Inadequate incomes to save ii. Lack of information and education iii.Rampant poverty Social security becomes an imperative Time value of consumption? Transition to retirement Current state End state (Retirement) •What is the aim of the retirement design? •What level of welfare should society enjoy? •What retirement amount is adequate? Replacement ratio •Retirement and/or social security? •Ability to manage immediate risks (death, disability, unemployment)? •What form of retirement is appropriate? •How many people can afford to save for retirement •How meaningful is retirement funding, therefore? •How many people will reach retirement? •Preserving income growth •For low income earners, risk and current welfare is more important •For high income earners, retirement is more important Social Security defn. “… an institutional arrangement, driven by the state to secure the welfare of members of society through securing a certain amount of minimum income, during their productive years and in retirement. It is a system that prevents destitution in the case of members of society faced with incapacity and unemployment. It is a highly distributive institution that relies on the principle of solidarity amongst the income capable and the less income capable…” The design of such system varies from society to society depending on the underlying philosophies and circumstances. Hurdles to social objective function Value chain Retirement savings = (Replacement ratio) + Contributions: ƒ(Ŷ, Cons. behaviour…) + Returns: ƒ(ř, Ρ˙, choice of manager…) + Period to retirement: ƒ(Ŷ stability, Ē/Ū…) - Leakages: ƒ(Т, Ρ˙, erratic Ē, Intermediate costs, ancillary benefits…) Conditions Sound macroeconomic policies Effective regulation Robust accounting and legal standards Information symmetries/transparency Consequence If objective function is sub-optimal or society fails to realise optimality …Need for reform …Any resistance often is imposed on the state Why reforms Concerns of most economies Cost of provision Poor efficiency Lack of competition Poor coverage Future fiscal risk Lack of trust of government and politicians Design flaws Inability of state to administer i. Poor fund management Inequitable benefits Regressivity in income distribution Triggers for reform Globally: South Africa: Reactionary considerations… Proactive considerations… Short term budgetary Long term fiscal abilities Acute social imbalances constraints Demographic pressures, and dependency ratios ageing and dependency ratios Inadequate private system Inefficient public systems Fragmented public sector Untrustworthy governments system Backdrop to Chilean reform Considered it as a macro rather than a sectoral reform Unsustainable PAYG system i. Demographic pressure ii. Abuse iii. Premature retirements Reform had to be based on honest promises to deliver i. Guarantee promise way into the future ii. RDP and GEAR nostalgia…? Key macroeconomic pre-requisites i. ii. iii. iv. Structural fiscal surplus targetting (1%) Inflation targetting (3%) Floating exchange rate regime Labour market flexibility Economic impact of reform Labour market impact i. Flexibility ii. Productivity Shifting and sharing of risk i. Government vs individuals Poverty impact Industry impact i. Employment ii. Firm efficiency Fiscal impact South African reforms Why reform? Increasing access Increasing welfare Reduce dependency on the state i. Adequacy of retirement savings Deal with household vulnerability Increase overall savings Increase shareholder activism i. Empowerment of individual saver Efficiency, sustainability and equitability Feature of SA economy Poor domestic savings (15%) i. Long history of government dissaving Low inflation environment (6%) High unemployment (35%) Loe literacy levels Skewed income distribution High dependency ratios High poverty levels Rising marginal propensities to consume i. Greater social transfers Financial liberalisation i. Higher credit-financed consumer spending Low income levels Implications Cannot plan for retirement only Social security is equally…, if not more, important i. South Africa does not have a comprehensive social security net ii. Huge gap between haves and have nots Key proposed reforms Compulsory state retirement fund i. Compulsory social security - Risk benefits and annuities ii. Individual savings accounts iii. Critical contribution thresholds iv. Wage subsidy Administration of national fund by state? SOAP means test made non-binding i. Double dipping Consolidation and pooling of funds Preservation Changes in tax treatment Common legislation Post retirement medical aid Social security model Funded DB, from “A” is similar to “C” save only for funding productively employed A Social Security (DB) 50-60% Death, disability, Annuities, Unemployment C B Individual accounts (DC) 40-50% Retirement (DB) (Income based) Crosssubsidisation solidarity Unfunded DB, from fiscus Opt-out option Accreditation (Factors) Basic social security and welfare - Universe •SOAG •CSG Guaranteed rates of return? Inflation linked bonds Macroeconomic consequence Increased retirement provision Provide without risking job creation Poverty reduction Increased aggregate savings More competition on service provision Short term loss of business to private sector i. Consolidation has positive impact on umbrella business Expansion of markets Shift from supply to demand led market… i. Reduced need for large marketing budgets What is the net impact…? Industry challenges identified Likely shrinkage of private sector participation due to mandatory nature of scheme i. Admin business ii. Risk business iii.Annuities business iv. Asset management business v. Benefit and other consulting business? Role of sound investing Case for sound investment Preserve purchasing power of savings Mitigate for i. Low contributions ii. Leakage Build confidence towards the system Deal with short and long term expectations Sequencing Internationally, retirement saving leads financial markets development In South Africa we started with financial deepening to the detriment of the poor i. Poor coverage ii. Complex systems that excludes the average person iii.Large conglomerates and high concentration Role of deep capital markets Essential economic assets in their own rights i. Need to be treasured Encourage better portfolio returns and risk management Efficient diversification of investment Essential growth vehicles Assets 1,200,000 84.0% Assets of pension funds by fund type (R'm) As a share of GDP 82.0% 1,000,000 80.0% Amount (R) 800,000 78.0% 76.0% 600,000 74.0% 400,000 72.0% 70.0% 200,000 68.0% - 66.0% 1997 1998 1999 2000 2001 Years 2002 2003 2004 Coverage 12,000,000 Membership 10,000,000 Number of members 8,000,000 6,000,000 4,000,000 2,000,000 1997 1998 1999 2000 2001 Years 2002 2003 2004 Why sound investing is critical Conversions from DB to DC i. Shifting risk to beneficiaries ii.Managing past and future conversions Effective member representation on boards i. Better skilled cadre of trustees (Numbers??) ii.Deciding on the amount of investment risk that is appropriate for the members Growing market volatility Corrosion on savings Investment (1) In the age of DC funds individual bears the investment risk i. Trasparency in management ii. Competitive returns iii.Beat inflation at all times - Preserve purchasing power iv. Take account of life cycle Costs remain an essential element of realising good returns Socially useful investment Sound regulation Why regulate investment Pension and insurance reserves are biggest component of household wealth Protect savers Establish more certainty in the industry Ensure healthy returns over time Avoid over-speculation and risk taking i. Exposure limits in particular to currency risk Ensure asset/liability matching Compensate for absence of strong and transparent markets Arguments re country limits Advantages Retains domestic savings Capital market deepening Forces creative intermediation Encourages investment in real economy Growth Disadvantages Capital outflows and possible flight Failure to reap benefits of domestic savings Disallows divesification Global rule of thumb Thresholds for phasing out limits i. Assets/GDP ≤5% Bonds ii. Assets/GDP >5%, ≤ 20% Bonds and equities iii.Assets/GDP > 20% Bonds, equities and alternative investments Global rule of thumb Depends on i. Risk appetite ii. Sophistication of market and society iii.Economic openness iv.Macro stability v. Regulatory effectiveness Risk of regulation Over-regulation i. Breeds bottlenecks and inefficiencies Potential abuse of resources by government i. Asset prescription ii. Inappropriate financing of government deficits iii.Poor returns to beneficiaries Regulation in SA context Shifting focus from financial stability… Emphasise increased access i. Poor ii. Previously disadvantaged iii.People in outlying areas Diversification i. Relaxing limits ii. Prudent-expert rules iii.Sound investment policy statement iv. Performance and transparency v. Member choice? vi. Phasing out exchange controls Investment decision challenge Short versus long term views Socially responsible investment decisions i. Political or economic imperative? ii. Are returns comparable? iii.Is it compulsory? iv.How conscious are owners of assets? Investment decision challenge (Long-term) Economic returns Risk of not doing this? Financial returns (Short-term) Social returns (Long-term) Summing up - Key themes End state Optimal replacement ratio DB vs DC Funded vs unfunded Benefit structure and design i. Savings vs risk ii. Annuity, Housing, medical Compulsion vs voluntary savings i. Incentives and impact Preservation Appropriate regulatory structure Conclusion Investment focus on its own, will be inadequate to deal with our challenges Macroeconomic environment is important Income levels should allow for adequate savings first Sound retirement regime is essential However, sound investment is essential for the realisation of comfortable retirement for our societies SIYATHOKOZA SIYABONGA SIYABULELA THANK YOU DANKIE Contacts: [email protected]