Transcript Overview - South African Savings Institute

Why are private pension
assets in South Africa
declining?
Sheshi Kaniki
SASI & Momentum
SASI-ERSA Savings Workshop
4 - 5 August 2009
Overview

Objectives of the paper

Why are pension assets important?

Literature review

Trend in pension assets

Reasons for trend in pension assets

Conclusions
Objectives of the paper

To examine the trend in private pension assets from 1998 to 2008

To investigate reasons for this trend

To provide policymakers and practitioners with an evidence base for
pension reform
Why are pension assets important?

Have a positive impact on retirement income

Mitigate risk of old age poverty

Promote financial sector development

Mobilise domestic resources for fixed investment

Contribute to economic development
Definitions of pension assets

Private pension assets:
• Assets of self-administered funds plus the assets of underwritten funds
(Financial Services Board)
• Assets of self-administered funds (Reserve Bank)
• Self-administered funds invest their assets on their own behalf and
underwritten funds operate exclusively by means of insurance policies

Official pension assets:
• Assets of pension funds established by particular laws for employees
of the State and some parastatal institutions (Financial Services Board)
Review of literature
Factors affecting accumulation of pension assets

Income (Huberman et al, 2007)

Age (Chatterjee and Zahirovic-Herbert, 2009)

Education (Arenas de Mesa et al, 2004)

Years of employment (Yuh and Devaney, 1996)

Contribution rates (Lasagabaster, 2002)
Factors affecting accumulation of pension assets

Employer contributions (Gutter et al, 2007)

Participation rates (Huberman et al, 2007)

Introduction of mandatory system (Kritzer, 2008)

Economic growth (Hu, 2005)

Exposure to equities (OECD, 2008)
Trend of SA pension assets
Table 1: Real Value of Pension Assets (Rand Millions)
Total Pension
Assets (TPA)
1998
704,672.15
1999
701,084.02
2000
694,057.00
2001
776,073.35
2002
728,919.79
2003
730,314.07
2004
830,983.43
2005
926,997.06
2006
978,720.91
Average annual % change 3.82
Private Pension
Assets (PPA)
477,885.20
484,082.91
444,187.00
518,801.11
460,377.07
466,598.18
527,932.15
581,136.57
569,533.29
1.76
Official Pension
Assets (OPA)
177,673.88
176,118.09
206,733.00
221,744.13
233,147.84
240,101.76
269,850.97
308,015.17
367,047.17
8.50
Source: Author’s calculations from FSB Annual Report (various issues), Registrar of Pension Funds Annual
Report (various issues) and Reserve Bank Quarterly Bulletin (various issues).
Base year = 2000
Table 2: Pension Assets (% of GDP)
1998
1999
2000
2001
2002
2003
2004
2005
2006
TPA/GDP
81.47
79.19
75.27
81.92
74.22
72.11
78.25
83.16
83.36
PPA/GDP
55.25
54.68
48.17
54.76
46.88
46.07
49.71
52.13
48.51
OPA/GDP
20.54
19.89
22.42
23.41
23.74
23.71
25.41
27.63
31.26
Source: Author’s calculations from FSB Annual Report (various issues), Registrar of Pension Funds Annual
Report (various issues) and Reserve Bank Quarterly Bulletin (various issues).
Figure 1: Private Pension Assets (% of Total Pension Assets)
70
Percent
65
60
55
50
98
99
00
01
02
03
04
05
06
Source: Author’s calculations from FSB Annual Report (various issues) and Registrar of Pension Funds
Annual Report (various issues)
Figure 2: Assets of Private Self-Administered Pension and Provident
Funds (% of GDP)
35
30
Percent
25
20
15
10
5
0
98
99
00
01
02
03
04
05
Source: Authors calculations from Reserve Bank Quarterly Bulletin (various issues).
06
07
08
Reasons for trend in SA pension
assets
Income
Figure 3: Real GDP Per Capita
30,000
25,000
Rands
20,000
15,000
10,000
5,000
0
98
99
00
01
02
Source: Reserve Bank Quarterly Bulletin (various issues)
Base year = 2000
03
04
05
06
07
08
Employment
Table 3: Employment Trends in the Public and Private Sector
% change in public sector % change in private sector
employment
employment
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Average
-1.70
-3.10
-4.10
-2.20
-0.20
1.20
1.00
2.80
2.80
3.70
0.02
-2.40
-0.30
-0.80
-0.40
0.80
-2.30
2.40
0.60
3.00
2.00
0.26
Source: Authors calculations from the Reserve Bank Quarterly Bulletin (various issues)
Stock market performance
Figure 4: Growth in Value of Shares and Private Self-Administered
Pension and Provident Funds (% Change)
50
40
Percent
30
20
10
0
98
99
00
01
02
03
04
05
06
07
08
-10
-20
Value of shares/GDP (% change)
Private pension assets/GDP (% change)
Source: Author’s calculations from the Reserve Bank Quarterly Bulletin (various issues).
Participation rates
Table 4: Pension Participation by Sector (%)
2005
2006
2007
2008
Formal
61.73
60.37
59.05
56.49
Source: Masilela and Kaniki (2009)
Informal
10.09
6.84
12.64
5.88
Total
56.15
55.2
55.46
51.71
Participation rates continued…
Figure 5: Official and Private Pension Fund Membership (% of Total
Membership)
90
15
85
10
80
5
0
75
98
99
00
01
02
Official pension fund membership
03
04
05
06
Private pension fund membership
Source: Author’s calculations from FSB Annual Report (various issues)
Private Funds, Percent
Official Funds, Percent
20
Participation rates continued…
Figure 6: Private Pensions – Correlation between Membership and Assets
60
90
Assets, Percent
85
50
80
45
40
75
98
99
00
01
Private Pension assets/GDP
02
03
04
05
06
Private pension fund membership
Source: Author’s calculations from FSB Annual Report (various issues)
Membership, Percent
55
Contribution rates
Table 5: Employee and Employer Pension Contributions (% of Salary)
2002
2004
2006
2007
2008
Employee
Contribution
Employer
Contribution
Total Contribution
6.2
6.3
6
5.5
5.5
6.2
4.8
5.5
5.8
5.4
12.4
11.1
11.5
11.3
10.9
Source: Sanlam Employee Benefits Annual Survey (various issues)
Contribution rates continued…
Figure 7: Private Pensions – Correlation between Contribution Rate
and Assets
13
25
12
23
Assets, Percent
Contribution, Percent
24
11
22
10
21
2002
2004
Contribution Rate
2006
2008
PPA/GDP
Source: Sanlam Employee Benefits Annual Survey (various issues) and Author’s calculations from
Reserve Bank Quarterly Bulletin (various issues)
Legal framework

Mandatory participation can improve participation and contributions

By law all government employees are required to join the
Government Employee Pension Fund (GEPF)

The private sector does not have such a legal framework

Mandatory participation will have limited success in stimulating
informal sector participation
Causality tests

Test causal effect of income and stock market performance on
private pension assets
• Real income growth not reflected in private pension assets
• Equity markets are open to large swings as shown by financial crisis

Data for the period 1971 - 2006

ADF tests showed the variables are stationary after first-differencing

Johansen-Juselius technique found one cointegrating relationship

Performed Granger causality tests using VECM framework

Lag exclusion tests found that four lags are required
Results of Granger causality tests
Table 6: VECM Granger Causality Tests
Null Hypothesis
Chi-Square
Statistic
Real GDP does not Granger cause 2.538
private pension assets
[0.638]
Inference
Stock market turnover does not 13.880*
Granger cause private pension assets [0.007]
Causality
Private pension assets do not Granger 26.506*
cause real GDP
[0.000]
Causality
Pension assets do not Granger cause 1.644
stock market turnover
[0.801]
No causality
p-values are reported in parentheses
*denotes rejection of the null hypothesis at 1% level of significance
No causality
Other factors

Deteriorating savings performance in SA over the study period

Lack of financial literacy – e.g. need to save; investments; changing
pension environment poorly understood

Leakage – early withdrawals when employees change jobs

Declining confidence in private pension industry due to fraud/poor
governance
Conclusions

As a share of GDP and as a share of total pension assets, private
pension assets have declined in the last decade

In contrast, official pension assets have grown rapidly

Declining participation and contribution rates have contributed to the
trend in private pension assets

Stock market performance is key for the growth of pension assets

A legal framework that makes pension participation mandatory can
improve pension asset accumulation