Pros and cons of forcing SA to save
The National Treasury wants to introduce mandatory pensions preservation, but the consultation process is off to a rocky start. On the one hand, there are those who argue that preservation must be compulsory, without exceptions that would make it too porous to work.
On the other, the mere principle of compulsion is resisted on the grounds that it shouldn’t even be contemplated until a government-run National Savings and Social Security Fund (NSSSF) is in place.
An illustration of the extreme sensitivities involved was the case of the fired mineworkers at Marikana. Thousands had resisted reinstatement – risking not only their jobs but also their accrued pension benefits for death and disability – so that they could immediately pocket lump sums to pay off debts.
What is the Treasury supposed to do? It proposes improved inducements for long-term savings. But escalations in living costs and squeezes on disposable incomes cause families to prioritise short-term exigencies for food, transport and shelter. Where family members have jobs, that is.
It seeks to reduce the cost of financial products and introduce additional tax incentives, so that net returns are enhanced, but a protracted period of lower economic growth will make it harder for investments to replicate what the bull markets of the past decade have delivered.
Unhappily, good results do not necessarily flow from good intentions. While there would be broad consensus around the reform proposals set out in the series of National Treasury discussion documents, and the principles widely supported by the financial sector, they cannot be excised from the politically fraught environment.
To meet the goals will be an uphill struggle. Attempts to make savings more attractive are fundamentally undermined by the efforts of Cosatu, among others prominent in the ruling party, to introduce prescribed assets. Higher returns on savings are defeated by lower returns on below-market investments that prescription implies.
As if the adverse odds were not sufficient, the government contributes to their stacking. It is not as though the spending patterns of cabinet ministers, including the president, universally offer a frugality model for the nation to emulate. Ditto the beneficiaries of unpunished corruption, privileged largesse and widening pay gaps who flaunt egregiousness.
Splurging by the few cannot promote a culture of saving among the many battling to make ends meet. The stuff of anti-apartheid struggle is now exacerbated by expectations unfulfilled. The Marikana debacle is its most explosive manifestation to date.
In turn, Marikana has coincided with, and possibly contributed to, the downgrade of South Africa’s sovereign debt. Numerous reasons are cited. One, highlighted by rating agency Moody’s Investors Service, is “uncertainty as to whether the policy decisions being devised ahead of the December leadership conference of the ANC will be helpful or detrimental to the country’s growth and competitive outlook”.
It noted that the ANC’s policy conference in June called for “more radical policies and decisive action to effect thorough-going socio-economic and continued democratic transformation”. This suggested that increasingly interventionist strategies were likely, which in turn could deter investment and retard growth.
Irrespective of what the New Growth Path and National Planning Commission have recommended, the government has so many strategy documents that it’s impossible to guess which one applies. The biggest bugbear not laid to rest is nationalisation, whatever that term is supposed to mean.
It is kept alive by populist sloganeering, and more. Cosatu general secretary Zwelinzima Vavi argues for an “activist interventionist state”. A proposal at this month’s ANC elective conference is for the state “to regulate a substantial part of retirement and life insurance funds to be invested in state-owned enterprises and/or development financial instruments”.
Subsequent to the Freedom Charter of 1955, ANC constitutional proposals in 1988 and the early 1990s advocated a mixed economy. A mixed economy is what South Africa has. The question worrying investors is how much more mixed it is to become. They look askance at the performance of parastatals and take fright.
Singled out by the Freedom Charter, for an ownership transfer “to the people as a whole”, are mineral wealth and banks. Mineral Resources Minister Susan Shabangu is the outstanding critic of such crude nationalisation of mines. With good reason. What she has is better.
The mining charter commits the mining houses to a schedule for the transformation that the government seeks, while a state-owned mining company can compete directly with them for new order rights. Should the mining houses not meet the charter’s stiff targets by 2014, a prospect which looks increasingly remote, state competition can become severely robust.
Running in parallel with the mines is the financial services industry. In place is the first phase of the financial sector charter, also to advance industry transformation, but not yet the second phase. The closing date for comments passed in May, so its gazetting should be imminent.
Not yet in place is the state’s proposed NSSSF, envisaged as the first pillar in wholesale reform of retirement fund structures. If and when an NSSSF eventuates, it could compete with the industry by capturing swathes of private sector business.
Under the charter, among other things, the banks and insurers become committed to allocate targeted amounts by specified dates to debt financing, credit extension or equity investments to help overcome economic development backlogs.
Phase two introduces empowerment financing and access to financial services. There’s also a provision for consumer financial education where, says the draft, “products and services will be closely aligned with developed and maintained by the Financial Services Board as designated owners of consumer education by the National Treasury”.
For consumer education alone, the scorecard requires measurement against an annual target of each institution’s retail net profit after tax. It was put at 0.25 percent of net taxed profit for this year, 0.3 percent for next and 0.4 percent for 2014. On present guesstimates, the eventual amount could approach R100 million annually.
Clearly, for scorecard purposes in meeting all targets, the monies to be assigned by the financial institutions can be multiples of this amount. Bring in the infrastructure investment by pension funds – they can go up to 100 percent of their assets in bonds issued or guaranteed by the government – and the amount shoots up exponentially.
There’s no shortage of need, of projects waiting to be detailed and of financing packages to be structured. Neither is there likely to be a shortage of money so long as savings institutions thrive to provide it.
The more the educational initiatives succeed, in tandem with discretionary incomes that rise with economic growth, the more South Africans are cushioned from later-life penury; the more their stake in the economy is seen by them to increase; the more South Africa’s current account turns from reliance on volatile inflows of short-term foreign capital; and the better for future prosperity.
From the self-interest perspective of the institutions themselves, there’s the opportunity for expansion of their customer base by greater inclusion of the populous lower-income categories. It comes hand in glove with the series of National Treasury proposals for tax incentives and cheaper products better understood.
And it might just cause the Damocles swords, in the shapes of prescribed assets and an NSSSF, not to fall.
Crucially, get right a spirited implementation of the charter and the interventionist case collapses. The state becomes more reliant on the private sector, not the other way around, and a firmer societal base is established for the transformation that must happen. Or else.
Rating agency Standard & Poor’s based its sovereign debt downgrade on anticipated consequences of “underlying social tensions”. The Economist, in a recent cover story, warned that on its present trajectory “South Africa is doomed to go down as the rest of Africa goes up”.
What happens with savings will be a key indicator of whether they’re wrong.
Allan Greenblo is editorial director of Today’s Trustee (www.totrust.co.za), a quarterly magazine mainly for trustees of retirement funds.