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FINANCE PORTFOLIO COMMITTEE
16 February 2005
RETIREMENT INDUSTRY: PUBLIC HEARINGS
Chairperson: Dr R Davies (ANC)
FINANCE PORTFOLIO COMMITTEE
Retirement Fund Reform Discussion Paper
Powerpoint presentation by Institute of Retirement Funds
Address by CEO of Institute for Retirement Funds
Submission by Institute of Retirement Funds
Submission by Life Offices Association
Submission by Mr Rob Rosconi
Submission by COSATU
The Committee held a third day of public hearings on the Retirement Funds Industry (15 February 2005 and 10 November 2004). The submission by Mr Rosconi outlined a broad overview of retirement funds, the fact that there was insufficient analysis on the matter, the security of retirement fund members and the lack of fiscal support for the National Savings Fund (NSF).
The Life Offices Association submission dealt with the extent to which coverage and leakages were dealt with in the discussion document, the emphasis placed on good governance of these funds, the preservation of compulsory participation for employees and the NSF, governance and trustee conduct, an appropriate tax dispensation and the need for a smooth transition to a new system.
The submission by Institute of Retirement Funds (IRF) outlined its concerns regarding access to retirement funds, the role of the NSF, preservation and portability of funds, the pension/provident fund debate and trustee training.
The COSATU submission outlined the introduction and background to retirement funds, COSATU’s concerns and analysis regarding the NSF, the issue of differentiation, the form of the benefit, the issue of preservation and portability, the fate of unclaimed benefits as well as the need for good governance and trustee conduct
During the discussion the Committee raised the following issues:
- the preferred kind of trustee envisaged;
- whether compulsion to join retirement funds would result in movement of people from such funds;
- whether it was possible for the NSF to cater for people who were outside the current retirement fund industry, or for those who were currently in the private retirement fund industry;
- whether there were certain kinds of charges, fees and commissioned payments that should be regulated out of existence;
- how exactly the reform would ensure the security of the population in old age;
- clarity was sought on the exact nature and operation of the NSF;
- the circumstances under which preservation of retirement fund benefits was supported preservation; and
- the reasonableness of the commissions retained by some funds with regard to the rest of the cost structure.
Submission by Mr Rob Rosconi
Mr Rob Rosconi, addressing the Committee in his private capacity, conducted his presentation (document attached) which outlined the picture of old age prosperity, the fact that there was insufficient analysis on the matter, the security of retirement fund members and the lack of fiscal support for the National Savings Fund (NSF)
Submission by Life Offices Association
Mr Gerhard Joubert, Executive Director: Life Offices Association, conducted the introductory portion of the presentation (document attached) which explained its background and mandate.
Mr Rod Stevenson, Convenor: LOA Retirement Funds Standing Committee, presented the LOA proposals and concerns with the reform paper, which included the extent to which coverage and leakages were dealt with in the discussion document, the emphasis placed on good governance of these funds, the preservation of compulsory participation for employees and the NSF, governance and trustee conduct, an appropriate tax dispensation and the need for a smooth transition to a new system.
Submission by Institute of Retirement Funds
Mr Anesh Soonder, CEO of the Institute of Retirement Funds (IRF), conducted the presentation (document attached) which outlined the background of the IRF and its consultation with industry and members.
Ms Desiree Partridge, Elected IRF Board Member, presented the technical issues arising from the document, which included access to retirement funds, the role of the NSF, preservation and portability of funds, the pension/provident fund debate and trustee training.
Submission by COSATU
Mr Elroy Paulus, COSATU Research Co-ordinator, and Mr Jan Mahlangu, COSATU: National Retirement Fund Co-ordinator, outlined the introduction and background to retirement funds, COSATU’s concerns and analysis regarding the NSF, the issue of differentiation, the form of the benefit, the issue of preservation and portability, the fate of unclaimed benefits as well as the need for good governance and trustee conduct.
DiscussionMr L Gabela (ANC) asked COSATU to indicate their preference for the kind of trustee envisaged in the discussion document.
Mr Mahlangu responded by stating that when this Committee approved the democratisation of pension funds a few years ago, the intention was to allow members to elect their own representatives. COSATU does not necessarily agree with the appointment of professional trustees because it amounts to "two wrongs with the hope that it would make a right". The fact was that trustees were not provided with proper training that would allow them to properly execute their duties. Perhaps the INSITA should be requested to address this Committee on the work that it has done so far in producing the desired kind of trustee. A trustee was needed that would shape shareholder activism and ensure that the industry changed for the better in the interests of its members.
Mr Gabela stated that the IRF has indicated that compulsion to join retirement funds would result in movement of people who believe their savings might dwindle desperately, and requested the IRF to explain its proposal on this matter.
Ms Partridge replied that the IRF supported the initiative for the NSF, but it was concerned that there would be a migration from occupational funds and the current compulsory environment to a much more voluntary environment. This migration, especially amongst the lower income earners, could result in a loss of retirement provision.
There was a need to protect the rights of existing members so that they could derive their benefits as a lumpsome. This applied to voluntary preservation funds where members would save their money upon withdrawal for their retirement or as needed, and would be entitled to one withdrawal. If there was a move to compulsorily preserve those amounts, it would result in a massive movement of members from the preservation and provident funds in order to avoid being subject to such a provision. She stated that she had no doubt that the IRF could work with Treasury in reaching an agreement on these issues. The IRF did not have a concrete proposal on this matter, but perhaps the phasing in of a new approach over time could be considered.
The Chair stated that everyone supported the NSF, but asked COSATU to explain its proposal that the NSF should cater for people who were outside the current retirement fund industry. He asked whether the NSF should not be providing a real alternative to people who were currently in the private retirement fund industry.
Mr Mahlangu replied that COSATU’s understanding of the NSF was that it was meant for irregular contributions from people who were not employed on a full-time basis. Small funds referred to those in which people were employed on permanent basis, they derived income but the cost of running that fund was very expensive. The contributing factors have been that, because the fund was small, people have migrated to other funds. COSATU was of the view that these small funds should thus be closed down and instead consolidated, as this would save significant costs.
Mr Paulus added that a very valuable lesson could be learnt regarding the manner in which access to credit panned out around competition in the retirement fund industry. The National Credit Bill was currently being finalised by NEDLAC and will be tabled in Parliament in March 2005. One of the fundamental lessons, especially with the Micro Finance Regulatory Council (MFRC), was that the assumptions employed when the Usury Act did not apply to informal micro-lenders dictated that competition would allow the rate of interest to drop to a level that was more or less affordable. Yet the report titled "The cost, volume and allocation of credit in South Africa" conducted in March 2003 indicated that people in living standard measures (LSM) 1-4 paid 350% interest to MFRC registered institutions and paid around 650% to the "mashonisa’s", whereas LSM 7 and upward were protected by the Usury Act.
With this in mind, when people in the formal economy "who just can’t make it" were given almost an exclusive opportunity to invest in the NSF, the scenario may be created in which formal retirement industries that charged the current rates would not consider the exclusive rates by which they exclude people. The question was thus what came first: the cost of running the industry without transformation, or re-looking costs to make them accessible for people. This was a fundamental constraint, over and above issues such as blacklisting, which prevented people who normally should be able to access the funds from accessing them.
The Chair asked whether there were certain kinds of charges, fees and commissioned payments that should be regulated out of existence.
Mr Mahlangu responded that once the smaller funds were consolidated, because of the economies of scale, it would be effective and more efficient to run the consolidated fund.
Mr Stevenson responded that the appropriate containment of costs would be done through the fundamental structure of the trustee board, with its fiduciary responsibilities, combined with a suitable disclosure regime. The LOA was not of the view that there was a necessity for particular regulation of costs, as more evidence was needed to prove that regulation was indeed the route to be followed if there was a regime that encouraged and enforced further disclosure, and the improvement of the fiduciary roles of the trustees which was key in the containment of costs. The trustees functioned to govern the management of the fund, and part of the responsibility was considering the costs. It was perhaps a measure of the failure of trustee training to some extent and in certain areas that the costs were in fact not looked at by trustees. The LOA promoted the idea that professional or truly independent trustees had a place in funds, especially large funds, where their role and attention to issues such as costs could guide other less experienced trustees.
Mr Rusconi replied that his suggested priority was non-negotiable disclosure as it was not that difficult to implement and needed to be done, coupled with regulation. He stated that he agreed with Mr Paulus that competition did not guarantee cost-effectiveness, and he has compiled a spreadsheet that allowed trustees to summarise all their costs into an understandable measure. The spreadsheet was really simple and was currently being checked before distribution. This was thus an opportunity to provide trustees with a tool that would allow them to analyse what they wre dealing with.
Mr K Durr (ACDP) stated that the National Treasury indicated that the aim of the reform is not solely to deal with retirement fund system but to deal with the security of the population in old age. Clarity was thus sought on how this would be achieved.
Mr Rusconi responded that Treasury has dealt with the reform in exactly the manner in which he expected it to, as the retirement fund regime must be viewed holistically. The only way to break down the complexity is to determine priorities, and then a budget can be determined as the retirement fund industry was about affordability. The fact that South Africa has an advanced and massive private pension sector implied a considerable cost from government, because it was supporting that sector through the tax incentives. If the private pension sector was half its current size, the government would have more resources "at the central pot" to redistribute. The retirement fund tax must then be put in context of government’s priorities, and if redistribution was declared a priority then it must take place somehow. He stated that his view was that retirement fund tax was a fairly convenient way to maintain that redistribution.
Mr Durr asked whether Mr Rusconi’s indication that interrupted employment results in diminished personal wealth was due to the lack of portability of the savings.
Mr Rusconi replied that the chart in his presentation was not in absolute terms, but instead he was arguing that people who were middle income earners for 40 years would be expecting tangible returns, whereas much dribbled away in the leakage. In fact that sector of the population faced very serious difficult at retirement, even if they had as much in their hands as those that were desperately poor and unemployed.
Mr Durr asked whether means testing for the poor could not be used, because their propensity to save money during their lifetime was poor. The implication was that their state benefit would be reduced, and this was thus a disincentive to save.
Mr Rusconi responded that his research was not designed to consider means testing. There were however alternatives. In Mexico, for example, the government funded the first peso of saving. This was reasonably generous but at the same time it was not a tremendous drain on the fiscus. It was an alternative to means testing because it offered the first peso to all. Even though this did not make much of a difference to the wealthy it made a tremendous difference to the poor, and this was redistributive in many ways. Means testing involves quite substantial costs, but He stated that he does not have any research or an informed view on the matter.
Ms B Hogan (ANC) sought clarity on the operation of the NSF, and how it differed from a bank saving account. Furthermore, clarity was needed on the extent to which it would benefit anyone to opt for a national savings account.
Mr Rosconi replied that the assumption made, as was clear from the Treasury document, that the NSF would be fundamentally different to the balance of retirement funds. Yet no-one has explained what the NSF would look like. It could be fundamentally different if it adopted a hybrid form because, if it combined elements of DC (defined contribution) and DB (defined benefit), it mixed protection and flexibility. This would create an entity that was completely different and which was in many ways quite strongly centralised.
The other option was to make it identical in its regime to defined contribution pension funds but much cheaper, much more effective, centralised and possibly auction off parts of the fund to the lowest bidder in the private sector, as was done in the United States with the thrift savings fund. It would have to be broadly centralised for cost-effectiveness, but otherwise much the same. There was the risk that the salaried would move to that fund, but it also gained economies of scale very rapidly. He stated that he was not asserting that this model was the answer, but issued a plea for an open-minded and holistic approach.
Mr Elias Masilela, National Treasury Chief Director: Macro-economic Policy, responded that the Treasury document deliberately did not suggest a specific design for the NSF but it did however identify the problems it wanted to deal with. The first was irregular income, the second was people at the low income levels and the third was the costs issue. A product that dealt satisfactorily with all three in the final analysis would be ideal. He stated that Treasury essentially saw the NSF as an extension of the retail bond, which locked people in for the short to medium term, whereas the NSF was aimed at locking people in for the medium to long term. The precise structure of the NSF would be decided following extensive discussions.
Ms Hogan asked COSATU to explain the circumstances under which it supports preservation, as indicated in its submission.
Mr Mahlangu responded that retirement funds must still be accessed by persons even though they move from one position of employment to another, because the fund was meant to provide for the time of life after employment. Preservation of the benefit throughout was thus key, and the employee must be entitled to transfer the benefit to a registered fund. It would however be problematic to compel the employee to preserve the benefits should he be retrenched, because he would be facing a number of life crises such as school fees and mortgage bonds. Thus COSATU’s submission proposed that the benefits provided by the Unemployment Insurance Fund (UIF) be considered, so that a person attain his UIF benefits before the retirement fund benefits were considered. If the person remained unemployed after utilizing these benefits, lumpsome versus monthly payments must then be considered.
Mr Paulus added that the more one thought about the conditions under which compulsory preservation did not apply the more difficult the matter became, because very different degrees of vulnerability were involved. Factors such as when a member fell below a minimum level of income, or perhaps a key list of events that would constitute a crisis in a household or even chronic illness or when state old age pensions fall away. Life crises were very different for different groups of people.
Mr Rusconi replied that a holistic approach should be followed, as it appeared that people were stuck in a "DC mould" or a private sector, individual account mould. One way to deal with the preservation issue was to stipulate that a certain amount would be a mandatory saving, and another specified amount would be a voluntary saving. The member must be informed that even though the mandatory saving was in the same system as the voluntary saving, the former could not be accessed for any reason. This type of system could be done by expanding South Africa’s social security system, as it was so broad and could be expanded to provide that "there is more in the central pot and everything else is free, its completely voluntary". This was a different way to deal with the same issue.
Ms Hogan asked whether Treasury was considering a moratorium on umbrella funds, as it appeared that big corporations appeared to enter this field in an attempt to avoid dealing with trustees and other issues related to having pensions funds.
Ms J Fubbs (ANC) requested the LOA to explain its statement that the protection or preservation of existing rights as proposed by the Treasury document could in fact increase costs.
Mr Stevenson responded that the premise must be that regulation has a cost and, secondly, that cost must be weighed against benefit. The Treasury document approves this method of regulation to balance the benefits against cost. The issue of confusion and complexity was attempting to apply the regulation to the same issue under different regulatory instruments. The LOA was concerned that the legal advice that would be needed to attain clarity on the exact regulatory position would involve significant costs.
Ms Fubbs sought clarity on the reasonableness of the commissions retained by some funds with regard to the rest of the cost structure.
Secondly, Ms Fubbs questioned the reasons for trustees’ conduct currently falling outside the legal regime governing their conduct, when there were sufficient laws in place to hold them to account. Surely it would be to the advantage of the fund to have at least one expert professional, as that one person would not override the majority of the trustee membership.
Mr Stevenson replied to these two questions by stating that commissions were regulated in the Long Term Insurance Act, which was at odds with the regulation in the rest of the financial services sector. The question then was whether this should be extended to the rest of the financial services sector, or whether it should be made subject to non-capping but very rigorous regulatory and disclosure regimes. The LOA was of the view that this was the preferred option. As suggested the COSATU this was premised on having trustees that were capable of analysing what was presented to them. He stated that the LOA supported the training of trustees.
Mr Mahlangu responded that COSATU agreed that by far the number of trustees on the board must be democratically elected. COSATU was of the view that Section 7A of the Long Term Insurance Act must be amended to effect pension fund reform, because the election of independence trustees must be avoided. Professional trustees will add a cost to the retirement fund.
Mr T Vezi (IFP) stated that COSATU indicated that grassroots stakeholders were "conspicuous by their absence" from this process, and asked COSATU to explain its proposed route to include stakeholders.
Mr Paulus replied that, in fairness to the Committee, he did not believe that civil society organisations were fully aware of the importance of activism on an economic shareholder and consumer level as they were around political and social activism. COSATU has liaised with its partners especially to ensure their presence at the road shows
The Chair asked Treasury to explain whether it envisaged the NSF catering for people who were inappropriately catered for currently by the private funds, as well as those who were not covered at all.
Mr Masilela responded that Treasury has received very valuable proposals and it would process each of them and reply to the Committee at a later date. He stated that he was surprised at the level of convergence of views expressed, and informed the Committee that Treasury will be available for bilateral discussions until the end of March 2005.
There was clearly a recognition of the need for reform, and the other issues raised included: the NSF, the tax issues, costs and lastly the issue of professional trustees. These were the areas Treasury must apply its mind to. Treasury was of the view that the aim with the NSF was to arrive at an environment that encouraged competition and which was accessible. This meant that Treasury did not mind people switching from one instrument to another. If people who were currently covered believed that the NSF would provide a better vehicle for them, they could switch if they wanted to. This was the case with the launch of the retail bond, which provided people with an alternative saving instrument to the traditional instruments used.
He appealed to the Committee to continue thinking about this kind of reform as a long-term initiative. Secondly, the key principles must be observed in ensuring that the industry functioned in the desired manner, which were consumer protection, stability and accessibility.
Financial Administration of Parliament and Provincial Legislatures Bill
The Chair stated that the Secretary to Parliament had informed him that Parliament would not be ready with its submission on the Financial Administration of Parliament and Provincial Legislatures Bill on 22 February 2005, as planned, but would come back to the Committee with another date at a later stage. Thus the meeting scheduled for 22 February will not be taking place.
The meeting was adjourned.
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