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Governments and regulators around the world are increasingly drawing the battlelines more firmly amid growing public anger over widespread abuses in the financial services industry that, in recent years, have either undermined people’s ability to save or reduced their savings.
This week, the massive gap in perceptions between government and the financial services industry was highlighted at the launch of National Savings Month at a breakfast in Sandton hosted by the South African Savings Institute (Sasi).
The launch was attended by representatives of the industry, government and the regulators, who again for the most part talked past each other, while industry representatives did not deal with the concerns raised by government.
Earlier this week in Pietermaritzburg, at a conference organised by the KwaZulu-Natal provincial government, Finance Minister Pravin Gordhan accused the financial services industry, including the banks, of being “greedy monsters” driven by “undignified greed”. The industry is in a moral and ethical crisis, Gordhan says.
“Vulnerable South Africans can be exposed to unfair and manipulative sales and are offered products that will strain their finances,” he is reported as saying.
However, the banking industry dismissed Gordhan’s criticisms as applying to the latest international scandal – namely, the manipulation of interest rates in the United Kingdom by Barclays Bank (which owns Absa Bank).
At the Sasi breakfast, National Treasury deputy director-general Ismail Momoniat threw down the gauntlet to the financial services industry, challenging it to disprove Treasury’s contention that the pro-ducts it offers are not in consumers’ best interests, because they are too expensive and complex.
“We want you to prove us wrong. We want companies to come out and tell us that they have cheap and simple products in the best interest of consumers that their competitors do not have,” he says.
Momoniat says there are many reasons people do not save, ranging from the most important reasons of not having a job and not earning enough to save, to softer issues such as a culture of consumption, which in some ways can be explained by many people enjoying access to consumer goods for the first time and “playing catch-up”.
Between these hard and soft reasons is the problem of the financial services industry’s costs and products, Momoniat says.
The industry has a bad name because of its history. The bad name is based on the exploitation of consumers, he says.
“People do not save as a result of this reputation and because of their fear that all the returns that they should receive simply go into the hands of the industry,” Momoniat says.
However, everyone at the Sasi breakfast agreed that South African households do not save enough, borrow too much to fund consumption and spend too much.
TWO-THIRDS OF HOUSEHOLDS SAVE NOTHING
Almost two-thirds of South Africans who are in full-time employment say they spend everything they earn and save nothing. And this shocking figure is up from 39 percent in 2011 and 34 percent in 2010.
This is one of the findings of the third Old Mutual Retirement Monitor, which measures the financial perceptions of 1 000 people in full-time employment who live in South Africa’s metropolitan areas.
The survey also shows that over the past three years South Africans have steadily increased their use of informal savings vehicles, such as stokvels, burial societies and grocery schemes, while their use of retirement funds has, after a drop last year, recovered to the level at which it was two years ago. The use of risk life assurance and controversial life assurance endowment savings products has fallen.
Old Mutual says the survey shows that most South Africans prioritise savings products that will provide for their children’s education, while the use of short-term insurance and products to cover medical expenses has jumped over the past year.
The survey shows that the wealthier people are, the more likely they are to save and use financial products.
Of those surveyed, 58 percent say they belong to an occupational retirement fund.
Only 53 percent of those who earn more than R40 000 a month use occupational retirement funds to save for retirement, but people in this income group rely extensively on retirement annuities (73 percent).
However, 31 percent of the people surveyed do not save for retirement through a formal product.
Of those surveyed, 77 percent see retirement as their main savings objective, while 49 percent have education as a savings objective. Repayment of debt comes further down the list of priorities (the objective of only 10 percent of respondents), while 39 percent would like to save so they can go on a holiday.
About 34 percent of those surveyed are looking to their children to provide for them when they are old, while 32 percent hope government will take care of them if they cannot do so.
As people get older, they increasingly see saving for retirement as a priority, but they probably leave it too late to save sufficient money. Only 28 percent of people under 25 see retirement as a savings objective, but this percentage climbs to 69 percent for people who are aged 50 to 64.
Age group and life stage also affects other savings objectives. For example, 59 percent of respondents in the 35 to 40 age group see their children’s education as a savings objective, against 24 percent of respondents under age 25 and 40 percent of those over 50.
On the other hand, 22 percent of respondents under the age of 25 see their own education as a savings objective. This percentage falls to three percent of those over 50.
Saving for a motor vehicle is the main objective of those under 25, with 48 percent of respondents in this group saying it is their top priority.
NOT MUCH TO SHOW AFTER 11-YEAR CAMPAIGN TO ENCOURAGE SAVING
The South African Savings Institute (Sasi) will press ahead with its 11-year-old mission to persuade you to save despite being unable to show any improvement in the level of saving by South African households, which continue to spend more than they earn and use debt to make up the difference.
At the launch of National Savings Month this week, Sasi members expressed their determination to continue with their campaign – this year under the banner of “Changing mindsets towards financial freedom: save now”.
Cas Coovadia, chief executive of the Banking Association of South Africa, says one mindset the country needs to move away from is trotting out statistics and simply saying that structural problems, such as poverty and unemployment, deter saving.
“Places like India and countries in other parts of Africa have greater degrees of poverty than South Africa but still have higher savings rates than us,” he says.
South Africa has to address the values that drive consumption and the desire for instant gratification rather than an urge to save, Coovadia says.
Sasi chairperson Prem Govender, who pointedly thanked Personal Finance for the role it has played in the campaign to promote saving, says: “You need to take charge of your life by saving.
“We need to remind South Africans that the power is in their hands to either strive for financial freedom by saving or to remain vulnerable to personal and family crises, or the effects of economic downturns.
“Sasi’s mission is to encourage South Africans to increase their savings as the path to personal freedom and because it improves our country’s financial strength.”
You will not only be helping yourself by saving; nations that save enjoy a certain degree of self-reliance, excellent economic growth and citizen well-being, Govender says.
South Africa’s national savings rate is dismal compared with its peers. The World Economic Forum’s 2011/12 Global Competitiveness Report ranks South Africa 72nd in the world for its gross national savings rate, which is the equivalent of 20 percent of gross domestic product (GDP) – worse than the rates of most of its Bric (Brazil, Russia, India, China) country peers.
China, which the report ranked second in the world, has savings equal to 54 percent of GDP; India, at 15th, has savings equivalent to 34.7 percent of GDP; and Russia, at 44th, has savings equivalent to 24.7 percent of GDP. South Africa fares marginally better than Brazil, which, in 90th position, has a savings rate equivalent to 17 percent of GDP.
In Africa, 13 countries have higher savings rates than South Africa.
Govender says increasing our national savings rate and extending financial security to the majority of South Africans can be achieved only by dramatically increasing access to financial products.
“Every South African should be able to access affordable financial services, such as bank accounts and insurance,” she says.
However, despite the new willingness by banks to target previously excluded communities, it is likely that it will be technologically low-cost platforms such as mobile phones that will accelerate financial inclusion.
According to the government’s draft National Development Plan, the proportion of the population with access to financial services should rise from the current 63 percent to 90 percent by 2030.
Govender says: “Without greater levels of personal financial literacy, many consumers may not be able to manage the financial products they purchase. An over-reliance on supposedly easy credit, without a firm grasp of its true ‘costs’, is a danger faced by many unwary citizens.
“Financial literacy forms the backbone of financial well-being.”
DRAFT RETIREMENT POLICY DOCUMENT DELAYED
The release of a draft policy document spelling out National Treasury’s proposals for the compulsory preservation of retirement savings has been delayed so that wider endorsement, particularly from organised labour, can be obtained for its principles.
National Treasury and the retirement savings industry are concerned about the ongoing leakage of retirement savings, which undermines the ability of most South Africans to retire financially secure.
It is already compulsory to preserve savings in a retirement annuity fund until the age of 55. But this is not the case with occupational funds, where savings can be withdrawn when members change jobs or when non-member former spouses receive a benefit on divorce.