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Saving in South Africa is in a crisis, with households spending more than they earn every year since 2005, to the detriment of the development of the country and, ultimately, all South Africans.
The crisis was the subject of an assembly hosted by financial services industry organisation the Association for Savings & Investment SA (Asisa) in Johannesburg this week. The assembly involved sectors of the industry (the banking sector did not attend), National Treasury, the Financial Services Board and organised labour.
National Treasury deputy director-general Ismail Momoniat told the assembly that although government and the financial ser-vices industry are in complete agreement that the average South African borrows and spends too much and saves too little, government is reluctant to force you to change your bad behaviour. However, he says, this does not mean that Treasury, the industry and organised labour do not want you to improve your behaviour – although their approaches as to how this should be done differ.
Treasury remains committed to getting employed South Africans to save for their retirement and to making it mandatory that, if at all possible, you preserve those savings for retirement, Momoniat says.
But, he says, your existing rights will be entrenched. In other words, if you already have the right to access your retirement savings on quitting a job or at divorce, that right will not be removed – legislative changes will apply only to savings made after the legislation has been approved.
National Treasury does not want a repeat of the scare stories that were spread after government initially announced in 2005 that it was pressing ahead with retirement reforms. These stories resulted in a significant number of people resigning from their jobs to get their hands on their retirement savings, Momoniat says.
Any changes in legislation should make it more difficult for consumers to behave badly, he says.
What is required is a range of default products that are safe and do not need financial advice. However, advice is essential when people do things such as borrow money or withdraw their savings, he says.
Asisa senior policy adviser Peter Stephan warns that it is difficult to “nudge” consumers to behave properly or to use default products. Advisers and advice are required to do the nudging.
Stephan says a system of sticks and carrots seems to work best, but trust and confidence in the financial services industry will have to be fully restored, with consumers seeing the need to save while receiving value for money.
WHY WE DON’T SAVE
Numerous reasons for South Africans’ poor savings habits were presented at the Association for Savings & Investment SA’s assembly. They include:
* Consumerism – the “I want it now” mentality results in consumers borrowing to spend instead of saving.
* Distrust of the financial services industry because of high costs and a lack of transparency.
* Lack of education. There is a paucity of understanding when it comes to financial products, and there are major deficiencies in consumer education, starting at school level.
* “Not value for money.” There is a perception that the costs of saving are too high.
* Exclusion. Many low-income earners are unable to access savings products.
* Access can be difficult. For example, consumers can borrow money from banks on every corner, whereas they find it hard – particularly if they are lower-income earners – to invest in a unit trust fund.
YOUR SAVINGS ‘AREN’T EASY MONEY’
Retirement fund savings belong to members and pensioners and should not simply be seen as easy money to solve the problems of others, Ismail Momoniat, the deputy director-general of the National Treasury, says.
Momoniat was speaking at an assembly organised by the Association for Savings & Investment SA (Asisa) this week for the financial services industry, government, the regulators and organised labour to discuss how to improve the savings culture of South Africans and how those savings can be used to stimulate the economy for the benefit of all South Africans.
His comments come against a background of recent calls for the re-introduction of prescribed assets, which would force pension funds to invest in government’s R3.2-trillion infrastructure development programme at lower rates of return.
Momoniat says many people look at the large pools of retirement savings and forget that the money belongs to members and pensioners.
He says currently in Europe retirement funds are being eyed as a useful source of capital to bail out fragile banks.
One of the problems, however, was that pensioners as a group have little political clout when it comes to protecting their savings, while younger members don’t want to think about what may happen when they are old.
For this reason, Momoniat says, it is important that trustees oversee retirement funds in the best interests of members and pensioners, and that members and pensioners must be educated so that they can exercise control over their savings.
“Members must be entitled to vote on how their money is invested.”
The issue of the protection and investment of retirement fund money came up in a number of debates ranging from one on recent new calls for government to apply prescribed investments to fund infrastructure development through to one on sustainable investment based on the principles of environment, social responsibility and good governance (ESG).
Speakers agreed that the re-introduction of prescribed investments, with retirement funds being forced to invest in government projects at cheaper rates of return, would be counter-productive, and there was no reason why investment in infrastructure projects should not provide competitive returns for retirement funds.
Momoniat says that retirement fund investment is about investing for the long term. The basis of ESG investing is about making long-term investment decisions in opportunities that are sustainable.
He says retirement funds have a role to play in the development of the country for the ultimate benefit of members, but the investments should be voluntary.
Trustees and members should be happy to invest, but they must understand the risks and returns.
Andrew Canter, chief executive of Futuregrowth Asset Management, which specialises in ESG investing, says that retirement funds are not instruments of the state.
He says, in fact, that there is no shortage of money in South Africa to finance the infrastructure programme – the problem lies in the ability to spend the money efficiently.
He also says that government will only be looking to borrow about R1 trillion to fund its infrastructure programme, with the balance mostly coming from tax and cash flow from the projects themselves.
Canter says prescribed investments, which are, in effect, a “tax” on investment returns, would create uncertainty around long-term savings because people would be loath to save in retirement funds and capital markets would be distorted. But he believes that retirement funds can make sound returns from investing in government infrastructure, including things such as toll roads.
But he says retirement funds must earn suitable returns and must be able to decide on the projects in which they wish to invest. “Socially responsible investment should be seen as an opportunity, not a threat. Retirement funds can deliver impact on the economy while also looking after their members,” Canter says.
STATE ‘SHOULDN’T BE A FINANCIAL SERVICES PROVIDER’
Government should not be involved in providing financial services to consumers, Johan van Zyl, Sanlam chief executive and chairman of the Association for Savings & Investment SA (Asisa), says.
His comment comes in the wake of government proposing to introduce an investment-linked living annuity with underlying investments in its successful RSA Retail Bonds, which were launched to make the banking industry offer more competitive returns for investors.
Olano Makhubela, chief director at National Treasury, told the Asisa assembly that government is not in the business of providing financial services and products, and relies on the industry to provide cost-effective services and products.
Price regulation is the alternative that government needs to consider when there are clear market failures, Makhubela says.
Van Zyl says he firmly believes that the solution to improving the rate of saving and to deploying savings responsibly “does not include government getting involved in the provision of financial services”.
He says his view is summed up by British economist John Maynard Keynes, who stated: “The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.”
Van Zyl says that if, in the context of South Africa’s challenges, government does believe it needs to get involved in providing solutions that will improve saving, “we strongly believe that this should happen in partnership with the private sector, where the necessary infrastructure and expertise are already in place”.
However, government’s real focus should be on ensuring regulatory and policy certainty. The aim should be to create a stable environment underpinned by level playing fields, which will encourage private sector initiatives to increase the country’s savings rate, Van Zyl says.
KENYAN MODEL MOOTED FOR LOW-INCOME SAVERS
The financial services industry body, the Association for Savings & Investment SA (Asisa), and organised labour are eyeing a savings model initiated in Kenya as a potential savings structure for South Africa’s informal sector, including seasonal workers whose employment contracts and incomes are often erratic, such as actors, hawkers and farm workers.
The Mbao Pension Fund allows people who earn low and variable incomes to save as and when they can afford it. The fund is promoted by the Kenyan financial services regulator and is sponsored by Kenya’s informal sector association, Jua Kali (which means “people who work in the hot sun”).
Jua Kali has about 8.9 million members who potentially can join the Mbao Pension Fund.
The fund has grown from 13 contributors in May 2011 to 23 000 account-holders. Although the fund is still small, average contributions have been well in excess of the minimum of two rand a day.
The fund has been popularised using the M-Pesa mobile banking platform, which enables members to move contributions from their bank accounts to their pension fund accounts quickly and efficiently. Contributions are reflected instantly in members’ pension fund accounts, which they can view via their mobile phones. Members also have full access to their total pension balance on their phones.
Leon Campher, chief executive of Asisa, says the financial services industry would like to assist in introducing to South Africa a concept similar to the Kenyan structure, but with the design taking into account the local context.
The industry would like to see low-cost pension savings products that are aimed specifically at the informal sector being made available through a broad constituency of stakeholders. There is currently nothing on offer for this grouping, Campher says.
The involvement of organised labour, which led a delegation to Kenya earlier this year to study the Mbao Pension Fund, is essential in ensuring that the appropriate constituencies are heard about what will work in South Africa, he says.
A multi-constituency steering committee is being assembled to guide the process. Workshops with potential member groupings are also under way.
STAKEHOLDERS DISAGREE OVER COSTS
“We would like to be proved wrong about the high costs of financial products and services,” National Treasury deputy director-general Ismail Momoniat told the assembly hosted by the financial services industry body, the Association for Savings & Investment SA (Asisa), and attended by the industry, government, the regulators and organised labour.
Momoniat was responding to remarks by Sanlam chief executive and Asisa chairman Johan van Zyl, who said he is concerned “about our industry being thrown into the collective financial services pot when it comes to issues such as high charges, lack of access and other challenges, without any credit for the massive reform initiatives already undertaken”.
Van Zyl says there has been substantial product innovation in recent years aimed at reducing charges for consumers and ensuring they receive value for money.
“We have come up with many creative ways to make our products more accessible to low-income earners, while at the same time keeping them affordable.”
Greater policy and regulatory certainty from government is required before the savings and investment industry can take the bold steps that are needed to make a real difference, Van Zyl says.
However, numerous speakers at the conference, including those who represent the industry, conceded that the cost of savings and investment products is undermining saving.
Simon Mabunele, principal officer of the Food and Allied Workers Union Provident Fund and a Congress of South African Trade Unions delegate at the Asisa assembly, says most farm, forestry and fishing industry workers do not save, and the reason is the high cost of access, particularly to banking products.
Banks deduct anywhere between R10 and R20 when low-income workers put money into an account, Mabunele says.
“Bank charges in this country are making people scared to change their savings habits. It is better for them to put their money under the mattress.”
He added that a programme to improve savings should include everyone in order for it to succeed.
Mabunele also criticised the life assurance industry for not being more upfront about its products, which are often sold to people who cannot read or write. Important details do not emerge when there is a dispute at the claims stage, allowing the assurance companies to negotiate from a position of strength. The result is that low-income workers believe the life industry is there to rob them, he says.
“As a union, we want to encourage savings, but the environment does not allow most people to save. They [low-income workers] can’t afford a lawyer when they take out a contract of assurance,” Mabunele says.