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Adrian BaskirASSA President

June 2007

Building up the Actuarial Profession in Africa

Retirement Reform & Social Security: A South African Perspective

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•

Context•

Poverty in Africa•

Poverty in South Africa•

Environment (Retirement and Social Security)•

SA•

Brief comments on Africa•

Current Proposals•

SA National Treasury•

SA Dept of Social Development•

Implications•

for South Africa•

for Africa•

for Actuaries

Agenda

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Context Poverty in Africa

Poverty in South Africa

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Africa –

a history of poverty

The East is taking big strides to alleviate poverty; in Sub-Saharan Africa, poverty is tightening its grip

Out of 1.3bn people living on less than US$1 per day, 380 million reside in Sub-Saharan Africa

380 mil

poverty alleviation

poverty increase

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Emprirical analysis suggests that SE Asia’s superior growth performance to Africa’s can be explained primarily by geographic differences (coastal

density, tropics, Malaria, life expectancy, etc.)

SE Asia –

a case study

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Key conditions that favoured

Botswana’s growth

1.

Like Angola, DRC and Sierra Leone, Botswana is blessed with diamonds

2.

But unlike its counterparts, in Botswana civil war & conflict are absent

3.

Powerful and efficient institutions govern and ensure peace by:

•

Ensuring secure property rights

•

Maintaining political stability

•

Maintaining minimal and efficient public services

•

Ensuring relatively low corruption

Despite the increasing poverty of neighbouring

countries, Botswana was the fastest growing economy in the world between 1965 and 1995. This

can be attributed to diamonds …

and to sound governing institutions keeping the peace

Botswana –

an African Success Story

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90% of Sub-Saharan Africa fall within tropics, posing challenges. Hong Kong and Singapore are the only 2 tropical countries among the world’s wealthy countries

A Challenging Geographic Environment

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A large percentage of Sub Saharan countries are landlocked, increasing transportation costs and restricting growth

A Challenging Geographic Environment

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•

Highest incidence of malaria, TB and Aids in the world, with Sub-

Saharan Africa markedly worse off than the rest of Africa

•

Of 30 mil HIV+ in the world, 21 mil in Sub-Saharan Africa

•

Malaria effectively eradicated in the world, except for Sub-Sharan Africa where it causes the death of 165 out of every 100 000 people p.a.

High Incidence of Disease

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Sub-Saharan Africa has 3 times the ethno-linguistic diversity than that of SE Asia –

does extreme fractionalisation inhibit growth?

Pronounced Ethno-diversification

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Civil wars and conflict have profound impacts on growth: countries without conflict show growth rates 2-5 times higher than those with conflict

Civil War and Conflict

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High corruption index

•

Countries with less red tape & corruption typically have higher growth rates

•

Apart from Botswana & SA, Sub-Saharan Africa score very low on the corruption index: 3-4 times lower than Europe and much lower than Asia

Corruption

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•

Persistently high unemployment •

42% real unemployment in 2006

(30.5% officially unemployed according to DBSA, 2005)

•

Increased from 29% unemployment in 1994•

Widespread poverty and malnutrition•

34% of South Africans subsist on less than $US2 per day and in 2002 11%-20% (~5 million people) lived on less than 1US$ a day

•

Estimated 30% of South African children suffer stunted growth from early-age malnutrition

•

The crime capital of the world•

Based on Interpol figures SA has high but not excessive levels of property crime but an extraordinary high level of violent crime

South African Challenges

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•

Low levels of education•

1 in 7 South Africans is illiterate; 1 in 3 functionally illiterate (<grade 7)•

Despite some improvements, the effectiveness of the schooling system rates poorly

compared to international standards•

High HIV Aids infection rates•

By 2005, 5.5 million South Africans were HIV positive, with a prevalence of 18.9% in the 15 –

49 years age group •

25% of all deaths in South Africa are due to HIV Aids and by 2015 5.4 million South Africans will have died of Aids

•

HIV Aids account for 73% of all new orphans•

Inadequate housing•

In 2004 about 4.1 million households were living in informal, traditional or backyard dwellings

•

The backlog in promised housing provision is growing, in 2003 reaching 208 000 p.a.

South African Challenges

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South African Challenges

•

Difficulties posed by dual formal/ informal economy •

50% of employed people are in the informal sector and 53% are excluded from formal financial services

•

Wide urban-rural disparities•

According to a *Markinor

survey in 2006, rural people are significantly poorer than their urban contemporaries

•

70% of rural households have incomes less than R2500 per month compared to only 50% of urban households

•

15% of rural women have matric, versus 50% of urban women•

High demographic dividend •

Households in SA are significantly larger than households in China where single-child policies are enforced. Thus the effect of increases in household income (through charity or enterprise) in SA is diluted.

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South African Challenges

•

Increasing Gini

coefficient•

Large wealth disparities exist –

relatively high Gini

coefficient (0.64) •

And the disparity is widening; the Gini

coefficient in 1995 of 0.59 has grown to 0.64 in 2002

•

Cultural inhibitors to growth•

Paternal society and women traditionally disempowered•

Large families driven by a belief that having many children will

bring prosperity and security in old age

•

Access to social grants –

6.8mil in 2003

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Environment South Africa Africa

(Brief comments)

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•

Two-thirds of population reach retirement age and depend on the social old age grant

•

Basic poverty relief in old age (SOAG) and tax incentivised

quasi-mandatory occupational funds and retirement annuities means that …

•

Disjuncture exists between poverty relief “pay-as-you-go”

and tax incentivised

legs

•

Governance and cost issues –

80% of funds have less than 100 members–

Conflicts of interest; poor disclosure–

Highly intermediated with high upfront commissions

South Africa -

Retirement

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•

Stronger growth and fiscal position creates space for broadening

and consolidating social security

•

SA lacks integrated “2nd

pillar”

earnings-related saving and social benefits system

•

Existing arrangements fragmented & incomplete –UIF, Compensation funds, social grants, RAF, various retirement

vehicles…

But these are foundations on which to build

•

Private saving industry is a source of financial & institutional

strength, but does not efficiently pool risks for low income earners and preserve saving

South Africa –

Macro Environment

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Retirement models –

Social Security

•Australia – Mandatory occupational pensions supported by means-tested social security programme: old-age, permanent disability and survivor pensions

•Chile –Mandatory private pensions supported by minimum guaranteed government pensions for old-age and permanent disability

•Hong Kong – Mandatory occupational pensions supported by means-tested social security programme: old-age and permanent disability pensions

•Singapore – Mandatory occupational savings not supported by social security

•UK – Universal state pension provided for old-age, permanent disability and survivors

•USA – Voluntary occupational pensions supported by means-tested Supplemental Security Income for old-age, permanent disability and survivors

•South Africa – Voluntary occupational pensions supported by means-tested social security programme: old-age and permanent disability pensions at R870/month

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UK

USA

HK

Australia

Chile

SA As-Is

Future SA ?

Singapore

MandatoryTax

Advant- aged

Employer Influence

Member Choice (1)

Gov’t Invol’ment

Union Invol’ment

Industry Richness

Full Rating

International comparison

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•

No single model•

Different social, political and economic scenarios•

Key learnings:–

Compulsion–

Govt

safety net–

Tax incentivisation–

Limited State role except Singapore–

Union role limited except Australia (industry funds)–

Members have choice –

Employers may influence member choice range–

Prosperous private sector (except Chile and Singapore)

International conclusions

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Generally very low rates of coverage and high rates of poverty. While a number of African countries are making determined efforts to meet the needs of the elderly, this objective must take its place among others. Difficult to argue that elderly need greater resources when children are malnourished or

unschooled

Africa -

Retirement

Head Count Poverty Participation rates:Contri

All ElderlyTo Labour

ForceTo Working age Popn

Burkino Faso 1998 52.0% 56.3% 1993 3.10% 3.00%Burundi 1998 61.2% 59.2% 1993 3.30% 3.00%Cameroon 1996 60.9% 62.4% 1993 13.70% 11.50%Cate d'Ivoire 1998 36.7% 46.7% 1997 9.30% 9.10%Ghana 1998 43.6% 45.5% 1993 7.20% 9.00%Guinea 1994 38.1% 44.0% 1993 1.50% 1.80%Kenya 1997 49.7% 53.8% 1995 18.00% 24.00%Madagascar 2001 62.0% 55.3% 1993 5.40% 4.80%Nigeria 1996 63.4% 59.5% 1993 1.30% 1.30%Zambia 1998 66.7% 79.4% 1994 10.20% 7.90%

Sources: Poverty figures from Palacios & Pallarès-Miralles, 2000.

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Africa•

Zambia •

A nominally compulsory system with significant problems of evasion•

Zambia National Provident Fund, a defined contribution fund, is mandatory for all workers in the formal sector

•

350 000 actively contributors, 70% of private sector workers•

Study by Queisser

–

30% of employers 7+ months in arrears•

Nigeria •

Compulsory individual account system to stimulate coverage•

15% contribution with at least 7.5% by employer•

Pension payable from 50+; early withdraw if remaining bal 50% of

salary•

Employers with 5+ employees required to enrol•

A large proportion of the workforce is in the informal sector•

Estimated participation -

20 mil (Independent Newspapers, 2005)•

Mauritius •

Pillar I universal pension system (age 60; 18% of per capita GDP) •

Pillar II notional DC (points system)

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Current Proposals National Treasury

Department of Social Development

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–

Improved access–

Reduced cost of provision–

Improved governance–

Risk pooling–

Effective tax system–

Improved savings for retirement–

Reduced State burden–

Speedy implementation–

Minimised

political risk–

Create safety net

Key Drivers for Government

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•

SOAP without means test or affluence test to eliminate poverty trap•

Integrated social security system•

Compulsory NSSF contribution up to income threshold–

Basic retirement savings–

Disability and death (survivor) benefits, –

Unemployment Insurance•

Compulsory private layer above threshold •

Preservation & Portability•

Annuitisation•

Revised tax dispensation•

Broad-based wage subsidy up to R45 000

•

SOME KEY DIFFERENCES IN THE DEPARTMENT OF SOCIAL DEVELOPMENT APPROACH

Key Aspects of NT 2nd

Discussion Paper

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4. Voluntary Additional

3. Compulsory Private

2. Social Security Fund

1.SOAP, Social Grants

Voluntary Additional, tax incentivised up to cap

Compulsory for all earnings > R60, 000 pa at mandatory rate

Compulsory 13-18% social security fund contribution (all employed earnings up to R60,000 pa) at mandatory rate

State safety net for everyone

Fund Structure

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•

EET tax basis•

Uniform basis for all (i.e. no distinction between funds)

•

Limited tax incentive for high income earners (roll-up)•

Not decided whether tax incentive will be at marginal rates or fixed rate

•

Low income to receive wage subsidy instead of tax incentive

•

Tax on end benefits to promote annuity income rather than lump sum

•

Simplified tax on lump sums already introduced•

Vested rights likely to be preserved

Tax Structure

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Implications South Africa Africa

Actuarial profession

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UK

USA

HK

Australia

Chile

SA As-Is

Future SA ?

Singapore

MandatoryTax

Advant- aged

Employer Influence

Member Choice (1)

Gov’t Invol’ment

Union Invol’ment

Industry Richness

Full Rating

International comparison

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•

Need for job creation stimulus met by wage subsidy which alleviates increased cost of employment

•

Shift people from informal to formal employment•

Despite the intent to extend coverage, the informally employed are likely to remain outside the net•

Household employees, self-employed, agricultural sector•

Bridge between Social Assistance and Developed Retirement Funding system

•

The public sector may become the sole service provider for a substantial number of people

•

Significant possible impact on private sector•

NSSF first tier provider•

Asset management•

Crowding out of risk benefit providers•

Annuities without capital requirements•

Loss of scale economies

Implications -

SA

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•

Whilst tax cap improves equity, it may be a disincentive to save•

Organisational

challenge•

SARS as contribution collection agency•

Consolidation of benefit administration•

Post retirement medical assistance integrated•

Transition arrangements?•

Contracting out?•

Lowering costs anticipated•

Protecting member benefits: minimum benefits, compulsory preservation, portability

•

Improved standards of fund governance•

Challenge of self and informal employed not met•

Government as Employer faces its own challenges

Implications -

SA

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•

There appears to be no model that can be held up as a model system •

The problems of Africa are uniquely African•

Can the Rest of Africa learn from SA’s

reforms?•

Improved standards of fund governance•

Wage subsidy•

Annuitisation•

Minimum survivor and disability benefits

•

INPUT PLEASE!

Implications -

Africa

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•

DC carve out impacts on existing DB arrangements•

Hybrid DC underpin to DB fund could be interesting challenge•

Need for individual advice significantly reduced•

NT have asked for our assistance to shape the Reforms•

Modelling•

Task Teams•

Sponsor Conference•

Very few SA actuaries in Social Security•

…

but about half our actuaries advise occupational retirement funds•

Reduced need for actuarial valuations, number of funds likely to

reduce significantly from current 13 000•

Possibly reopen discussion on Government Actuary’s Department

Implications –

SA Actuaries