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Thursday, March 1, 2012
What about the informal sector?

In the UK, twenty year olds are three times more likely to get to 100 than their grandparents. A quarter of 16 year olds are expected to make this milestone. While people are living much longer worldwide, AIDS masks the effects of improvements in living conditions and healthcare, which most South Africans will enjoy.

A twenty year old will work for forty years before reaching the age he qualifies to draw a state pension, and given the analysis above, have a reasonable chance of needing to live off his savings for another forty years.
“We know that South Africans presently fail to protect their standard of living in retirement by saving adequately now,” notes Rowan Burger: Head of Investment Strategy at Liberty Retail South Africa.”
What will happen in future? The recently released Vision 2030 document by the National Planning Commission (NPC) outlines the extreme need to change the culture of savings in South Africa in light of the existing and anticipated changes to working lives, ensuring that our income security is enhanced as well as promoting saving as a way of life amongst all South Africans. “At the moment, a quarter of South Africans receive some form of social grant, we cannot afford to extend this any further,” says Burger.
The ultimate goal in reforming the current retirement system is to ensure financial security amongst the elderly by providing a pension for all through compulsory savings and reducing the dependency on the state in old age.
“Whilst the argument appears simple in form, the overhaul of our current retirement saving structure has been subject to disagreement between various bodies, resulting in the next retirement reform policy paper to be released this year,” he notes.
Whilst no formal commentary has been released, there is general sentiment about what the social reform policy would mean to South Africans should it be introduced. At the moment it appears unlikely that it will have a positive impact for all South Africans as it will assist in:
• Increasing long-term savings in a disciplined fashion;
• Providing access to regulated simple, cost-effective retirement savings;
• Providing access to related products for those who historically have not had access.

However, one of the challenges outlined in the NPC Report is that for the proposed system to be successful it will require a larger work force and presently too few people are employed or at least declare their earnings. Nevertheless, Government aims to create 11 million jobs by 2030, confident that this will go a long way in aiding the reformation of our current retirement savings structure.
The question still remains, even with an increased work force, how will retirement reform be implemented in a socially challenged society, coupled with sluggish growth within the job market compacted by volatile economic conditions?
Comments Burger, “The NPC report offers an interesting insight into the thinking that is driving the proposed retirement reform. The mere fact that social protection forms part of the philosophy is heartening.
“The need for social protection as an integral part of any country’s social development is well documented internationally. It is absolutely essential if our country wants to achieve any success in income equality, poverty alleviation and even crime reduction.”
However, Burger says the document should not consider solutions for secure long term employment as they have in the civil service, but focus on the needs of the currently under catered for population who are informally or temporarily employed and where the reality is that long-term job security is fast becoming a thing of the past.
The vision for 2030 is for a social system that provides social security grants, provides for mandatory retirement savings and risk benefits such as unemployment, together with death and disability benefits and voluntary retirement savings.
“While substantial recognition is given in the document to the challenges of providing informal workers with retirement savings vehicles, it still hints at the possibility of introducing a dual contribution and a defined benefit retirement savings system for formal workers only. Informal workers would be catered for on an ad hoc basis with little social insurance.” Burger explains.
He goes on to explain that any retirement plan, whether undertaken by an individual or as part of a national scheme, needs to make allowance for the fact that the world of work is very different to what it was twenty years ago – and is likely to continue changing substantially over the next few decades.
“Given the current challenging economic environment, the notion of long-term job security will most likely be more difficult to come by, hence it is going to become increasingly difficult for the majority of employees to make regular, fixed contributions to a retirement savings scheme for a lengthy period resulting in dire implications for any retirement plan,” he points out.
Burger adds further that the challenge goes beyond finding a compulsory retirement savings solution that suits the nature of informal employment. Government also needs to be aware that the idea of stopping work completely at retirement age is less likely. An increasing number of people realise they will need to retain employment of some sort after retirement in order to make ends meet and face a far longer period in retirement than previous generations.
“The result of irregular payments into a retirement scheme makes the proposed defined benefit savings structure an unsustainable option for the national retirement scheme,” he emphasises.  “Tacking on a separate savings arrangement for informal employees will only serve to introduce higher risk into the overall scheme by encouraging people to seek out employment that enhances their benefit entitlements, usually to the detriment of the whole scheme.
“Possibly, the most important consideration of any national retirement scheme eventually proposed by government is that it must offer consistent treatment for all.
“The best way to achieve this would almost certainly be through a single, defined contribution system that covers both formal and informal workers by offering sufficient flexibility to allow for the likelihood of irregular income and payments and the continuation of the strong social insurance safety net the social grants system provides.
“The treatment of the nation’s retirement savings is obviously a hugely emotive issue,” adds Burger. “The nature of employment in South Africa is also a highly politicised one.
“Hopefully, rational thought, foresight, and the lessons of an inflexible and now crumbling European retirement system, are applied when constructing this country’s retirement reform proposals to ensure that the dynamic employment circumstances and changing retirement needs of all South Africans are considered.”

Copyright © Insurance Times and Investments® Vol:25.3 1st March, 2012
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