A small base of three million taxpayers pays 95% of the personal taxes paid in South Africa. High unemployment and a slow growth economy means that alarmingly few people can afford to retire when the time comes.
Many cash strapped households have prioritised disposable income over savings and retirement. Currently the state funds around 18 million social security grants and few employment opportunities mean that this figure is likely to grow. This will have implications for the state going forward as it creates a perpetual, generational dependency on the state.
The country’s failure to get its society to be financially independent creates a huge tax burden on the next generation, pointed out Anthony Govender, CEO of ASI, a level 1 B-BBEE firm offering independent expertise in health, wellness, insurance, investment and retirement advisory. Govender was speaking at the second Business Day Dialogues LIVE online discussion, in partnership with ASI.
Currently, South Africa’s pension fund investments are guided by Regulation 28 in the Pension Funds Act, which determines where funds can invest, with a strong focus on local equities. This in turn raises the issue of a lack of diversity in the financial advisory industry
Financial advisors in South Africa don’t represent the diversity of the country’s population and this issue needs to be addressed, particularly given that people tend to deal with advisors they are comfortable with and whom they trust, said Andrew Davison, Head of Advice at Old Mutual Corporate Consultants.
Ensuring greater diversity among financial advisors and asset managers needs to be an industry priority in terms of forging a viable way forward before government imposes regulations, said independent scenario planner Clem Sunter.
The South African government intends to amend retirement regulations. Many argue that this will ultimately allow government to use pension fund resources to bail out struggling state-owned enterprises. This potential move raises certain questions: just how lawful is this and are pension fund members fully aware of how this will impact their future?
Prescribed assets are currently off the table as far as government is concerned, said Viresh Maharaj, the Managing Executive of Corporate Distribution at Sanlam. However, should it be introduced, it would result in substantial market distortions.
The Association for Savings and Investment (ASISA) has voiced its objections to the notion of prescribed assets, instead calling for the creation of a compelling investment environment: a pull rather than push approach.
There is no objection to pension funds being used for impact investments, but prescribed assets is the wrong way to go about it, agreed Davison, adding that it would distort the pricing of assets and make them less attractive.
The notion of using the capital liquidity of the pension fund industry to provide an economic stimulus is a good idea in theory, but only if the governance framework is sound and that investments are made into sustainable and profitable businesses, said Govender.
History indicated that it was a bad idea, he said, pointing out that the apartheid government’s prescribed assets strategy resulted in dismal performances.
Sunter’s closing advice was to ensure that retirement savings are diversified and not reliant on only one asset class.