Introduction and background

The recent publication of the Retirement Fund Discussion document by the National Treasury in December 2004 is welcomed since it begins to comprehensively address many of the long-standing concerns regarding the transformation of the retirement fund industry.

We welcome the invitation by the Finance Portfolio Committee to comment on the Discussion Document. We understand that the provision to have comments on the discussion document at a Parliamentary level appears to be an extraordinary meeting. As pointed our by yourselves and the Treasury, this matter is also being discussed at a NEDLAC level this week. Our comments and inputs are therefore not binding in terms of NEDLAC Protocol, and we reserve out right to raise issues in an amended form at NEDLAC. A comprehensive submission will follow once the inputs from stakeholders and negotiations are finalised at NEDLAC.

It is regrettable that civil society stakeholders who represent the interests of low-income earners, sectors of our population for whom many of these proposals are specifically being formulated, and other partners, such those that involved in structures such as the Financial Sector Charter, are not in attendance, or were not invited to this special session. These are stakeholders who are working with communities on daily basis and they know and understand their issues better.

We are therefore concerned that inputs are therefore skewed at the outset, with a large preponderance of business and industry representatives being allowed to make comments, to the exclusion of equally important stakeholders. We hope that future consultation would include a broader range of stakeholders.

Within the Development Chamber of NEDLAC, the Social Security Task Team is considering proposals regarding the review of Social Security services. Recommendations tabled by the Department of Social Development have a bearing on these recommendations, in particular a Chapter on Retirement and Old Age. These recommendations may also be important for consideration by this Committee. It is recommended that the consultative process between government departments and/or clusters be clarified to prevent duplication.

A recent trustee workshop for COSATU affiliates was held on Feb 10^th in Tshwane. Several of our key comments and questions emanate from this workshop. In drafting comments on the Discussion Document, resolutions of COSATU with regards to retirement funds, Labour resolutions of June 2004; the deliberations and declarations of the Retirement Funds Trustees’ Conference in late 2004; and the recommendations of the Taylor Committee were considered.

Retirement funds account for R909 billion as per the FSB forty-fifth report of institutional investor assets, being the major provider of the equity listed on the Johannesburg Stock Exchange.

Retirement fund contributions from 80 per cent of the formally employed amount to R64,8 billion a year – 14 per cent of total personal remuneration in South Africa. As a result, South Africa rates fourth in the world for retirement fund assets, after the UK, Switzerland and the Netherlands. In terms of private pension fund assets to GDP, South Africa is first in the world.

Powerful vested interests control the insurance and related industries and investment choice. There is limited state capacity to monitor compliance with trustee laws across 15 000 funds – we therefore welcome several of the recommendations in the Discussion Document to ensure greater compliance, largely through increased powers and capacity of the Registrar of Pensions.

The Discussion document does not refer to the GDS Agreements (2003) or Agreements of the Financial Sector Summit (2002) as it pertains to retirement funds, though several of the amendments proposed are in principle aligned with these Agreements.

Over and above the various broadly progressive recommendations regarding membership control, shareholder activism and powers of the Regulator, further details are required regarding the funding mechanisms, management and implications of the National Savings Fund (NSF) model being proposed.

In particular the proposed 3 pillars of the NSF model, needs to be assessed at several levels that include equitability, redistribution, and cross-subsidisation. International developments, especially the implications of recent developments in the management of CalPers (the largest public pension fund in the USA), and the push by the United States government to privatise social security funds are informative. Current recommendations need to be compared to these trends and avoid any potential for such problematic outcomes.

Developments around the CalPers fund demonstrates the attack of corporations on these committed funds pushing for privatisation and investment on stock exchanges, thereby making benefits to members more vulnerable to the vagaries of the market. It also removes the autonomy of decision-making from elected trustees and compromises transparency with regards to investment decisions.

We are of the view that both the National Treasury document and Ch7 (Social Security NEDLAC document) takes the existence of the 2 economies for granted. This is problematic since it may suggest that economic disparities would remain a long-term feature of the South African economic landscape. In fact, projections on p.21 of the Discussion document bases its projections on a rate of unemployment will not be significantly reduced in 20-30 years from now. This flies in the face of COSATU’s call for decent jobs and an economy that would create sustainable, quality jobs.

Arguments by government, such as people moving "up" from the second to the first economy require evidence that this would be possible. At the least, projections and economic modelling be should be undertaken, under various employment scenarios, to ascertain what percentages of the total economically active population would populate the various "Pillars" proposed.

With regards to the above concern, recent research done by the Bureau of Market Research claim that the anticipated and desired transition from the so-called "second" to "first" economy would not be attainable based on their findings. They quote the example of a typical person in the informal sector (such as a vendor) having on average, a turnover of around R3800 per month. However, of his turnover, only R1000 is typically disposable income – a far cry short of being able to save, and make ends meet. It also indicates an almost impossible chance of entering the ‘first’ economy through his/her honest work and disciplined savings.

It should also be clarified whether the proposals contained in the National Savings Fund suggests that government would want to be less responsible for long-term challenges of atypical workers. Further details are required on how to expand coverage to include marginalized workers e.g. domestic and farm workers, and fixed term contract employees.

Clarity is sought regarding the investment decisions regarding pension funds. Over and above the significant absence of relating these reforms to the 5% of investible incomes’ GDS commitment – it is not enough merely to discourage low investment in foreign assets and insisting on keeping money internally. Government should be clearer on which investment instruments are preferred to promote socio-economic developmental goals.

Some of the language around who the best investors are, is problematic. Whilst there should be great caution in terms of secure and prudent investment decisions, the proportional representation of investors, over and above the view of trustees who, with time will be adequately trained, and have increased understanding about whether they have been properly advised. Some investors unnecessarily emphasise the need to have "professional" trustees, to the exclusion of ordinary trustees nominated by employees and employers. No one will deny the need for profession and objective financial investment advice. It should however not be exclusionary. History has shown that some of these "experts", even though they portray themselves as people who know best, many of them have put personal greed and interest above the long-term needs of members.

Whilst the State Old Age Pension provisions in South Africa are relatively high compared to other countries, it is critical to note that the persistently high unemployment rates in South Africa, a crisis by any developing, middle- income country, requires a unique and pro-active response.

COSATU is broadly supportive of recommendations regarding improved governance, trusteeship and the proposed increased regulation and oversight functions of the Registrar of Pensions.

The Discussion Document also appears to be pushing conversion and transfers of funds largely at the discretion of the employer. Previous experiences have demonstrated that this discretion has resulted in significant leakages and increased costs to the member through many problematic and unacceptable practices of fund managers and employers.

Evidence of this is demonstrated on page 13 of the Discussion Document where The Sanlam Survey comparing contribution rates in 2002 with 2004 of DC funds shows that the decline in savings for retirement is due to a drop in employer contribution, an increase in admin fees of almost 30%, and a 27.4% reduction in the savings component of the employer. National Treasury, nor employers should decide for members which form of retirement funds is best for them. Our position has always been that is a worker, a member of the fund who should decide whether he/she join a DB or DC. Linked to this, are considerations for a lump-sum monthly annuity payment system. In our submission to the Taylor Commission, we proposed a mechanism which to address this issue.

COSATU is also concerned about safeguards mechanisms that should be put in place when funds are placed under administration? This may be particularly important when employers hold over payments and allow the benefits of the member to be compromised. We suggest that a minimum handover period of payments be implemented. Often members incorrectly assume that their payslips statements correctly reflect and guarantee that retirement funds contributions has been paid to the fund by employer on their behalf. These situations point to the critical need for early enforcement – it should be upfront, at the point of violation with heavy fines, penalties applicable.

Pending further details regarding the NSF, COSATU is of the opinion that once the NSF can be shown to be a feasible vehicle to ensure that persons outside of the current retirement fund industry are accommodated, several key issues around the fund need to be further developed.

Firstly, it is imperative that the fund be administered at very low cost. It is proposed that a Member Administration Company administer these funds. It would therefore be effectively controlled by members, along similar lines such as the model in Denmark, where such a company manages these funds, with oversight by government. The NSF should not be outsourced or administered at all by the private sector. We need to learn from lessons regarding the Msanzi Account – especially the extent to which there has been an uptake of targeted beneficiaries and whether there are sufficient checks and balances in place that would not be exploited by opportunists.

Secondly, further details should be provided regarding the proposal and conditionalities around compulsory saving. There may be several unintended outcomes that negatively affect the member. What happens, for example, to people that work a few hours a week – should compulsory saving still apply in this situation? There is the very likely situation that the disposable income of people in this situation, if compelled to save, would rob them from addressing their basic needs?

COSATU would therefore caution that a barrier or limit on the compulsion to save, based on income level be established. People in desperate situations, should not be forced into further poverty and destitution as a result of this proposal.

Thirdly, the funding of the NSF is a key question that requires further debate. It is not clear how the NSF would reach economics of scale a soon as possible. We reserve our recommendation pending feasibility study on how best to fund this critical fund.

COSATU agrees that the NSF be exempt from Retirement Fund Tax and should be determined by a tax formula. It should not be used for tax avoidance by higher income earners.

NSF and the conditions under which a bonus is payable if moneys are retained until retirement – COSATU agrees that a bonus should payable. However, it is important to determine the criteria that would determine this decision. For example, how much must be saved over a period of years to qualify for such a bonus? What happens in the case of an emergency, such as a house burning down, or if other emergency funds are needed? Should no bonus accrue in these circumstances? We believe that every effort is made by the State to preserve the savings of members who need it most and who are most vulnerable.

It is unacceptable for the National Treasury to reject the feasibility of a single retirement fund, as outlined in the Discussion document. There absence of providing for an industrial bargaining council and the establishment of national retirement funds is highly problematic. COSATU has always maintained that we should strive for one industry within one legislative regime, taking into consideration the dynamics of current bargaining council funds provisions. Failure to do so will seriously compromise the impact of collective bargaining agreements. We insist that this is a matter that requires further consultation with unions to develop an acceptable proposal for all stakeholders.

COSATU will oppose provisions that interfere with collective bargaining agreements. An individual cannot have more rights than a collective agreement. We are adamant that the gains made in this issue should remain and that alternatives or provisions be made that would ensure the integrity and good faith of these agreements.

We agree with the provision cannot support any form of discrimination on benefits.

The New Retirement Funds Act prescribes the payment of only a modest proportion of the benefit in the form of a lump sum, with the balance being used to secure an annuity. Again we draw attention to discuss the proposal for lump sum vs monthly annuity options.

COSATU agrees that punitive and exploitative charges prevent members to vote with their feet. Several of these costs are extremely unfair and excessive fees should be banned and not left to the freedom of the market to decide.

Whilst 3.12.3.1 states that – "If an employee changes jobs and ceases eligibility to be part of his/her retirement fund – the benefit payable from old fund must not be available in cash – but be transferred to new retirement fund or retirement fund of the employee’s choice". It is not clear whether this applies equally to a retirement annuity, a preservation fund e.g. umbrella fund, and/or the NSF. On the surface this provision may appear fine, it is imperative to guard against facilities that to allow privileged/wealthy members of the Funds to transport their shares of funds to where they can make decisions to prevent socially responsible investments (SRI’s). It is critical to find mechanisms to guard against this provision.

COSATU believes that every effort must be made to trace the rightful beneficiaries of pension funds, including family members, especially children. The provision that unclaimed benefits be held by the State and ultimately accrue to it is fraught with problems. The management of pension funds has a moral and legal obligation to trace beneficiaries with vigour and consistency. Several organizations offer services to trace beneficiaries that are very costly to the member, and we would argue exploitative. When a principal member dies, it is often that poor rural families do not have recourse to the bereaved, unless fellow workers like those in unions and informed civil society structures to raise awareness of entitlements of families. There is an urgent need to address these shortcomings. Moneys should be used for retirees’ beneficiaries ONLY. We do not believe that these recommendations are fair to the deceased employee.

The establishment of a central fund can create another bureaucracy – part of this problem can be addressed by compulsory and regular updating of data. Both small funds and large funds are constrained by a lack of up-to-date information. Members also need to be educated regarding the importance of responding to requests for information, since it is critical to good management and administration.

Whilst COSATU supports the commitment to reform with aspect of the retirement fund industry, current recommendations are somewhat limited in the scope of its provision. The kind of training that was and is proposed on empowerment is limited to management of a Fund on a day-to-day basis.

There is also a need for training of all stakeholders in the industry. This training should focus on issues around the bigger economic and socio-economic challenges facing South Africa. A greater need for information and training of the social and economic challenges facing us is needed. It will be fatal if these factors are considered casually. The national needs of the country are critical in the decision-making of trustees and promotes socially responsible investment decisions.

On the governance of umbrella funds, there appears to be a rapidly growing interest around these recommendations by business. Mechanisms need to be developed to ensure that employees get involved in management of umbrella funds. The track record around high costs and problematic management of umbrella funds are shocking. These concerns have been echoed in previous submissions to the Committee yesterday.

Claims by investment managers that funds are too big, complex, or contain too many members, with no hope for representative management, are unacceptable and problematic. Under these conditions, the focus will remain on mere profit maximization of these funds, with no commitment to access by lower-income earners at affordable rates. Maintenance of the status quo would also fail to realize the objectives of the discussion document and broader goals of transforming the industry.

Several comments were flagged by the legal advisors of COSATU, who participated in the strategy workshop mentioned earlier: