Issue: September/November 2008
Another day, another crisis
This “nationalisation rumour” is allegedly causing droves of fund members to cash in their retirement benefits. It’s a pretext, not the cause, and trustees have a responsibility to prevent it. A drive to educate consumers on the NSSF would help too.
Manuel . . . rightful anger
Trustees of retirement funds had better catch a wake-up. Were they not asleep at the wheel, there’d be no cause for the panic attack of finance minister Trevor Manuel at the flight of members from their pension and provident funds.
He blames it on the “unscrupulous behaviour” of unnamed service providers, administrators and brokers. Many thousands of workers are withdrawing, he says, because there’s a spread of “unfounded fears” that their savings will be nationalised. By implication, the spark is the envisaged National Savings & Social Security Fund (NSSF).
When there’s smoke, look for the fire. And when there’s a fire, the flames can be either be fuelled or doused. In this instance, the flames are ostensibly being fuelled by quick-buck intermediaries. But they can readily be doused. It’s not so much by threatening rumour-mongers with the revocation of licences, which is Manuel’s gun-blazing response, but by insisting that trustees simply do their duty, as they are obliged if only they were properly to understand it.
The straightforward way to put out the fire is for trustees not to allow the withdrawals. Should consultants come to funds with advice patently against the funds’ interests, it’s for trustees to tell them to take a hike. Should brokers frighten members to cash out, which is against the individuals’ welfare, it’s for trustees to man the barricade of pensions preservation.
In the firing line of Manuel should be trustees first, intermediaries and others second. Placing them in reverse order is a damning commentary on how many trustees, in innocence or ignorance, can be led by the nose.
Look no further than the Pension Funds Act. It says that all assets, rights, liabilities and obligations of a fund are those of the fund “to the exclusion of any other person, and no person shall have any claim on the assets”. In other words, the money in a fund belongs to the fund and not to its members. When a wildfire rumour incites members to call for their cash and run, which in turn causes a run on a fund, the trustees need merely say no.
And so they should. In fact, so they are beholden. Or they are in breach of the Act. It strictly limits the pre-retirement use by members of fund investments, under defined conditions, to specific loans.
Members are supposed to be paid out only on leaving employment. To get their hands on promised benefits beforehand – prior to retirement, resignation, retrenchment or death – defeats the whole purpose of a fund as a long-term savings vehicle to provide for long-term needs. Premature withdrawal can also undermine a fund’s stability, if not its solvency, to the prejudice of members who remain.
That several thousand workers have apparently cashed in their retirement savings is scary. To do this, they must resign from their jobs. It shows desperation in that new jobs, given the current economic malaise, aren’t easy to find. However, the resignation exercise can be a sham.
It happens when an employer allows the resignation of an employee from his job and hence from the fund. The employee then pockets his retirement savings and the employer immediately accepts re-employment of the same person. Re-entering the same fund afresh, the employee now has zero savings and zero accrued benefits.
This looks disconcertingly like a fraud on the fund. To the extent that employers and employees collude in perpetrating such fraud, with or without the say-so of self-serving intermediaries, it’s for the trustees to hit them. Unless they do, the trustees are derelict in having condoned a loss of fund assets.
The nationalisation scare is more a ruse than a root of the situation that rightly alarms Manuel. Confronted by the consequences of overextended credit, consumers are tempted to raid every resource they can. Retirement funds, with their promise of minimum benefits and accumulation of members’ individual reserves, are particularly vulnerable. That premature accessing of these funds will hurt tomorrow is eclipsed by the burdens of debt today.
People who have no other means to pay for food, fuel and shelter – let alone for family support – are now in a life crisis. In its second NSSF discussion document, published last February, National Treasury recognises that in life crises the early withdrawal of voluntary savings “may need to be accommodated”.
Thus, at present they are not accommodated. The flip side of accommodation, the document indicates, is that more than half of those who don’t withdraw early will nevertheless reach retirement age with pensions worth less than 28% of their pre-retirement income.
From either perspective, of early withdrawal or even of non-withdrawal, it’s evident that South Africa stares down the barrel of dangerously inadequate retirement savings. This is the fire.
The smoke is in the NSSF. For lay people and fund members most affected, its implications are poorly grasped. Public participation in NSSF debate around the National Treasury and Social Development discussion documents has been intensive, but centred on technocrats and industry insiders. As an opportunity for consumer involvement and awareness, it’s fallen short.
To the credit of policy formulators, they have not come with fait accompli. They have presented proposals, and they have sought advice. But the bedfellow of exhaustive consultation is protracted delay in producing a final outcome. In the process of extended debate among experts, a hotbed for misinformation among non-experts has natured.
What, then, can be meant by this “nationalisation” thing? Is it sufficiently clear, for instance, that accrued benefits will be unaffected by the NSSF? Under what circumstances will it be possible for existing funds to opt out from the NSSF? What will be the extent of private-sector participation in the NSSF? Who will appoint the NSSF trustees, and who will define its mandate?
Clearly, there’s public mistrust over the ability of government to administer retirement savings. It’s not without good cause, given the flawed service delivery of government departments too numerous to mention.
On top of this, a new government of new personnel with a statist bent is in the offing. Retirement funds represent pots for power, not least over corporate South Africa because of their huge stakeholdings (TT Sept-Oct ’07), but also for manipulation to prescribe investments that lean to populism at the expense of optimal returns.
Manuel is outraged by a symptom. The cause runs deeper. Taking chances to profiteer, by switching members from funds or charging fees for bad advice, are one thing; uncertainties genuinely felt, by people who don’t readily understand retirement funding at the best of times, are another. A campaign for consumer education on the NSSF’s underlying principles is so far conspicuous by its absence.
It needn’t await the last detail to be ironed, or the void for rumour will persist. The sooner the die is cast in mass communications, the more difficult it will be for nationalisation aficionados among Jacob Zuma’s cohorts to spring adjustments later.