The year 2012 promises to be a significant one for South Africa’s long-term insurance industry. The publication of a green paper is expected to at last provide details of the proposed National Social Security Fund (NSSF). The initiative is designed to meet a well-documented social need, but while its goal might be laudable, its implementation carries major implications for a large segment of the nation’s insurance sector.
COVERAGE: South Africa’s move to introduce a new social security system is in part an attempt to answer a coverage conundrum. Rising social assistance spending, including pensions and disability benefit, is placing an increasing strain on government coffers and is anticipated to grow rapidly in the short term, with National Treasury projections seeing the $13.6bn social grant expenditure of 2011/12 rising to $15.8bn by 2015. At the same time, South Africans remain under-insured in life terms. A 2011 study by the Association for Savings and Investment in South Africa revealed that the nation’s 12.5m income earners are underinsured by some $2.25trn, with an overall death gap of $894bn and a shortfall in disability coverage of $1.36trn.
Insurers welcome bringing more South Africans inside the social security net. However, the information provided by National Treasury and the Department of Social Development (DSD) since the scheme was first proposed in 2008 has resulted in an extended period of speculation as to its potential impact. For example, a proposed opt-out provision for large, well-managed funds (such as those run by unions) has recently been ruled out, and the compulsory nature of contributions from all earning South Africans is now an element on which both the Treasury and the DSD agree.
IMPACT: Working out impact assessments for what has been a slowly evolving national strategy has been challenging for long-term insurers. However, given that the scheme will be compulsory, and that the most recent proposed earning threshold mechanism would see 6% of the first R150,000 ($18,360) to R200,000 ($24,480) collected for retirement and a further 6% for risk benefits such as death, disability and unemployment, one implication is clear: the lower end of the pension fund market is likely to see its customer base shrink. “The proposal means the only place low income earners can get social security cover is the NSSF,” Sheshi Kaniki, a senior economist in strategic intelligence for MMI Holdings, told OBG. “They wouldn’t have the income to contribute to two different funds – and that’s where the impact would be on us.” Other insurers question the scheme’s ability to meet all of the societal needs it seeks to address. “It will provide a good pension system, but will it provide for the other broad needs?” Rudolf F Schmidt, the group CEO of Assupol, told OBG. “Funerals, for example. The fund may cover the person who is a member, but will it cover the extended family? We cover the insured and the extended family.”
PRESERVATION: A fundamental issue the NSSF must address is preservation. “The propensity to cash in pensions before maturation comes from a lack of trust, as there were past instances were workers felt shortchanged,” Bassie Maisela, the CEO of financial services firm NBC Holding, told OBG. Cashing in on pensions during times of hardship remains an industry problem, and the practice of leaving employment, accessing funds and then seeking new work is commonplace. Current regulations allow for such pension fund churning, and the introduction of compulsory preservation, coupled with a tax-funded scheme covering the unemployed and informally employed, could address the retirement funding issues without the need for an elaborate NSSF. “Compulsory preservation – with an emergency escape clause – and an adjustment to old age grants to incentivise self-reliance would reduce the burden on the state and benefit pensioners,” Robert Dower, the COO of Allan Gray, told OBG. The new framework is expected to include just such a compulsory preservation provision. The details, and answers to other questions related to implementation, should come in 2012, when insurers will be able to adjust their initial assessments and planning for the NSSF can begin.
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