Pension fund auto-enrolment – what it may mean for South Africa

Adapted from the article ‘Auto-enrolment: how will it affect us in South Africa?’ by Kobus Hanekom, Head of Strategy, Governance and Compliance at Simeka Consultants & Actuaries
 
Auto-enrolment is a key element of government’s retirement reform objectives
In his 2016 budget speech, Finance Minister Pravin Gordhan stated that government remains committed to its retirement reform objectives. One of the key elements of the retirement reform is auto-enrolment or mandation, which has the potential to be a game changer for South Africa when implemented.
In simple terms, auto-enrolment involves employers automatically enrolling employees in an employer pension scheme
The employer will also contribute to the pension fund and employees will benefit from tax benefits. The purpose of auto-enrolment is to encourage more people to save for retirement to address the dual challenge of people not saving enough during their working life as well as increased life expectancy. Auto-enrolment was implemented in the UK in 2012, starting with the biggest businesses with 120 000 employees or more. Considering the process and impact of auto-enrolment in the UK can provide us with some key insights into what that the system may mean for South Africa.
The UK’s retirement challenges are similar to those in South Africa
The Turner Report, published in April 2006, brought about significant changes in the UK retirement fund industry. The report identified three key concerns – which we can relate to in South Africa – which led to a number of key policy interventions, as shown below.

Including the ‘unpensioned’ low-income earners is the biggest challenge
A big challenge for the UK – and the same will apply for South Africa – is how to include the ‘unpensioned’ at the lower end, especially those employed by small employers. For obvious reasons, UK pension providers have not had much traction in this end of the market. The state therefore had to establish a fund that could provide a pension offering at an affordable fee by first establishing a ‘market failure’ in this sector. In South Africa, the small end of the market cannot be served cost effectively by the current providers in terms of current legislation. We therefore also have market failure in this sector and will have to establish a special fund, which will most likely be a state-controlled fund.
 Summary of the UK auto-enrolment experience

• UK employers who do not have their own defined contribution fund have a choice of two fund types: master trusts (the equivalent of an umbrella fund in South Africa) and a GPP (Group Personal Pensions, a retirement annuity policy issued by an insurer without the need to establish a fund and appoint trustees).
• The National Employment Savings Trust (NEST) – a master trust – was established to serve the low-income market. This new ‘state fund’ is funded by a £600 million loan facility by the state (currently standing at £400 million). NEST currently enjoys a market share of around 50% of new business and all services are sub-contracted to the private retirement fund industry.
• At the beginning of the year, around 100 000 employers had enrolled. In the next two years, more than 1.8 million small and micro employers (less than 30 staff) will implement auto-enrolment.
• Opt-out rates have been low and more than 5 million workers are now saving towards retirement.

Will a state fund in South Africa be successful?
Good institutions are seen as a critical difference between rich and poor countries. One of the concerns of the rating agencies is South Africa’s institutions. Worker resistance to the T-Day reforms also gives us a good idea of how workers may respond if they are compelled to pay their money into a state fund. We may therefore have to trust that, like in the UK, there will be service providers who, with the help of a loan from government, will be prepared to take on the challenge of offering funds to the low-income market.