Why are private pension assets in South Africa declining? Sheshi Kaniki SASI & Momentum SASI-ERSA Savings Workshop 4 - 5 August 2009

Overview Objectives of the paper Why are pension assets important? Literature review Trend in pension assets Reasons for trend in pension assets Conclusions

Objectives of the paper To examine the trend in private pension assets from 1998 to 2008 To investigate reasons for this trend To provide policymakers and practitioners with an evidence base for pension reform

Why are pension assets important? Have a positive impact on retirement income Mitigate risk of old age poverty Promote financial sector development Mobilise domestic resources for fixed investment Contribute to economic development

Definitions of pension assets Private pension assets: Assets of self-administered funds plus the assets of underwritten funds (Financial Services Board) Assets of self-administered funds (Reserve Bank) Self-administered funds invest their assets on their own behalf and underwritten funds operate exclusively by means of insurance policies Official pension assets: Assets of pension funds established by particular laws for employees of the State and some parastatal institutions (Financial Services Board)

Review of literature

Factors affecting accumulation of pension assets Income (Huberman et al, 2007) Age (Chatterjee and Zahirovic-Herbert, 2009) Education (Arenas de Mesa et al, 2004) Years of employment (Yuh and Devaney, 1996) Contribution rates (Lasagabaster, 2002)

Factors affecting accumulation of pension assets Employer contributions (Gutter et al, 2007) Participation rates (Huberman et al, 2007) Introduction of mandatory system (Kritzer, 2008) Economic growth (Hu, 2005) Exposure to equities (OECD, 2008)

Trend of SA pension assets

Table 1: Real Value of Pension Assets (Rand Millions) Source: Author’s calculations from FSB Annual Report (various issues), Registrar of Pension Funds Annual Report (various issues) and Reserve Bank Quarterly Bulletin (various issues). Base year = 2000

Table 2: Pension Assets (% of GDP) Source: Author’s calculations from FSB Annual Report (various issues), Registrar of Pension Funds Annual Report (various issues) and Reserve Bank Quarterly Bulletin (various issues).

Figure 1: Private Pension Assets (% of Total Pension Assets) Source: Author’s calculations from FSB Annual Report (various issues) and Registrar of Pension Funds Annual Report (various issues)

Figure 2: Assets of Private Self-Administered Pension and Provident Funds (% of GDP) Source: Authors calculations from Reserve Bank Quarterly Bulletin (various issues).

Reasons for trend in SA pension assets

Income Figure 3: Real GDP Per Capita Source: Reserve Bank Quarterly Bulletin (various issues) Base year = 2000

Employment Table 3: Employment Trends in the Public and Private Sector Source: Authors calculations from the Reserve Bank Quarterly Bulletin (various issues)

Stock market performance Figure 4: Growth in Value of Shares and Private Self-Administered Pension and Provident Funds (% Change) Source: Author’s calculations from the Reserve Bank Quarterly Bulletin (various issues).

Participation rates Table 4: Pension Participation by Sector (%) Source: Masilela and Kaniki (2009)

Participation rates continued… Figure 5: Official and Private Pension Fund Membership (% of Total Membership) Source: Author’s calculations from FSB Annual Report (various issues)

Participation rates continued… Figure 6: Private Pensions – Correlation between Membership and Assets Source: Author’s calculations from FSB Annual Report (various issues)

Contribution rates Table 5: Employee and Employer Pension Contributions (% of Salary) Source: Sanlam Employee Benefits Annual Survey (various issues)

Contribution rates continued… Figure 7: Private Pensions – Correlation between Contribution Rate and Assets Source: Sanlam Employee Benefits Annual Survey (various issues) and Author’s calculations from Reserve Bank Quarterly Bulletin (various issues)

Legal framework Mandatory participation can improve participation and contributions By law all government employees are required to join the Government Employee Pension Fund (GEPF) The private sector does not have such a legal framework Mandatory participation will have limited success in stimulating informal sector participation

Causality tests Test causal effect of income and stock market performance on private pension assets Real income growth not reflected in private pension assets Equity markets are open to large swings as shown by financial crisis Data for the period 1971 - 2006 ADF tests showed the variables are stationary after first-differencing Johansen-Juselius technique found one cointegrating relationship Performed Granger causality tests using VECM framework Lag exclusion tests found that four lags are required

Results of Granger causality tests Table 6: VECM Granger Causality Tests p-values are reported in parentheses *denotes rejection of the null hypothesis at 1% level of significance

Other factors Deteriorating savings performance in SA over the study period Lack of financial literacy – e.g. need to save; investments; changing pension environment poorly understood Leakage – early withdrawals when employees change jobs Declining confidence in private pension industry due to fraud/poor governance

Conclusions As a share of GDP and as a share of total pension assets, private pension assets have declined in the last decade In contrast, official pension assets have grown rapidly Declining participation and contribution rates have contributed to the trend in private pension assets Stock market performance is key for the growth of pension assets A legal framework that makes pension participation mandatory can improve pension asset accumulation