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

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

3. 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

4. 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

5. 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)

6. Review of literature

7. 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)

8. 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)

9. Trend of SA pension assets

10. 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

11. 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).

12. 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)

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

14. Reasons for trend in SA pension assets

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

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

17. 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).

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

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

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

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

22. 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)

23. 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

24. 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
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

25. 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

26. 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

27. 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