In September 2021, The South African Department of Social Development withdrew its Green Paper on Comprehensive Social Security and Retirement Reform.
The paper proposed to introduce a government-run social security fund that would have allowed people to receive retirement, survivor, disability and/or unemployment benefits. Contributions would have been based on a person’s income and wealth, with different bands and benefits provided accordingly.
But the government gazetted the green paper to “provide better clarity on some of the matters entailed [in it]” as some of the technical aspects of the proposals were not well understood and many have misrepresented the proposals, particularly on the National Social Security Fund.
International Adviser spoke to Holborn Assets and Overseas Trust and Pension to discuss how the social reforms will impact high net worth taxpayers and the South Africa pensions market.
The original plans for the proposed social security system was originally going to be made up of four tiers:
- Tier 1 will be available to everyone and will be non-contributory;
- Tier 2 will be mandatory with contributions up to a certain threshold and will pay out retirement, death and disability benefits;
- Tier 3 will be phased in via an auto-enrolment model providing approved retirement funds benefits, including annuities; and,
- Tier 4 will be voluntary with contributions securing private savings and insurance benefits.
South Africa has many political issues but are the reforms necessary in the retirement and pensions market?
Mark McAllister, senior partner at Holborn Assets, said: “There is a huge wealth divide in South Africa sadly created through the legacy of apartheid, compounded by corrupt mismanagement by successive ANC governments.
“Rather than tackle the issues at hand, generating real wealth through freeing entrepreneurs to drive the economy, these socialist policies are only exacerbating this wealth divide. Though the idea makes sense, it’s like providing a fish for a day rather than empowering more fisherman who can self-sustain if governance was better and with less red tape.”
Rex Cowley, director at Overseas Trust and Pension, added: “The informal sector, which are low-income earners and represent around 18% of the population, means a high level of vulnerable people are not participating in pension and relying on government grants in retirement.”
The hits keep on coming for South African taxpayers. Economic struggles, compounded by covid lockdowns and a dwindling tax base, have driven hundreds, if not thousands, of people to consider moving out of the country.
And if the National Social Security Fund (NSSF) is introduced, taxpayers will face another blow. The original NSSF plans wanted all employers and employees to contribute between 8% and 12% on qualifying earnings up to a certain limit.
This could turn away the high net worth population who already feel aggrieved about paying high sums of tax.
McAllister said: “The taxpayers are already alienated, when you add on the costs of private education, security, pensions and medical aid due to poor service delivery – South Africa is one of the highest effective costs of living countries in the world.
“Expecting them to fund further social policies as a result of misspent public funds whilst ex-ministers enjoy the proceeds of corruption unchallenged underlines why so much wealth is leaving the republic.”
Cowley added: “Pension is a matter of social security and as such mandatory contributions for employers in this sector, via the social security system, which is well developed in South Africa, could easily be sued to cater for the informal sector.
“As such, there is no need to introduce forms of indirect taxation but rather a mandatory pension contribution as part of social security provisions which are mandatory under SA law.”
Changes to the reform plans
The Green Paper on Comprehensive Social Security and Retirement Reform was gazetted because some areas of the proposals needed further clarification to avoid any further confusion.
Overseas Trust and Pension’s Cowley said that the South Africa government should not “meddle with the existing environment for pensions as this is working well be it personal provision or occupational provision”.
“Rather consider introducing a compulsory pension contribution for all employed people where an occupational scheme is not available,” he added. “Such contribution either going into personal plan or new government fund and funded by the employer and an option for the employee to also contribute.
“However, this would need a phased introduction starting at a low rate of contribution of circa 2% and progressively increate to 8% over a number of years so as not to create unnecessary financial difficulties for employers.”
Holborn Assets’ McAllister added: “Sadly, we can’t see a scenario where it would work as intended with the current lack of investment in the private sector to provide jobs and real economic growth.
“It will more likely provide more opportunities for mismanagement and corruption to the detriment of the nation and the people of desperately need this help.”
Passing the bill
The South African government said that, after discussing the reforms with a variety of sectors, it will release a second version of the green paper as soon as its teething issues have been addressed.
Then it will look to pass the bill, which according to Cowley and McAllister is unlikely to make changes to the issues facing South Africa and its citizens.
Cowley said: “The issue in the information employment sector will not change unless there is intervention, and the government grant and old age pension is not sustainable, so something has to be done to address this. Hopefully a more thought-out version will emerge in time.”
McAllister added: “Due to the African National Congress retaining a majority it’s likely this bill will be passed in some format – leading to a replication of the similar policies, like national insurance in the UK.
“However, South Africa is more reminiscent of the UK in the dark socialist days of the late 70’s than its current G7 leading nation status. Many remember the excessive power of the unions, three-day week and rolling black outs.
“South Africa is a similar scenario and needs an economic reformist to transfer the economy to reward those willing to work hard and build the economic success of the country. Without that kind of thinking it will continue to slip further and further towards the Zimbabwean failed state than a Singaporean style powerhouse.”