Why are private pension Why are private pension assets in South Africa assets in South Africa

declining?declining?

Sheshi KanikiSheshi KanikiSASI & MomentumSASI & Momentum

SASI-ERSA Savings WorkshopSASI-ERSA Savings Workshop4 - 5 August 20094 - 5 August 2009

OverviewOverview Objectives of the paperObjectives of the paper

Why are pension assets important?Why are pension assets important?

Literature reviewLiterature review

Trend in pension assetsTrend in pension assets

Reasons for trend in pension assetsReasons for trend in pension assets

ConclusionsConclusions

Objectives of the paperObjectives of the paper

To examine the trend in private pension assets from 1998 to 2008To examine the trend in private pension assets from 1998 to 2008

To investigate reasons for this trendTo investigate reasons for this trend

To provide policymakers and practitioners with an evidence base for To provide policymakers and practitioners with an evidence base for

pension reformpension reform

Why are pension assets important?Why are pension assets important?

Have a positive impact on retirement incomeHave a positive impact on retirement income

Mitigate risk of old age povertyMitigate risk of old age poverty

Promote financial sector developmentPromote financial sector development

Mobilise domestic resources for fixed investmentMobilise domestic resources for fixed investment

Contribute to economic developmentContribute to economic development

Definitions of pension assetsDefinitions of pension assets

Private pension assets:Private pension assets:

• Assets of self-administered funds plus the assets of underwritten funds Assets of self-administered funds plus the assets of underwritten funds

(Financial Services Board)(Financial Services Board)

• Assets Assets of self-administered funds (of self-administered funds (Reserve Bank)Reserve Bank)

• Self-administered funds invest their assets on their own behalf and Self-administered funds invest their assets on their own behalf and

underwritten funds operate exclusively by means of insurance policiesunderwritten funds operate exclusively by means of insurance policies

Official pension assets:Official pension assets:

• Assets of Assets of pension funds established by particular laws for employees of pension funds established by particular laws for employees of

the State and some parastatal institutions (Financial Services Board)the State and some parastatal institutions (Financial Services Board)

Review of literatureReview of literature

Factors affecting accumulation of pension assetsFactors affecting accumulation of pension assets

Income (Huberman et al, 2007)Income (Huberman et al, 2007)

Age (Chatterjee and Zahirovic-Herbert, 2009)Age (Chatterjee and Zahirovic-Herbert, 2009)

Education (Arenas de Mesa et al, 2004)Education (Arenas de Mesa et al, 2004)

Years of employment (Yuh and Devaney, 1996)Years of employment (Yuh and Devaney, 1996)

Contribution rates (Lasagabaster, 2002)Contribution rates (Lasagabaster, 2002)

Factors affecting accumulation of pension assetsFactors affecting accumulation of pension assets

Employer contributions (Gutter et al, 2007)Employer contributions (Gutter et al, 2007)

Participation rates (Huberman et al, 2007)Participation rates (Huberman et al, 2007)

Introduction of mandatory system (Kritzer, 2008)Introduction of mandatory system (Kritzer, 2008)

Economic growth (Hu, 2005)Economic growth (Hu, 2005)

Exposure to equities (OECD, 2008)Exposure to equities (OECD, 2008)

Trend of SA pension assetsTrend of SA pension assets

Source: Author’s calculations from FSB Annual Report (various issues), Registrar of Pension Funds AnnualReport (various issues) and Reserve Bank Quarterly Bulletin (various issues). Base year = 2000

Total Pension Assets (TPA)

Private Pension Assets (PPA)

Official Pension Assets (OPA)

1998 704,672.15 477,885.20 177,673.88

1999 701,084.02 484,082.91 176,118.09

2000 694,057.00 444,187.00 206,733.00

2001 776,073.35 518,801.11 221,744.13

2002 728,919.79 460,377.07 233,147.84

2003 730,314.07 466,598.18 240,101.76

2004 830,983.43 527,932.15 269,850.97

2005 926,997.06 581,136.57 308,015.17

2006 978,720.91 569,533.29 367,047.17

Average annual % change 3.82 1.76 8.50

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).

TPA/GDP PPA/GDP OPA/GDP

1998 81.47 55.25 20.54

1999 79.19 54.68 19.89

2000 75.27 48.17 22.42

2001 81.92 54.76 23.41

2002 74.22 46.88 23.74

2003 72.11 46.07 23.71

2004 78.25 49.71 25.41

2005 83.16 52.13 27.63

2006 83.36 48.51 31.26

Table 2: Pension Assets (% of GDP)

50

55

60

65

70

98 99 00 01 02 03 04 05 06

Per

cent

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)

0

5

10

15

20

25

30

35

98 99 00 01 02 03 04 05 06 07 08

Per

cent

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 Reasons for trend in SA pension assetsassets

Income Income Figure 3: Real GDP Per CapitaFigure 3: Real GDP Per Capita

0

5,000

10,000

15,000

20,000

25,000

30,000

98 99 00 01 02 03 04 05 06 07 08

Ran

ds

Source: Reserve Bank Quarterly Bulletin (various issues)Base year = 2000

EmploymentEmployment

% change in public sector employment

% change in private sector employment

1998 -1.70 -2.40

1999 -3.10 -0.30

2000 -4.10 -0.80

2001 -2.20 -0.40

2002 -0.20 0.80

2003 1.20 -2.30

2004 1.00 2.40

2005 2.80 0.60

2006 2.80 3.00

2007 3.70 2.00

Average 0.02 0.26 Source: Authors calculations from the Reserve Bank Quarterly Bulletin (various issues)

Table 3: Employment Trends in the Public and Private Sector

Stock market performanceStock market performance

-20

-10

0

10

20

30

40

50

98 99 00 01 02 03 04 05 06 07 08

Per

cen

t

Value of shares/GDP (% change) Private pension assets/GDP (% change)

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 ratesParticipation rates

Formal Informal Total

2005 61.73 10.09 56.15

2006 60.37 6.84 55.2 2007 59.05 12.64 55.46

2008 56.49 5.88 51.71

Table 4: Pension Participation by Sector (%)

Source: Masilela and Kaniki (2009)

Participation rates continued…Participation rates continued…

0

5

10

15

20

98 99 00 01 02 03 04 05 06

Off

icia

l F

un

ds,

Per

cen

t

75

80

85

90

Pri

va

te F

un

ds,

Per

cen

t

Official pension fund membership Private pension fund membership

Figure 5: Official and Private Pension Fund Membership (% of Total Membership)

Source: Author’s calculations from FSB Annual Report (various issues)

Participation rates continued…Participation rates continued…

40

45

50

55

60

98 99 00 01 02 03 04 05 06

Ass

ets,

Per

cen

t

75

80

85

90

Mem

ber

ship

, Per

cen

t

Private Pension assets/GDP Private pension fund membership

Figure 6: Private Pensions – Correlation between Membership and Assets

Source: Author’s calculations from FSB Annual Report (various issues)

Contribution ratesContribution rates

Employee Contribution

Employer Contribution

Total Contribution

2002 6.2 6.2 12.4

2004 6.3 4.8 11.1

2006 6 5.5 11.5

2007 5.5 5.8 11.3

2008 5.5 5.4 10.9

Table 5: Employee and Employer Pension Contributions (% of Salary)

Source: Sanlam Employee Benefits Annual Survey (various issues)

Contribution rates continued…Contribution rates continued…

10

11

12

13

2002 2004 2006 2008

Co

ntr

ibu

tio

n, P

erce

nt

21

22

23

24

25

Ass

ets,

Per

cen

t

Contribution Rate PPA/GDP

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 frameworkLegal framework

Mandatory participation can improve participation and contributionsMandatory participation can improve participation and contributions

By law all government employees are required to join the By law all government employees are required to join the

Government Employee Pension Fund (GEPF)Government Employee Pension Fund (GEPF)

The private sector does not have such a legal frameworkThe private sector does not have such a legal framework

Mandatory participation will have limited success in stimulating Mandatory participation will have limited success in stimulating

informal sector participationinformal sector participation

Causality testsCausality tests Test causal effect of income and stock market performance on Test causal effect of income and stock market performance on

private pension assetsprivate pension assets

• Real income growth not reflected in private pension assetsReal income growth not reflected in private pension assets

• Equity markets are open to large swings as shown by financial crisisEquity markets are open to large swings as shown by financial crisis

Data for the period 1971 - 2006Data for the period 1971 - 2006

ADF tests showed the variables are stationary after first-differencingADF tests showed the variables are stationary after first-differencing

Johansen-Juselius techniqueJohansen-Juselius technique found one cointegrating relationship found one cointegrating relationship

Performed Granger causality tests using VECM frameworkPerformed Granger causality tests using VECM framework

Lag exclusion tests found that four lags are requiredLag exclusion tests found that four lags are required

Results of Granger causality testsResults of Granger causality tests

Null Hypothesis Chi-Square Statistic

Inference

Real GDP does not Granger cause private pension assets

2.538 [0.638]

No causality

Stock market turnover does not Granger cause private pension assets

13.880* [0.007]

Causality

Private pension assets do not Granger cause real GDP

26.506* [0.000]

Causality

Pension assets do not Granger cause stock market turnover

1.644 [0.801]

No causality

Table 6: VECM Granger Causality Tests

p-values are reported in parentheses*denotes rejection of the null hypothesis at 1% level of significance

Other factorsOther factors

Deteriorating savings performance in SA over the study periodDeteriorating savings performance in SA over the study period

Lack of financial literacy – e.g. need to save; investments; changing Lack of financial literacy – e.g. need to save; investments; changing

pension environment poorly understoodpension environment poorly understood

Leakage – early withdrawals when employees change jobsLeakage – early withdrawals when employees change jobs

Declining confidence in private pension industry due to fraud/poor Declining confidence in private pension industry due to fraud/poor

governancegovernance

ConclusionsConclusions

As a share of GDP and as a share of total pension assets, private As a share of GDP and as a share of total pension assets, private

pension assets have declined in the last decadepension assets have declined in the last decade

In contrast, official pension assets have grown rapidlyIn contrast, official pension assets have grown rapidly

Declining participation and contribution rates have contributed to the Declining participation and contribution rates have contributed to the

trend in private pension assets trend in private pension assets

Stock market performance is key for the growth of pension assets Stock market performance is key for the growth of pension assets

A legal framework that makes pension participation mandatory can A legal framework that makes pension participation mandatory can

improve pension asset accumulationimprove pension asset accumulation