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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 - PowerPoint PPT Presentation
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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
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