joint colloquium of the iaca, pbss and iaahs sections of ... · westin copley place hotel, boston,...

Joint Colloquium of the IACA, PBSS and IAAHS SectionsJoint Colloquium of the IACA, PBSS and IAAHS SectionsWestin Copley Place Hotel, Boston, U.S.A. Westin Copley Place Hotel, Boston, U.S.A. –– 44--7 May 20087 May 2008

Joint Colloquium of the IACA, PBSS Joint Colloquium of the IACA, PBSS and IAAHS Sectionsand IAAHS Sections

of the International Actuarial of the International Actuarial AssociationAssociation

Westin Copley Place Hotel, Boston, U.S.A. Westin Copley Place Hotel, Boston, U.S.A. ––

44--7 May 20087 May 2008

“After Chile and Sweden - A New Emerging Model for Social Security and Pension Reform: The South African Case

Study”

Adrian Baskir


Disclaimer - About Myself

President of Actuarial Society of South Africa 2005-2007Currently Chair of ASSA’s Social Security Task ForceMember of IAA Social Security CommitteeEmployed by Old Mutual South Africa to look at OM’s Retirement Reform response Feb 2006 – Oct 200710+ years’ experience in SA Healthcare industry

Whilst some of the content of my presentation has been supplied by colleagues from the above constituencies, it does not necessarily represent any of their views

The views expressed are my own in my personal capacity


Agenda

Context for Reform What makes SA Potentially Unique

Basic ProposalsCase Studies

International Social SecuritySouth African Social Health Insurance

A Potential Emerging Model


Agenda

Context for Reform What makes SA Potentially Unique


Key Drivers behind Reform

Improved access to current systemReduce costs of provisionImproved Governance and Transparency Social solidarity eg through Pooling of RiskEquityImprove level and nature of retirement savings

inflation-linked pensionsreplacement ratios >40%,

Speedy implementation


Persistently high unemployment42% real unemployment in 2006 (30.5% officially according to DBSA, 2005)

Increased from 29% unemployment in 1994

Widespread poverty and malnutrition34% of South Africans subsist on less than $US2 per day and in 2002 11%-20% (~5 million people) lived on less than 1US$ a day

Est. 30% of SA children suffer stunted growth from early-age malnutrition

Low levels of education1 in every 7 South Africans is illiterate, and 1 in 3 functionally illiterate

Inadequate housingIn 2004 about 4.1 million households were living in informal, traditional or backyard dwellings

Difficulties posed by dual formal/ informal economy

50% of employed people are in the informal sector and 53% are excluded from formal financial services

SA Challenges – Some uniquely so (1)


High HIV Aids infection ratesBy 2005, 5.5 million South Africans were HIV positive, with a prevalence of 18.9% in the 15 – 49 years age group

25% of all deaths in South Africa are due to HIV Aids

HIV Aids account for 73% of all new orphans

Increasing Gini coefficientLarge wealth disparities exist - Gini coefficient of 0.64

Cultural inhibitors to growthLarge families driven by a belief that having many children will bring prosperity and security in old age

High demographic divide Households in SA are significantly larger than households in (say) China where single-child policies are enforced. Thus the effect of increases in household income (through charity or enterprise) in SA is diluted

SA Challenges – Some uniquely so (2)


SA’s Demographic Challenge

Increasing dependency ratio (currently 16%, expect 20% by 2025)

20% of working population estimated to be HIV+

Impact of child grants (AIDS orphans) SA not immune to the demographic challenges facing developed world pensions systems

SA Population pyramid (2007 vs 2025)

Source: OECD; ASSA Retirement Matters Committee Presentation to ASSA Social Security Seminar, Aug 2007www. actuarialsociety.co.za


SA national savings rate are among the lowest in the world, and much lower than our developing world peers

Over half of South Africans will not survive to retirement ageProportion of 20 year olds in 2007 dying before age 60,[Old Mutual Analysis, ASSA2003lite AIDS and demographic model, standard assumptions]

Large proportion reaching retirement age depend on SOAGComplex retirement environment with many different vehicles

80% of funds have less than 100 members

Members can withdraw benefitsExisting arrangements fragmented & incomplete – UIF, Compensation funds, social grants, RAF, various retirement vehicles

… But these are foundations on which to build

Private saving industry is a source of financial & institutional strength, but doesn’t efficiently pool risks for low income earners nor preserve saving

SA Challenges – Some uniquely so (3) Savings and Investments


Current System

State Old Age Pension (SOAP)

- PAYG- Means test

Social SecurityGrants

Children’s Grant

Disability

Grant

PILLAR 0 PILLAR 3

Voluntary Provisions

Retirement:Occupational Funds, Industry Funds,

Individual Retirement Funds

Death Benefits

Disability Benefits

Taxes % of Salaries

Source: Jacques Malan & Associates, Client Presentation


Agenda

Basic Proposals

“…all South Africans will enjoy membership of a common,

administratively efficient social insurance system, while those earning

higher incomes will be able to continue contributing to private

retirement and insurance schemes.”

President Thabo Mbeki, State of the Nation Address, 9th February 2007


% of Salaries

Basic Proposal


-PAYG (DB)- Universal


Children’s Grant

Disability

Grant

PILLAR 0 PILLAR 1

National Social Security Fund

(NSSF)

Basic RetirementBenefit

- State Admin-Funded

-Mandatory

Death

Unemployment

PILLAR 2

AdditionalMandatory

Additional RetirementBenefits

-Private Admin (ARIs)

-Ind. Accounts-Mandatory Preservation

PILLAR 3

Voluntary

AdditionalRetirement

Death

DisabilityDisability

Taxes15-18% of Salaries

(3-6% Risk, 10-12% Retirement) 10-12% of SalariesWage Subsidy

Source: Jacques Malan & Associates, Client Presentation


PILLAR 0: SOAG




Children’s Grant

Disability Grant

PILLAR 0




Children’s Grant

Disability Grant

Means Test or Affluence TestRetirement age for M & F equalized @60Guaranteed increases?Impact of immigration


PILLAR 1: NSSF

TIER 1


(NSSF)



-Mandatory

Death

Unemployment

Disability

PILLAR 1


(NSSF)



-Mandatory

Death

Unemployment

Disability

Will opt out be allowed?Many large occupational funds, umbrella funds, industry/union funds, bargaining councilsSARS and DoSS to do admin?

SARS only deals with est 2.5m taxpayers

Nature of Benefits:Life-time earnings DB

Hard to track ; hard to communicateIndexed DC (inflation + 2-3%)Death & Disability cover – DB or DC and level?

Contribution floor for NSSF vs Wage Subsidy vsContribution SubsidyContribution threshold?

Low threshold crowds out private sectorTransitional arrangements – phasing?Wage subsidy under debate


PILLAR 1: NSSF

TIER 1


(NSSF)



-Mandatory

Death

Unemployment

Disability

PILLAR 1


(NSSF)



-Mandatory

Death

Unemployment

Disability

Targeted contributions of 15-18% of salariesThe average SA retirement fund has a 15,2% contribution rate[Source: ASSA Retirement Matters Committee Presentation to ASSA Social Security Seminar, Aug 2007]

Large % of SA funds have contributions <15%Of 15% contribution assume 10% goes to retirement funding*:

NRR after yrs contributory serv ice

0%

10%

20%

30%

40%

50%

60%

40 30 20 10

Contributory service

Net

Rep

lace

men

t Rat

io

* Source: Alexander Forbes Financial Services analysis


PILLAR 2: Additional Mandatory (ARIs)

TIER 2

AdditionalMandatory




PILLAR 2

AdditionalMandatory




Accreditation criteriaWill it still remain viable for private sector participation

If opt out, will NSSF compete or be default?Complexity of belonging to (at least) 2 funds simultaneously

Contribution ceiling for tax deductabilityWho chooses the ARI?Preservation

Resistance from certain sectorsLife crises and life expectancy

PortabilityCompulsory annuitisation

Inflation linked?Capital to underwrite or State as guarantor?


PILLAR 3: Voluntary

TIER 3

Voluntary


Death

Disability

PILLAR 3

Voluntary


Death

Disability

Only really for High Net Worth and High IncomeNo tax incentive to save


Conclusions and Comments:For the private sector, opt out is the crucial elementThe wage subsidy to stimulate job creation is a vexed issueThe proposals do not deal adequately with the informal sectorFor many, the public sector becomes sole retirement providerLowering of costsImproved governanceReduced burden of state

More savers, preservation, minimum benefits

Impact on professionals serving the industry such as actuariesLess funds to consult toComplexity of DB / DC hybridsNeed for advice potentially reduced


Agenda

Case Studies International Social Security

SA Social Health Insurance


UK

USA

HK

Australia

Chile

SA As-Is

Singapore

Future SA ?

MandatoryTax

Advant- aged

Employer Influence

Member Choice (1)

Gov’t Invol’ment

Union Invol’ment

Industry Richness

Retirement models – Social Security

Full Rating

Source: Old Mutual Retirement Reform Programme: International Analysis


GREECEMEN WOMEN

85+80 - 8475 - 7970 - 7465 - 6960 - 6455 - 5950 - 5445 - 4940 - 4435 - 3930 - 3425 - 2920 - 2415 - 1910 - 14

5 - 90 - 4

in 2000: 10.9 Total population (in millions) in 2050: 10.6in 2000: 27 Old age dependency ratio (65+ in % 20-64) in 2050: 64

,0 ,2 ,4 ,6 ,8 ,10,0,2,4,6,8,10

Return to SA’s Demographic ChallengeGreece Population pyramid (2000 vs 2050)

Source: OECD; ASSA Retirement Matters Committee Presentation to ASSA Social Security Seminar, Aug 2007

www. actuarialsociety.co.za


GREECEMEN WOMEN

85+80 - 8475 - 7970 - 7465 - 6960 - 6455 - 5950 - 5445 - 4940 - 4435 - 3930 - 3425 - 2920 - 2415 - 1910 - 145 - 90 - 4

in 2000: 10.9 Total population (in millions) in 2050: 10.6in 2000: 27 Old age dependency ratio (65+ in % 20-64) in 2050: 64

,0 ,2 ,4 ,6 ,8 ,10,0,2,4,6,8,10

Return to SA’s Demographic Challenge

Source: OECD; ASSA Retirement Matters Committee Presentation to

ASSA Social Security Seminar, Aug 2007


No single model

Different social, political and economic scenarios

Key features:

Compulsion

Govt safety net

Tax incentivisation

Limited State role except Singapore

Union role limited except Australia (industry funds)

Members have choice

Employers may influence member choice range

Prosperous private sector (except Chile and Singapore)

International Conclusions


South African Social Health Insurance

Covered by Medical Schemes7m Beneficiaries

2,7m Principal members

Population 44 mil

Formal employment 12 mil

Private Health InsurancePublic Health Service


About 150 funds

Not-for-profit

50 open funds (multi-employer, individual voluntary participation)

100 restricted membership (occupational, industry/union, bargaining council)

Guaranteed enrolment

Community rated

Prescribed minimum benefits

Governance by Board of Trustees

Commission-driven agents (with commission cap)

SA Healthcare Industry


Heathcare Regulatory Framework

Community Rating

Risk Equalisation

Compulsory Membership

Government Scheme

Open Enrolment

Social Health Insurance

Late Joiner Penalties

Tax Reforms


Agenda

A Potential Emerging Model


Institutional Capacity

A robust national retirement industry provides retirement benefits to members of 13 000+ fundsA strong and visible accreditation process

A diversified institutional base diversifies the system against the failure of one element of it Minimum defined service standards with significant penalties for breaching those standards

Private group risk industry plays provides death & disability benefits Experience in premium collection & claim payments, particularly in claims management and rehabilitation of disability claims

This capability can be used (together with government) to provideadministratively efficient & cost effective risk cover

Centralised risk pool could achieve scale economies & risk diversificationOutsource to private group risk providers and re-insure the minimum benefits of central risk pool at nationally established price


Potential Model

ACCREDITATION FRAMEWORK

COMPANYOCCUPATIONAL

FUNDS

UNION ORINDUSTRY

FUNDS

INDIVIDUAL“OPEN”FUNDS

MULTIEMPLOYER

FUNDS

PILLAR 0 : SOCIAL SECURITY GRANTS

DC Retirement

Add Risk?

PILLAR 2AdditionalMandatory

DC Retirement

Add Risk?

DC Retirement

Add Risk?

DC Retirement

Add Risk?

DC Retirement

DB or DC RiskPILLAR 3Voluntary

DC Retirement

DB or DC Risk

DC Retirement

DB or DC Risk

DC Retirement

DB or DC Risk

PILLAR 1“Virtual”

NSSFDB Risk

DC Retirement

CENTRAL RISK POOL FOR REINSURANCE OF DB RISKDB Risk

DC Retirement

DB Risk

DC Retirement

DB Risk

DC Retirement


Potential Model

ACCREDITATION FRAMEWORK

COMPANYOCCUPATIONAL

FUNDS

UNION ORINDUSTRY

FUNDS

INDIVIDUAL“OPEN”FUNDS

MULTIEMPLOYER

FUNDS

PILLAR 0 : SOCIAL SECURITY GRANTS

DC Retirement

Add Risk?

PILLAR 2AdditionalMandatory

DC Retirement

Add Risk?

DC Retirement

Add Risk?

DC Retirement

Add Risk?

DC Retirement

DB or DC RiskPILLAR 3Voluntary

DC Retirement

DB or DC Risk

DC Retirement

DB or DC Risk

DC Retirement

DB or DC Risk

PILLAR 1“Virtual”

NSSFDB Risk

DC Retirement

CENTRAL RISK POOL FOR REINSURANCE OF DB RISKDB Risk

DC Retirement

DB Risk

DC Retirement

DB Risk

DC RetirementDB?DB? DB?

DB?

Tax Incentives?Tax Incentives?


Reinsuring a Central Risk Pool

Fund A

(better risk profile)Fund B

(worse risk profile)

Average premium rate

Premium rates affected by risk profile(Fund B is uncompetitive)


Fund A

(better risk profile)Fund B

(worse risk profile)

Average contribution rate

With equalisation risk profile has less impact on rates(Fund B is now a little more competitive)

Reinsuring a Central Risk Pool


Mechanism to equalise the risk profile faced by retirement funds by compensating / penalising them for differences

Applied prospectively based on risk factor adjustmentsExamples – Age, Incidence of HIV/AIDS

Based on a common set of benefits

To protect community-rated, open enrolment environment

To prevent funds competing on basis of risk selection

Encourages competition on basis of cost & quality of deliveryDoes not remove residual risks associated with delivery efficienciesDoes not mitigate risks of actual vs expected claims levels

Inflation, overservicing, fraud, catastrophes, epidemics, errors etc

Returning to the SA SHI Case Study Risk Equalisation Fund


0

100

200

300

400

500

600

700

800

900

1000

1100

1200

Ran

ds p

bpm

in 2

002

Scheme Total Community Rate pbpmScheme PMB Community Rate pbpm

Example: Community REF Rate for 2005

Industry PMB Community Rate

Source: REF Task Group


Death & disability experience varies significantly in SAExample:

Risk benefits : pooling

Industry A Industry B Industry C Industry D Industry ELowest rate 0.10% 0.06% 0.11% 0.11% 0.29%50 percentile 0.44% 0.42% 0.73% 0.61% 0.82%Highest rate 6.85% 4.03% 6.60% 5.39% 1.75%

Cost of 1X death cover (% of Salary)

Source: Alexander Forbes Financial Services Analysis


Mechanism used in Healthcare industry to address selective behavioursby participants – both funders and membersHas been stress tested and infrastructure largely in place to go live 2010 (has operated on a “shadow” basis for last few years)Apply same principles and infrastructure for retirementHas worked in a number of international Healthcare systems (Social Security??)Needs to be introduced at the same time as community rating & open enrolment to avoid introducing disruption into a system with unintended consequences such as cherry picking and forcing out the funds with poorer risk profilesShould be introduced with mandatory cover to stop the young and healthy from opting out (of system not funds)Could assist in broadening access (must be affordable)

Final thoughts on REF as a model for Reinsuring a Central Risk Pool


Mandatory Membership

Mandatory membership of the system a critical component to enable the costs of the system to be shared as widely as possibleRegressive for the economy to increase unemployment by increasing the cost of employment to industryHowever there needs to be a lower income limit to the mandatory requirement, e.g. people currently earning less than the State PensionSA has historically low savings rate – 2/3rds rely on grants. We need to develop a savings culture.Problem is compounded by low preservation rates. Compulsory preservation will benefit enormously.Evidence from OECD countries is that mandatory schemes do result in higher “net replacement ratios” for retiring members


Key Drivers behind Reform SCORECARD

Improved access Reduce costs of provisionImproved Governance and Transparency Social solidarity eg through Pooling of RiskEquityImprove level and nature of retirement savings Speedy implementation

Mandatory membershipAccreditation frameworkAccreditation framework

Central Risk Pool to reinsure DB RiskLimited via Central Risk PoolMandatory membership and contributions but tax capUtilises existing infrastructure


Thank You

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