Local Economies workshop
Session 2: Financial services – formal and informal
The Pensions Industry
Krishen Sukdev
(Recording does not begin at the start of his paper)
You need an income to sustain you in your retirement, and in this country there are
many different safety nets, I can give you some examples. If you become
unemployed, you can claim from the Unemployment Insurance Fund if you have been
a member of that fund and have contributed to it over the years, if you get injured at
work you can claim from the Workmen’s Compensation Fund, if you get injured in a
road accident you can claim from the Road Accident Fund. So there are many, many
different safety nets within the country. I’m going to hone in on one of them, and that
is the pension side of it and within pension provision there are many different levels
of how one can save for retirement.
The first level is simply not to save; and to rely on the state. And I’ll give
some statistics on that as well. The second level of pension provision can be through
an employer-related scheme. For example, you work for ABC company and you
belong to that pension fund, or provident fund, you save via that fund and when you
come to retire hopefully that fund will give you a sufficient amount of money to help
sustain you through your retirement. And of course, over and above that, the more
wealthy have their own individual savings so they don’t rely on the state and they
may have some savings within the pensions funds but they’ve also accumulated some
wealth on the side.
In South Africa there are currently about 13 and a half million people who are
in receipt of government grants, about 9 million of them are child-support grants,
about 2 and a half million are old-age grants and about just under 2 million are
disability grants. So you can see that within the population of about 48 million people,
there is a substantial percentage of the people who are relying on the state for
assistance. But most of them are in fact children. That creates a lot of debate about
whether that is sustainable, whether that is equitable, whether that…a lot of debates of
that nature.
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The empirical research suggests that for the poorest of the poor in this country,
government grants account for a substantial percentage of their income. So the
question is, are grants doing their work, and the answer is ‘yes’. Grants are helping
the poorest of the poor. But is it sustainable? Probably not. If we look at the economic
crisis and the fact that government is now stretching out its arms to try and get
revenue, it’s difficult to take away grants. So government’s in that difficult position
where it has current needs, people are desperate for income, but at the same time it’s
got to think long-term about whether these grants are sustainable.
Another grant that government has said ‘no’ to, of course, is the basic income
grant. For many years, unions have argued that there are many, many poor people in
this country who don’t qualify for any of the other grants. So, somebody who’s not
disabled or hasn’t reached old age, but is still in an impoverished condition or
situation, cannot access those government grants, and unions have argued that
government should be paying those members some minimum amount a month, and of
course government has so far has said ‘no’, saying that they do not have the economic
means to do so.
Right, so if we come now to the Pensions Industry, this is a formal industry,
outside the government net. These are the people that save in their retirement funds
and they can get a benefit if they die or get disabled, have a funeral benefit within that
grant, within the fund, but hopefully keep their benefits preserved until retirement and
that’s also a huge industry. There are approximately 11 million South Africans who
are members of retirement funds in one way or the other. There are about 7 million
who are actively contributors to the fund, people who are working and contributing
month by month. And there are approximately 3 and half million pensioners or so
who are in receipt of those pensions. These are the people who have contributed their
entire lives, they’ve now come to retirement and they’re in receipt of those pensions.
The key question is, are people saving enough?
When people come to retire it is critical that they have a sufficient pot of
money in order to maintain themselves. What we have seen over the last 20 years or
so within the pensions industry has been a conversion of schemes. Schemes that
traditionally defined benefits schemes, that guaranteed benefits at retirement, so when
you came to retirement you had a pension that was calculated by a formula based on
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your salary at retirement, so it gave you some form of guarantees. Those schemes
have now converted and most schemes are what we call ‘Defined Contribution
Schemes’ and these schemes do not provide you with investment guarantees. So if
you bought R100 000 in that kitty and the markets go down you are responsible. You
could easily put R100 000 and get less out of it, whereas with a Defined Benefit
Scheme a lot of those risks were taken by the sponsors of that scheme or the
employers. And this of course creates critical questions for us about how is it that
people can come to retire and have sufficient money for themselves. I think we can all
agree that the days when you relied on children or other family members to sustain
you throughout retirement, those sort of arrangements do not work efficiently now.
Many of the children move on, they have other relationships, they do not want to
sponsor their parents, their elders, they’re more mobile now, it’s more of a national
community and so people have to really see this pot of money as being critical. And
what government has done in the last five years is announced a series, or strategies of
reforms, initiatives that will help South Africans save more. The one is the
establishment of the National Social Security Scheme.
Currently, not all South Africans are members of retirement funds. You could
even be employed by somebody and not be a member of a retirement fund. But
government is now saying that it is important for all South Africans to in fact belong
to a scheme, so it must be compulsory. Everyone who is working must be part of this
scheme. Another issue that government has looked at is the leakage. When many
people leave their jobs, they do not preserve their monies. They cash it in, sometimes
irresponsibly buying cars, buying household items, and they do not see this pension
benefit as being that key link to financial sustainability in retirement, they’re quite
irresponsible in that way. But of course not everyone is irresponsible, some people
need that money. I mean some people would argue ‘why must I save for retirement in
forty years time when I actually need to pay for education, when I don’t have food at
home’. So there’s another debate. Should pension funds, monies, be allowed to be
made accessible to members? Should they have access to these monies? Or should
they only have access to these monies when they retire? And there’s really no clear
answer on that.
In the case of Chile for example, you can only access your monies at
retirement. Nigeria has also followed that example, where you can only access your
money at retirement, and Nigerian pension reforms are based very much on Chilean
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pension reforms. But other countries are more relaxed on that approach, for example
in Australia if you have a family emergency or you need to claim money for
education or some other emergencies, they will give some level of access. And maybe
there might be a compromise between the two, maybe government might say ‘you can
access up to this amount, but the rest has to be capped in your kitty until retirement’.
And of course, another key question is, with prevalence of HIV, etc., most
people would not actually reach retirement. So in other words if you had a pool of
about 1 000 people aged twenty today, a substantial amount of them would not reach
the age of 65. So is it fair and equitable to force this rule, to save for retirements and
not give an access to this money, while in the mean time they could be starving at
home, they might not have money, they may be evicted, they may have their house
repossessed. So that’s a very difficult argument. What has happened within
government is there are also these interesting debates. Previously the Treasury took a
view and issued the papers and issued comments, and you also had Social Security as
well issuing views on retirement fund reforms. But in between they were not talking
to each other. Now they’ve formed a committee that will speak with one voice from
government. So really the industries are waiting for feedback from government on
how this is going forward.
The key question is: how do we get South Africans to save more - because we
are not saving enough? And how do we get members to responsibly manage their
money more? Government then issued a third initiative, stating that when you come
to retirement you cannot access all your money. Remember at the moment if you’re a
member of a provident fund, you can claim all your money and then it’s up to you,
you can decide what you want to do with that money. But part of those initiatives of
reforms is to say, when you come to retirement, you have to purchase an annuity. So
you can’t go and take your R100 000 from the state. You can take a little bit of that
but the bulk of that money must be used to purchase a future stream of income for
you. So you can see there’s all these interesting intricate debates about how to better
help South Africans save.
So let me just say that these reforms are far-reaching and the key variable
there will be the informal sector. The theory is that people in the informal sector and
the private businesses, although we cannot monitor them, should also form part of the
net. But as we see in countries like Kenya and Tanzania, it’s a very difficult thing to
do. When somebody’s in the informal sector, they do not have the record keeping,
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sometimes they work and live here, in six months time they’re working here, in a
year’s time they’re working somewhere else. It’s a very, very difficult thing to police
and practice, to read records, to issue statements, to track those members. So the
theory is very good, the intentions are very good, you know: most of the workers in
this country are outside of the formal net. But I think the key question will be “how
can you bring in those informal workers, within the formal sector, but do it at an
affordable cost because if the costs are too high then clearly the system’s not going to
work. Because if you contribute R100 to assist in savings and R30 to R40 is going to
be taken in administration costs, you’re actually going to see it as poor value for
money and it’s actually going to give you an incentive to stay out of the system,
alright?
So I think for this conference then, just to summarise the key things from the
pensions industry. I think most of you see people at that grassroots level as well living
in poverty and doing a lot of good research in that respect. It would be interesting to
see from your research, and from household surveys, if there’s a trend towards people
wanting a greater part of the formal sector or if they’re just happy to stay in the
informal sector, not to pay the tax, not to contribute to all these social security funds,
and then try and make their own provision. I think the jury’s still out on that. But I
have tried to give a summary of where we are in terms of the pensions industry and
some of the big things that are happening on that front.
Responses of low-income Namibian consumers to financial services
Penny Hawkins
Today I’m talking about some work that we’ve been doing in Namibia. It was a spinoff from a larger project we were doing for the financial regulators there. It was one
of those areas of work where the client asks you to look only at the supply side and
we said “Well, we really think you actually have to do some work with consumers
and understand why it is that you have such low apparent use of financial services in
your industry.” So the data that I present is data that economists would dismiss as not
hard data, it comes from consumer focus groups. But I think what does come out is an
interesting insight into how some low-income consumers perceive the financial sector
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and what it is that they use of that financial sector. It resonates with some of the
papers in the first session this morning.
What we did was to look at adults between 18 and 60, and at those who had
incomes of less than 3 and a half thousand Namibian dollars (roughly one-to-one with
the South African Rand although I think a Namibian dollar buys you slightly less).
This was around the usage of financially regulated products. We graduated the focus
groups into three different groups. What we were saying was that we knew that
consumers were using both formal and informal financial services, so we grouped
people into, first, those groups who said they used no formal products whatsoever;
second, those who had a savings bank account at least and perhaps something else
like a funeral policy; third, those who were reasonably integrated in terms of utilising
formal services - they had a range of formal services. But they were all low-income
people, in South Africa that income would all be below LSM 1-5 which is around
about 50% of the population.
It was very early on revealed through this process that the distinction between
these groups was not a failure of understanding, they weren’t not using the formal
product because they didn’t understand what the formal product could deliver. They
were simply not using it because they were not employed. That was a key
distinguisher between who was using the product and who wasn’t, clearly if you are
employed you would have at the minimum a bank account and you might well have
another kind of policy, perhaps a pension fund that you would be contributing to. The
very worrying issue was, if you had a look at the expenditure on these household
budgets across the group, around about 46% of their income went into municipal
services, which is quite extraordinary. So this was the key and most expensive
expenditure for many of the Namibians.
Namibia is a very different society to South Africa, first of all the country’s
huge, and they have a population of only around about 2 million people. Of course
they have many providers that are very similar to South Africa - organisations in
South Africa ultimately set up shop in Namibia as well. We looked at both rural and
urban areas in the focus groups, and the responses didn’t change too much.
The key issue was that low income South Africans – although they are aware of
things like the opportunity to use those products - tend only to use them if they really
believe that there’s going to be use for themselves.
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Throughout these focus groups we used as a comparator the use of cell
phones. Now remember I said these were people who were more-or-less located or
dislocated in relation to the financial formal sector, some of them were employed and
some of them weren’t, about 50% each way. But when we asked them about cell
phones, there was only one person out of the 250 people in the consumer focus groups
who did not have a cell phone. They all deemed the use in value of that service
(which is relatively expensive compared to some really entry lower level savings
account) as absolutely essential. It was something they could use to communicate, to
run their business with, they could keep in touch with their family and so on. In sum,
on a relative basis, many of those people said the financial services offerings are
simply unaffordable. They were spending what little money they had on something
that was useful as a cell phone, but they didn’t see the relative value in many cases of
financial products.
We examined not only bank accounts but a full range of financial services.
And what was interesting of course is how rational these low-income people were.
The products they had were savings accounts, current accounts and funeral policies.
There was no mention at all of a pension fund or saving mechanism. Of course, as in
South Africa, you have this subsidy which distorts the market: the old age pension,
which lies in wait for people who earn at this level. We know that it would actually be
irrational for somebody who earns less than 3 and a half thousand Namibian dollars to
save. Were they to save it would mean it would threaten that which they perceive the
state owes them when they retire, because proportionally their old age grant would be
reduced. So there was no evidence of pension savings and no apparent value of that
product.
The one product that they didn’t have, but wanted, was medical aid. The
reason for that is although there is state provision of hospital services, it’s particularly
poor in Namibia. People complain about it, because also it’s a huge geographic area,
people travel miles to find a clinic that has any capability should they have disaster or
emergency. So they really would like to have medical aid but they quite frankly
cannot afford it.
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The kinds of statements that were made were quite interesting, I want to read
you a set of them from a group A. Somebody said, “There’s good and bad things
about having an account, the good things are that you can save your money, you also
earn interest on that money if you save, it’s safer than keeping your money anywhere
else. But when you want to take your money out, you have to pay bank charges.
When you put your money in your bank and you want to take it out you need to pay
for it and that’s when you wish it was rather in your own pocket.” And this was from
somebody who was in a group A, who did not have a bank account but they really
understood, had a sophisticated understanding of what it is that the account could
deliver.
A view from someone in group C, who had a current account, was “But the
bank is a profit-making institution so any withdrawal and deposit on your account is
chargeable so that’s the cost involved in keeping this money in the bank. Sometimes
when I draw the money before the bank transfers the money from my insurance cover,
I lose out. I need to pay 200 dollars for my life-cover, but if I take out all the money
from my bank account and they find that I took out everything, then I’ll owe the bank
280 dollars.” In Namibia they have particularly high penalties for dishonoured debit
orders, which range from 130 to 280 Namibian dollars per debit order per time, so it’s
very punitive.
One of the key things in Namibia, which is again a sort of unintended
consequence of the kind of formalisation that happens in many economies and for a
while was also part of our history, is that you cannot actually participate, really, in
other formal financial products. And what I mean by that is a medical aid or a pension
fund or life insurance or any formal credit whether it’s short or long term loans,
unless you bring with you the ability to be able to have a payroll deduction. So a huge
part of this very small economy is immediately excluded from participation because
they don’t work for the state or for a very large employer. What were the barriers that
they identified? Lack of income, lack of formal employment, was something that was
repeated time and time again.
What comes out as well in the studies is that all these consumer focus groups
did use some informal alternatives. So whether they were at the formalised end of the
scale, or relatively unserved by formal providers, they all indicated use of some
informal products. It’s very clear that the kind of social structures that exist often
crowd out the need for formal products such as life insurance or short-time insurance.
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“If my shack burns down, then the neighbours will help me because I helped them” –
so often the products that exist in the formal market are perceived not to add value
and not really to provide sufficient use value to otherwise stressed consumers.
Just to end off, one of the things that does come out of these interventions by
the state, and its attempt to encourage people to “save more”: one of the big issues is
the state grappling with an understanding of what it means to save. As I alluded to
earlier, we have a national savings definition that says “Household saving consists of
the residual after consumption”. Now residual is a hugely difficult and amorphous
thing to measure, so we simply say “well, it’s what’s left over”. We look at income,
we take away consumption, we say, “that must be saving”. It’s an inadequate
definition. We use formal sector measures, and so we can say, that which has
contributed to a policy must be saving, that which contributed to saving mortgage
must be saving. But the big problem is, in this kind of environment where people use
social and formal structures to survive, to risk-manage, measurement of saving has to
be far more nuanced. Very often it may mean saving a lump of R200 or 200 dollars so
I can buy a small amount of bricks or a bag of cement and that is saving for
household. It doesn’t go through a formal channel but it’s certainly seen as a very real
investment for a poor consumer.
A final comment on the idea that there’s a need to mobilise saving in South
Africa. There’s been a recent study by the Bureau of Market Research, they too used a
consumer focus group approach, and they divided their consumers into mass market
and emerging market. What I find interesting is that they canvassed the respondents
on their sense of being in financial trouble. What was interesting was 63% of mass
market consumers and 74% of what they referred to as “emerging market consumers”,
said they were in financial trouble more than half the time. This is the group of people
that we’re requiring to save using particular formal products that may not at all be
designed for their needs, they don’t have any compassionate flexibility and so we may
be so well off the mark in trying to direct savings in that direction.
The point I want to make from this kind of work is that although it’s not
quantitative, it does allow us some sense of nuance in terms of what is going on in the
lives of people, rather than simply looking at the world from a macro or supply-side
perspective. We need to engage more regularly and readily with on good gathering of
consumer data. One of the problems is that the data that we do gather, so often is
gathered with particular agendas, and inconsistently. I am critical of some of the
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regulators and some of the decisions they’re making at the moment, but when we
tackle them on it they will say “Ah, but if consumers have a problem with this
industry what they should do is write letters to the paper or speak to their
ombudsman”. And that is absurd because it reduces the consumer experience to an
anecdote. The problem is that a thousand anecdotes can each be rebuffed individually,
or each dealt with by an ombud, but it doesn’t give us a body of knowledge that says
“if we track the costs that were associated with ‘x’ over this period we can see this is
what is happening to income”. It’s that kind of information that one needs to have, in
order to answer the question, “how do we use the understanding of consumers to
change what is going on in terms of formal sector provision”?
Discussant:
Louise Whittaker (Wits Business School)
I’m from the Wits Business School which is a very different world. I can’t label
myself an anthropologist, economist or even journalist for that matter. But it has
pointed me to an idea that some of what we’re talking about is indeed “labelling”. So
I’m starting from that premise.
Detlev made a very interesting comment about the logic of finance having
overtaken, in some way, everyday life. It creates certain kinds of labels that become
very pervasive. And people begin to understand themselves in particular kinds of
ways. So when we begin to see “one of my personal assets is my listing at a credit
bureau”, that turns me into a particular kind of a person, or at least I begin to think
about myself that way.
Another label that always gets me is this idea of the “unbanked”. It’s a
horrible word, it always reminds me of the “undead”. What that points to, to me, is an
idea that we can label large masses of people and then think about them in not a very
nuanced way. That that is potentially quite dangerous because we then start making
assumptions about how to deal with those sorts of people. We assume that there are
levels of financial leverage; that if we can only educate people we can solve all sorts
of problems. And we tend to think about people perhaps in terms of “the banked”,
“the unbanked”, “the formal”, “the informal”, in these opposing ways that is not
necessarily helpful.
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We did a study a couple of years ago in an informal market, a very informal
market in Natalspruit. We were interested in understanding all sorts of dimensions of
the market, but one of them was access to finance and whether or not people would
take up credit. We were business school people and a couple of sociologists as well.
We made this assumption that there was this informal market and we realised after
some time that people in this market have vastly different means, which might seem
really obvious but wasn’t so from the outside – it all looked the same from the
outside. But once we ran a financial diaries project with the traders, we saw income
ranges (net income after expenses), from between minus R500 a month - how that
person sustains himself I’m not sure - up to profit numbers between R20 000 and R30
000 a month. So there’s a huge range of things that are happening there and if we
label things in very gross ways we don’t really understand that.
The other thing that we found was that the people that we spoke to there,
which speaks to some of what’s been said this morning as well, saw themselves in
particular ways, different kind of ways, and the ways in which they labelled
themselves had an effect on the way that they behaved in financial and non-financial
terms. So this idea of self-labelling is important. If my own label is about belonging to
a particular group, then the way I behave in relation to that group might be more
important and more rational to me than borrowing money from a bank. Penny spoke
about cell phones and how important they are, but maybe that’s because
connectedness is really important to particular people; membership of stokvel groups
too, I think. The thing about pensions, too: why do people save or not save for
pensions, does it have something to do about the way in which they understand
themselves as investors or not as investors?
Perhaps when we think about ways to deal with participants in the economy,
rather than making blanket recommendations about things like “we need to educate
everybody”, trying to understand how it is that they label themselves and deal with
that first, might be a useful way to proceed.
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