A lack of well-developed second pillar pension schemes across much of Africa is costing companies a chance to tap into the high-growth continent, Raquel Pichardo-Allison reports
All eyes were on Africa over the summer as the World Cup in South Africa brought the whole continent to centre stage.
The sporting event brought interest in Africa to a frenzy and asset managers and the media gushed over the investment opportunity provided by strong fundamentals in some African countries. But multinational companies looking to participate in the fast-growing economies by setting up residence there, could hit a snag.
According to new research by Mercer, and released exclusively to Global Pensions, the lack of a well-developed second pillar pension system, supplementary pensions often offered by an employer, could prevent some companies from setting up shop there to begin with.
The report, The Role of Retirement Benefits for Africa’s Long-term Growth, said: “Companies are missing business opportunities in the region, given the high employment costs, and in part due to the lack of effective saving vehicles for retirement. Encouraging savings for retirement via an effective second pillar would not only be beneficial to multinationals looking to invest in Africa (as this could potentially reduce their employment costs) but also to the local middle class.”
Mercer principal and author of the report Gabriella Franco, said her clients have shown interest in the region.
“We’ve done this research because we’ve seen an increase in the number of inquiries from multinationals about compensation and benefits. This has been one of the trigger points,” she said. Multinationals looking to place expatriates in particular in certain countries may find providing comparable pension benefits increasingly expensive.
Mercer used country classifications developed by the McKinsey Global Institute to categorise Africa into diversified economies, oil exporters, transition economies and pre-transition economies.
Diversified economies include Egypt, Morocco, South Africa and Tunisia, and are defined as countries where manufacturing and services total about 83% of combined gross domestic product. Oil exporters are countries that have exported oil for many years, transition economies have started diversifying their source of growth, while pre-transition economies are the worst off.
Franco found countries under the umbrella of diversified economies generally relied on state-provided social security, but there was a growing recognition that more needed to be done to develop the second pillar.
The exception proved to be South Africa, where company schemes are ubiquitous.
“The South African model has achieved what it needed to achieve in order to support state income,” said Franco.
Indeed, tax incentives for both employers and employees have been put into place that cover most full-time, contracted workers, and discussions are currently taking place over how to expand coverage to part-time and under-employed workers. (See case study: Anglo American Platinum, below)
Companies are also able to mandate participation in company plans as a condition of employment.
In oil exporting companies, most retirement income is still provided by the state, but companies tend to make up for the lack of a formal second pillar by offering alternative savings vehicles. Nigeria is the exception in this group, said Franco. In 2004, the government made it mandatory for all companies – private and public – with five or more employees to offer retirement provisions.
In transition and pre-transition economies, poverty remains high and the state continues to provide the bulk of retirement income.
Franco wrote: “The...trends indicate the diversified economies have begun the process, although slowly, of developing the second pillar to sustain growth. The same trend has begun, however, to a lesser extent among oil exporters, although there seems to be greater reliance upon ad-hoc provision from the employers.”
Diversified economies have the benefits of attracting multi-national companies and touting a growing middle-class. Franco said: “Typically a growing middle class is a catalyst for developing a second pillar system.”
However, key to sustaining that growth is the ability to promote security in retirement.
Franco said African countries should create a regulatory framework surrounding plan design and investments, incentives to lure providers to the region and provide access to a range of investment options, among other recommendations.
She wrote: “Without the above, it is very difficult for companies to use local schemes for retirement savings. While social security is mainly aimed at tackling poverty, a second pillar is really the only way to support savings for retirement. More than ever, financial transparency and regulation are needed to attract multinationals to the region, reducing their employment costs and to support the middle class.”
Case Study: Anglo American Platinum, South Africa
Multinational company Anglo American Platinum boasts what, in much of the Western World, is considered an enviable participation rate in its pension plans. All of its full-time salaried staff is covered under one of the four pension funds offered by the company.
Full participation is part of company policy, said Mark de Klerk, senior manager of retirement funds and principal executive officer retirement funds department.
The South African government does its part to encourage members to invest in company funds. Companies that mandate participation by all permanent, full-time employees are able to take advantage of the tax benefits earmarked for retirement schemes, said Michael Prinsloo, principal consultant at Alexander Forbes Financial Services and the firm’s consultant.
The firm offers four pension funds. Lower-level mine workers are enrolled in the provident fund, a retirement vehicle that provides a lump sum at retirement without compulsory annuitisation.
The other three funds are hybrid funds, so-called “member choice” funds, which combine the provident fund with a more traditional pension fund. The company’s contribution is funnelled into the provident fund and the members’ to the pension fund.
“We provide choice on a number of different bases. The first choice is the issue of the investment vehicle they wish to use. We provide a range of investment portfolios from a high-equity, high-risk portfolio...to a money-market-type portfolio”, said de Klerk.
The second choice allows the member to take the pay-out from the provident portion and use it to buy an annuity, pocket the lump sum, or any combination of the two.
With the final option, senior staff members can chose the amount of their overall pay to be counted as pensionable salary. They can select anywhere between 50% and 80% of overall pay, but their selection could have a ripple effect on the amount of other benefits, like death benefits, that are tied to pensionable pay.
An “enabling benefit” is in place to nudge employees towards savings, said Prinsloo. He said tax legislation has come to define the two types of schemes.
Members can contribute up to 7.5% of their retirement income pre-tax, a benefit not awarded to participants in a provident fund, said Prinsloo. Companies, meanwhile, are allowed to deduct up to 20% of their contribution towards benefits.
“So there is certainly an incentive. It goes further so that the investment returns within the retirement are not taxed,” he added.
Anglo American Platinum employees contribute 7.5% of pensionable pay, and the company contributes 14.5%. The retirement age across all funds is 60 years.
Ahead of the curve
Unlike much of Europe and the US, defined contribution dominates the South African landscape. Over 85% of the retirement market is now run under DC funds.
“The biggest change has been the switch from DB to DC, so we don’t have the problems you’re facing in Europe,” said de Klerk, speaking of the evolution he’s seen during his nearly two-decades in the retirement industry.
He also said the South African system has very advanced corporate governance structures, as evidenced by the latest draft of King III, a set of corporate governance principles. The principles work under an “apply or explain” premise, and call on companies to develop policies and practices around sustainability, social transformation, good governance, and other factors.
But challenges to the South African system still remain.
“By and large, the formal sector does have retirement benefits. One of the issues is how do we as a country draw people into the savings network? The casual workers, the seasonal workers, and the contract workers, they make up a very significant portion of employees in South Africa, and are not covered. How do we include that into a better savings network, and there are discussions taking place about that at the moment,” said de Klerk.
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