Government needs to show solid support for development of a South African savings culture

Scott Field, chief financial officer for FedGroup, South Africa's only independent life insurer, says government can best deliver on its mandate of transforming the country by creating an enabling environment in which the poor can save.

He also believes that saving for retirement needs to be mandatory, even if only in terms of forcing preservation of a portion of a working person's pension contributions.

"South Africa remains a highly polarised society, with the enormous divide between rich and poor continuing to grow. There is no short-term answer to the problem because, by nature, sustainable, broad-based wealth creation is a long-term process. But, if every South African found it easy to put away, say, R50 a month, then, over the medium term, a tangible increase in wealth at grass roots is more than possible. From this kind of platform, we can be confident that each subsequent generation will be better off financially than the one that preceded it."

Statistics prepared by ASISA, the country's primary authority for insurance savings, show that more than a trillion rand currently sits in unit trust funds in South Africa. This has a major steadying influence on the overall economy, but represents savings by only 5% of the population and all of it from the upper income groups.

"Pension funds also confer overall economic stability, but they're not discretionary for most low income earners who are members and, therefore, don't provide the means for individuals to manage their own financial wealth," Field says.

"In an attempt to encourage savings, banks are introducing accounts designed for low income people, but are still adding bank charges that effectively nullify any potential for an individual's wealth to grow. A deposit of R100 will attract bank charges of R5. If the interest earned on that deposit is 5%, then it takes the consumer a year to recover the bank charges, without being able to increase his capital. To make matters worse, with inflation running at 5%, the consumer is actually losing money, not making more of it.

"The only way for an ordinary person's money to make money is through participation in property or the stock market. The least complicated and best performing vehicles for such investments is unit trusts, and there are indeed many unit trusts that allow a deposit as low as R50.

"However, again, the bank charges eliminate any profit. So, for most South Africans, there is no incentive to take an interest in unit trusts."

Field also believes the government's insistence, via SARS, on a tax number being provided by participants in unit trusts - and in any other savings - is a significant administrative burden that, particularly, the poor don't want to shoulder.

"In any case, the vast majority of South Africans earn too little to pay tax, and therefore don't have a tax number. Having to register for a tax number just so that you can participate in unit trusts is hardly worth it, if the bank charges on your deposit wipe out any interest you may earn. And, for those earning slightly more and, therefore, able to deposit, say, R100 000, being taxed on the R1 000 in interest that you would earn at the end of your first year, is most discouraging.

"Fais and Fica impose similar impediments to saving."

Far better, Field believes, is for government to focus on encouraging savings by eliminating the need for a tax number or proof of residential address for deposits below a certain level, and also to put pressure on banks to slash bank charges for savings accounts less than a certain value.

"If we want people to want to save, then we have to offer them an opportunity that isn't simply an alternative to the mattress or coffee tin they're already using to store their money. And only government can bring to bear the moral and policy force to make commercial entities change their approach."

At the other end of the savings spectrum - retirement - Field says government needs to ensure that working South Africans preserve at least a portion of their pension funds when leaving one job for another or being retrenched.

"For people who lose their jobs and struggle to find another one, the pension monies they are able to withdraw help to put food on the table in the short term. So having some of that money available is important.

"What is worrying, however, is that most people will change jobs three or four times during a working life and, at each change, withdraw and spend their entire pension. So, with each new job, they have to start making pension contributions from scratch and, as a consequence, their final pensionable amount shrinks significantly. They then look to the state to support them in their retirement years, which negatively impacts government's capacity to fund transformation in general and service delivery in particular.

"Each person's recklessness with their own pension monies impacts us all. We'd like to see government consolidate the social contract each of us has with all other South Africans by making preservation of a portion of pension monies obligatory. The existing legal structure doesn't have to change; simply the detail.

"We don't have an issue with government's legitimate need to increase the tax base. But we think it would be better, initially, to increase the wealth that could, eventually, be taxed. There'll be time enough to find ways to tax the wealth, once we've actually created it."