The defined contribution revolution is under way in South Africa.
InterSec Research Corp.'s London office estimates defined contribution plans accounted for 18% of South Africa's $88 billion in retirement plan assets at year-end 1995.
But that proportion is expected to double by 2002. InterSec officials expect defined contribution assets to more than triple to $67 billion from $20 billion, as virtually all companies shift to defined contribution plans.
Defined benefit assets are projected to shrink to $40 billion from $68 billion at the end of 1995, as plans are frozen and benefits are paid out.
David Booher, director, said conversions to defined contribution assets are expected entirely on the corporate side, as public funds generally are underfunded, making a shift difficult.
However, pension officials at some South African governments and state-owned entities, including Cape Town Municipal Pension Fund, the Post Office Poskantoor, Pretoria, and the Transnet Pension Fund, Braamfontein, said shifts to defined contribution are being considered.
Although this process started more than a decade ago, led by union retirement funds such as the CG Smith Sugar Provident Fund, Sandton, and the Metal Box South Africa Provident Fund, Johannesburg, the trend is accelerating rapidly.
In the last two to three years, prominent companies have made the switch, such as construction group Murray & Roberts Holdings Ltd., Bedfordview; manufacturing and distribution group Barlow Ltd., Sandton; mining group JCI Ltd., Johannesburg; Anglo American Platinum Corp. Ltd., Marshalltown; and banking group First National Bank Holdings Ltd., Johannesburg.
Unlike in most countries, the initial impetus to change to defined contribution funds came from union officials.
One major factor driving union sentiment was that some employees were excluded from membership in traditional defined benefit schemes - ostensibly because they earned too little. In reality, these participation rules hit African, colored (mixed race and others) and Indian employees hardest.
Those workers who were admitted as members were penalized by poor withdrawal benefits if they left before retirement, often receiving only their own contributions back - leaving out employer contributions. Inflation adjustments were inadequate.
What's more, many participants wanted a lump-sum benefit when they retired, not a monthly pension.
In rural areas lacking banking facilities, it often was hard to cash checks. Also, many South African workers don't buy their homes until retirement; receiving a lump-sum payment from a provident fund often is preferable to an annuity payment.
Unionized employees also wanted a greater say in how their funds were run, not trusting white-run industry. Rael Gordon, managing director of Alexander Forbes Asset Consultants, Sandown, said workers "not controlling their own destiny" was "a big problem."
Employers embrace new plans
But in the past five years, the defined contribution concept also has won popularity with employers, who decided they no longer liked the open-end liability presented by defined benefit schemes.
The second persuasive argument for employers has been the rapid growth of AIDS in South Africa, which is adding greatly to the cost of group life disability and death schemes, which are packaged together with pension benefits. In a defined contribution scheme, the costs of providing for scheme members with AIDS are borne by the rest of the members.
Employers also have been upset by a 17% tax on income earned by pension funds that was imposed by the government in March 1996. Pension experts fear the tax might go up, because the Katz Commission - a panel charged with reviewing South Africa's tax system - originally had recommended a 30% tax. While employers must make up any shortfall in benefits caused by the tax, the burden is shifted to workers in a defined contribution scheme.
New worker trustee rules
But not all sentiment is in favor of defined contribution schemes.
Frans Mahlangu, benefits officer for the National Union of Mineworkers, one of the country's biggest and oldest unions, said his personal view is the unions should try to persuade participants to return to defined benefit schemes.
Unions' historical opposition to defined benefit schemes was based on the lack of participation by members - not only in the control of the rules of the scheme but also in the investment decisions. Defined contribution schemes were regarded as a way to enable members to participate directly in retirement decisions.
However, 1996 amendments to the Pension Funds Act require employees have equal representation on boards of trustees by Dec. 15, 1998, greatly increasing worker control.
Mr. Mahlangu said the new legislation makes defined benefit funds more acceptable retirement vehicles - particularly because they offer more reliable benefits. What's more, problems with poor withdrawal benefits can be addressed in each plan's rules, possibly creating a preservation fund to hold benefits for those workers who resign or are laid off prior to retirement age.
"Unfortunately, we believe employers would oppose a shift back to defined benefit schemes because defined contribution schemes offer a form of saving where members bear the brunt of the risks," he said.
NUM officials are opposing a move by the Sandton-based Electricity Supply Commission, the country's stated-owned electricity supply company, to move employees to a defined contribution scheme from the present defined benefit scheme.
Individual choice not available
South African pension professionals remain wary of giving investment control to plan participants.
Graeme Kerrigan, joint managing director of Alexander Forbes Consultants & Actuaries (Pty.) Ltd., Sandown, said at a recent conference run by TriStar International Consulting Ltd., Constantia, that poorly educated worker trustees "with no financial background are expected to take huge decisions affecting billions of rands."
Similarly, there are concerns about giving investment discretion to plan participants in defined contribution schemes. Dries du Toit, executive director: portfolio management of Sanlam Asset Management, Bellville, said investment choice is coming, but a herd instinct among individuals could result in greater market volatility.
Very few South African defined contribution schemes offer individual investment discretion. In some cases, employees are reluctant to grasp the nettle.
At RMB Holdings Ltd., the holding company for Sandton-based Rand Merchant Bank, only 20% of employees said they desired investment choices, said Richard Spilg, executive director of RMB Asset Management (Pty.) Ltd., the company's money management unit. And that's in a bank, where general knowledge of financial matters usually is superior than among the general population.
Cape Town ponders DC plan
The shift to defined contribution, however, clearly is under way, and sometimes for reasons peculiar to the plan sponsor.
The anticipated breakup of Cape Town government into five entities would cause a split of the 3.2 billion rand ($682 million) Cape Town Municipal Pension Fund.
Government officials and union representatives are in negotiations to convert the plan into a defined contribution plan, which would ease parsing out the fund.
If they can agree, Kevin Creasey, assistant principal officer for the fund, estimates the central city would retain 65% of the assets. However, he believes three-quarters of total participants - most of the active workers - might leave, resulting in a highly mature defined benefit fund.
While that fund might retain about 65% of the assets, it would result in a radical restructuring of plan assets into a higher fixed-income exposure. The fund now is about 55% invested in stocks and 45% in bonds.
Given Cape Town's commitment to protect retirees fully from inflation, fund officials might seek to shift a large chunk of the defined benefit fund to insurers, who would take on much of the inflation risk, Mr. Creasey said.
Meanwhile, some 1.2 billion rands in plan assets might be shifted to a new defined contribution plan, he said.
Mr. Creasey has hedged part of plan assets as negotiations continue. However, he would need to convert most of the assets into cash or short-term bonds should the breakup proceed.
Post Office conversion near
The 3.5 billion rand ($746 million) Post Office Poskantoor is switching to a defined contribution plan next February, said Karl Bailey, general manager, treasury and risk management.
Ahead of the pack, the Post Office fund plans to offer investment options to participants. They might start with four different options, possibly including bonds, equities and guaranteed funds. Passive investments also are an option, he said.
At the Transnet Pension Fund, Braamfontein, discussions to convert to defined contribution are under way. The 30 billion rand ($6.4 billion) fund provides pensions for workers of 100% state-owned entities, ranging from South African Airways to railroad to pipeline workers.
But the anticipated selloff of these units - starting with the pipeline company - provides a solid rationale for shifting to a defined contribution plan first.
"If you take over a company, you can't change the benefits of employees," explained Gideon van Zyl, chief executive officer of the fund.
Transnet officials, however, would have to receive approval for a shift to defined contribution from the government, which in the past has resisted such a change for political reasons, sources said.