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Initially, the SSC also favoured a defined benefit model with no exemptions. The reason for a defined benefit model was that it would allow for extensive cross-subsidisation, where the higher income brackets would subsidise the benefits of the lower income brackets.
However, in a true tri-partite spirit (government, unions, and employers), the parties developed a hybrid model. This model envisaged limited cross-subsidisation of management costs and risk benefits. It envisaged that 2% of a total contribution of 13% of remuneration, up to the prevailing MSD cap, would be appropriated to fund management costs and to offer certain minimum death and disability benefits to members and survivors, capped on the MSD remuneration cap.
The 11% balance would have been allocated to each member’s savings portion to accumulate for retirement. The 2% would have been a compulsory contribution by every employee. Employer funds with a total contribution rate of more than 13% would have been able to obtain an exemption for the retirement savings portion.
Unfortunately, it seems that our ‘indigenous model’ did not find favour with the Minister of Labour, advised by his special adviser, who prefers the ILO’s defined benefit system and the exclusion of any exemption. In addition, the ILO talks about a much higher total contribution rate of 15.9%. The fact that the three parties represented on the NPF steering committee compromised on a hybrid model seems to be of no interest to the ILO’s actuary who made his views very clear - or was it a matter of ‘whose bread I eat, his song I sing’?
The ILO actuary opined that the Canadian defined benefit model has proven its resilience during the global financial crisis and that the SSC model does not offer the required guaranteed minimum income. By comparison, defined contribution funds provide inferior replacement ratio outcomes at retirement, should a member retire shortly after a market crash. Given that defined contribution and defined benefit funds invest in the same assets, the ILO actuary’s assertion about the better resilience of defined benefit funds during market volatility is simplistic, at best. When markets crash, it impacts both types of funds equally. The only difference is that a defined benefit fund applies more extensive cross-subsidisation.
Those that have built up a substantial retirement kitty, would then pay for those that have not by the time of a market crash. Of course, the same result can be achieved in a defined contribution fund through investment smoothing. A convincing argument for a defined contribution fund is that it promotes the ownership principle of the free-market economic model, while the defined benefit fund is based on ‘socialist principles’. The socialist economic model ignores human nature and has proven unsuccessful worldwide.
Besides the philosophical arguments against the socialist, defined benefit model, the defined benefit fund would start off with a large actuarial deficit as members will be entitled to benefits without having contributed or having contributed very little yet. All defined benefit systems in the developed world are facing serious funding challenges and, undoubtedly, Canada must experience the same challenges as a developed country.
As we have recently seen happening in France, when the government addressed these challenges from its aging population by raising the retirement age, it was confronted with serious social unrest.
We may naively believe that Africa is on a different demographic trajectory, but the graph below shows that Africa’s population is also aging, even if at a slower pace than most of the world. It will undoubtedly follow the trajectory of the rest of the world. A defined benefit fund will thus not only start off with a large deficit but will also face the challenge of an aging population where fewer and fewer young people must fund the benefits of more and more old people.
The following excerpt from the 2023 Allianz Global Pensions Report makes an important point: “These [aging population] numbers underline the importance of preparing pension systems for demographic change to guarantee their long-term financial sustainability and avoid overburdening future younger generations. At the same time, pension systems also have to remain adequate to guarantee a growing share of elderly people a decent living standard in old age.
Pay-as-you-go financed pension systems, in which the contributions of the workforce population are used to finance the pensions of current retirees, are doomed to fail to meet these requirements. The challenge will be to find the right balance between guaranteeing sustainability and adequacy at the same time.
In many industrialized countries, this implies cuts in benefit levels. In many rapidly aging emerging markets, the coverage of public pension systems and benefit levels are still rather low. However, in both cases, to secure a decent living standard in old-age, complementary capital-funded old-age provision is the only solution.”
Namibia’s labour situation will exacerbate the challenges faced by a defined benefit fund. According to ILO estimates, the average unemployment rate of around 260 countries worldwide was just over 6% in 2018, while Namibia’s unemployment rate was in excess of 33%. The unemployment rate does not account for 17% who are employed informally and 21% ‘vulnerably employed’, or another 38% (71% in total), most of whom will likely contribute very little to the NPF!
Since the existing retirement funds industry currently accommodates over 330,000 members of our total labour force of one million (that is 33% of the labour force), it means that nearly every formally employed is already accommodated within the retirement funds industry. The likely NPF membership should be the same as the MSD fund’s membership, namely around 550,000. The difference of around 220,000 to the existing retirement funds industry membership will be drawn from those informally and ‘vulnerably employed’ persons who will hardly contribute to the NPF.
Using the ILO statistics, across the world, on average, 17 employed people support the social security benefits of one unemployed person. In Namibia, one employed person (33% of the labour force) will be burdened to support the NPF benefits of 2 people (67% of the labour force) if everyone receives benefits. Now, one may argue that only very few of the informally and vulnerably employed would contribute and be entitled to benefits. If that is the case, what is the purpose of setting up a huge NPF infrastructure for a vast majority of beneficiaries already catered for by occupational pension funds and ‘a handful’ of informally or vulnerably employed who can afford to contribute?
Putting it differently, less than 30% of what I must set aside will be used to fund my NPF benefits, while the balance will be used to fund others’ benefits. For people in the higher income brackets, the cross-subsidisation means that much less than 30% of one’s contributions will actually be used to provide benefits to them.
The higher income brackets are usually more outspoken and politically influential and will undoubtedly, at some point, use that influence to protect their interests. Introducing a national pension fund when Namibia has such a low employment rate is an acknowledgment by the government that it failed in its employment creation efforts. Surely, it should be preferable and more productive to put a person into a job to look after his own retirement than setting up a huge NPF infrastructure to redistribute retirement capital from the formally employed to provide benefits to ‘a handful’ not formally employer but entitled to benefits.
Although I am not aware of any studies to assess the impact the envisaged defined benefit NPF without exemption may have on the existing retirement funds industry, we estimate that the industry will be decimated to only 40% of its current membership and 60% of its current assets.
In conclusion, the NPF will use the 330,000 members of the existing retirement funds industry to pay the benefits of 220,000 informally and vulnerably employed persons. It will result in the existing retirement funds industry being no longer economically viable.
*Tilman Friedrich is a Chartered Accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is co-founder, shareholder, and Chairman of the RFS Board and retired chairperson, and now a trustee of the Benchmark Retirement Fund.