The private affairs of public pensions in South Africa: debt, development and corporatization

Toward the end of its rule, the apartheid government in South Africa converted its contributory pension system for employees in the public sector from one that effectively functioned as a pay-as-you-go (PAYG) scheme to a fully funded scheme. This paper explains the reasons behind this change and reveals its contemporary consequences within the context of the enormous development challenges facing South Africa, and the inadequacy of the social policy responses of the democratic government.

The paper:

• describes the political and institutional evolution of South African pension schemes with a special focus on the reform of contributory public pension schemes toward the end of apartheid
• examines the governance structure of the pension system in order to establish whether it is transparent and accountable, while ensuring that the pension system is able to pursue its main roles of social protection, redistribution and contribution to economic development and social cohesion
• investigates the institutions that serve public pensions, such as the GEPF and the Public Investment Corporation (PIC)
• analyses the investment policy of the public pension fund, paying special attention to whether this fund has been invested to build economic and social infrastructure

The author highlights the following points:

• the most far-reaching effect of the adoption of a fully funded pension scheme is that it led directly to a dramatic increase in national debt, as the public servants of the previous regime consciously indebted the state in order to safeguard their own pensions and retrenchment packages in retirement
• unlike other indebted governments, the major portion of national debt in South Africa is internal rather than external. In effect, the government is indebted to itself through the fully funded pension system, as the transition from a PAYG system to a fully funded one implied that former contributions to the public pension schemes had to be securitised via government bonds that were deposited in the newly created pension fund
• contributions of current employees were directed into the pension fund while current pensions had to be financed out of the budget. This costly transition had detrimental implications for social investment, especially in the areas of education, health and welfare

The author concludes that policy choices in respect of the pension system have profoundly shaped the overall economic prospects of the country. In so far as the levels of inequality in South Africa pose the greatest threat to the democracy, these policy choices have had contradictory effects. 

On the one hand, a progressive agenda involving social spending and dealing with poverty through non-contributory public pensions has certainly benefited many poverty-stricken black South Africans. On the other hand, the fully funded system of contributory pensions for workers in the state sector has had the dual effect of entrenching the deals made with senior public officials of the apartheid government, as well as enriching a very small group of black entrepreneurs who have profited directly from the centralised asset management of public pension funds. There is an inconsistency between solving the problems of poverty and the stated commitment to developing a black capitalist class which, through Black Economic Empowerment, could make inroads into the white stranglehold of ownership and privilege.

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