Secondary

Household savings: how does South Africa fare?

Global Finance magazine provides the following description of the term and some recent trends:

Household saving is defined as the difference between a household’s disposable income (mainly wages received, revenue of the self-employed and net property income) and its consumption (expenditures on goods and services). The household savings rate is calculated by dividing household savings by household disposable income. A negative savings rate indicates that a household spends more than it receives as regular income and finances some of the expenditure through credit (increasing debt), through gains arising from the sale of assets (financial or non-financial), or by running down cash and deposits. Nations aggregate this data and report it on a regular basis. Since the early-to-mid-1990s, savings rates have been stable in some countries but have declined in others – in some cases sharply, including in Australia, Canada, Japan, Hungary, South Korea, the United Kingdom and the United States. With the great recession of 2007-2008 that trend reversed itself, and household saving rates increased in 2009 in many countries. However, savings rates are again projected to decline in some countries by 2011.

It may just be incidental, but the sharp declines listed above include the UK and Australia, two countries normally used as role models for our own legislative changes.

When SA regulators consider changes to legislation affecting the financial services industry, they should bear in mind, access to such services, and particularly the influence the latter has on household savings as a percentage of disposable income. Apart from the more intricate benefits to the country’s economy, a healthy savings rate is a beacon of hope to a government currently staring down the double barrelled threat of its social obligations.

The latest statistics on South Africa’s household savings was recently published by the South African Institute for Race Relations (SAIRR). In the period 1994 to 2011, our national savings rate dropped from 2.7% to -0.1%. As explained above, it means that we are now spending more than we earn.

The statistics on welfare are equally frightening: Child support subsidies spiraled from R800 000 in 1994 to 10 903 000 in 2011 – an increase of 1262,1%. As an aside: having babies to qualify for the subsidy has become a national passtime, and major source of income for many.

The blueprint for proposed changes in the financial services industry as far as the regulator is concerned, remains the 2006 discussion document released by the national treasury entitled “Contractual Savings In The Life Insurance Industry”. The following quotes from this document seem to bear out the need for advice of a personal nature:

As long as investors do not understand how the products offered to them work and cannot effectively compare them to other products in the market, information asymmetries will imply that product and service providers can remain profitable without having to be competitive.

Despite the fact that the authorities apparently hate the phrase, those of us who make a living from the industry knows: “Insurance is sold, not bought.”

Rather than focus on issues like “The triangular association – whereby the intermediary provides advice to the policyholder but is incentivised by the insurer, who then recoups such costs from the policyholder – is fundamentally flawed. A commission-receiving intermediary cannot, by definition, be thought to be truly independent” the regulator should focus on enhancing the financial advisor’s ability to access and advise clients.

Two articles recently published in MoneyMarketing clearly highlight the dilemma facing consumers:

The one was the Moonstone article using FSB statistics to show that over 2 000 FSP licences were withdrawn over the last year. February this year saw a new “record” of over 300 FSP licences withdrawn.

The second article quotes Astute as saying that 3 800 new intermediaries were appointed over the last year, but that the nett growth in numbers was only 700. It also indicates that only 32% of advisors have more than 5 years experience, and 49% less than two years.

Surely this is a far more serious threat to consumers than the issue of how intermediary remuneration is funded?

This reminds me of the farmer who taught his horse to eat less every day. Just when he got it right, and the horse managed to get by without eating, the stupid beast went and died.

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