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 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. In 1989 the total debt of the South African government stood at 68 billion rand (R), of which R66 billion was domestic debt and only R2 billion was foreign. By 1996 it had grown phenomenally to R308 billion, of which R297 billion was domestic and R11 billion was foreign debt. The servicing costs for these debts rose from about R12 billion in 1989 to more than R30 billion per annum in 1996. During the same period, the assets of the Government Employees Pension Fund (GEPF) grew from R31 billion to R136 billion.

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 securitized via government bonds that were deposited in the newly created pension fund. Furthermore, 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.

This paper argues that the 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 centralized 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. It is crucial for the government to negotiate this tension in a manner that allows for social policies that encourage economic growth while simultaneously maintaining the social imperative of redistribution. The exigencies of legitimacy and consent demand the latter: in South Africa, precisely because of the extent of inequality and the manner in which the differentiation between rich and poor continues to correspond with the division between black and white, redistribution is all the more urgent.

In broad terms, this paper deals with the interconnections between public debt, contributory pensions in the public sector, the corporatization of the management of these public funds, the contradictions of Black Economic Empowerment, and the failure of South African social policy in respect of contributory public pensions to deal more comprehensively with its development challenges.

The paper starts by describing 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. It goes on to examine 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. In particular, the paper investigates the institutions that serve public pensions, such as the GEPF and the Public Investment Corporation (PIC). There can be little doubt that the PIC opens up possibilities for accomplishing social goals through an appropriate investment strategy. However, its recent corporatization pushes it toward privatization. While the PIC is still wholly owned by the state, it is an entity that formally exists outside of the public sphere and therefore beyond its oversight. Finally, the paper 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.