The government has again thrown down the gauntlet to the financial services industry by adding a new product to its RSA Retail Bond saving and investment offerings – the Top-Up Retail Savings Bond.
Since the government introduced RSA Retail Bonds in 2004, they have attracted 77 000 investors and R93 billion in assets.
At an event in Johannesburg this week to celebrate the 10th anniversary of the South African Savings Institute (Sasi) and the official launch of National Savings Month, Finance Minister Pravin Gordhan announced that the National Treasury will target the significant recurring-investment market when it makes the Top-Up Retail Bonds available by early next year (see “R500 minimum to invest in a Top-Up bond”, below). The existing RSA Retail Bonds allow for lump sum investments only.
In his Budget speech in February, Gordhan said the treasury is considering making an investment-linked pension product available that will use the existing inflation-linked bond as the underlying investment.
The government’s moves to expand its suite of retail bonds come against the background of the steady fall in the rate of individual savings, which is holding back South Africa’s economic growth.
At this week’s event, Gordhan, Sasi chairperson Prem Govender and Johan van Zyl, the chief executive of Sanlam and the chairman of the Association for Savings & Investment SA, all sounded the alarm bell about the disappearing culture of saving, which has dire consequences not only for individuals’ financial stability but also for the country’s efforts to achieve sustainable economic growth.
South Africa’s gross savings rate (that is, the savings of households, business and government) equates to 16 percent of gross domestic pro-duct (what the country produces), whereas the savings rate is 52 percent in China, 37 percent in India and 22 percent in Russia.
Former finance minister Trevor Manuel launched the first RSA Retail Bond in 2004 in an attempt to encourage saving by increasing competition in the financial services sector with the aim of lower costs and simpler products.
These problems were highlighted this week by Gordhan, who says the financial services industry must reduce investment costs and make its products less complex.
As part of its attempt to increase competition in the financial sector, the government is driving hard to get co-operative banks off the ground – two have been formed and 17 are in the pipeline.
Gordhan sees co-operative banks, which are owned by their members, as opening up financial services to people in rural areas.
And quasi-government institution PostBank, with its base of six million savers, is about to expand its operations to become a fully fledged savings and loans institution with branches at every post office around the country.
Gordhan says the government is taking various steps to create a savings-friendly regime based on its policy document entitled “A safer financial sector to serve South Africa better”, which was released earlier this year.
The government is also moving ahead with its reform of the country’s retirement-savings system, addressing issues such as the preservation of savings for retirement and proposing a national social security fund that will bring low-income employees into the retirement savings net.
Gordhan, Govender and Van Zyl are concerned about the country’s non-saving consumerist culture, which has resulted in the level of household savings dropping by 0.1 percent of gross domestic pro-duct each year for the past 10 years.
The only positive development is that the country’s ratio of debt to disposable income dropped from a high of 81.8 percent in 2008 to 78.2 percent for the first three months of this year, Govender says.
Gordhan, Govender and Van Zyl believe that education, starting at school level, is one of the ways to create a savings culture.
Van Zyl says that promoting initiatives such as National Savings Month is of prime importance in educating consumers about how to manage their money, and the financial services sector has a major role to play in this regard.
The slogan for National Savings Month this year is “Save now”.
No amount is too little to save and the sooner you start saving, the better, Gordhan says.
South Africans, Gordhan says, “must think of what we really need and consider the riches we can one day achieve as a country rather than be dazzled by the fool’s gold of today’s consumerism”.
R500 MINIMUM TO INVEST IN A TOP-UP BOND
The government’s new Top-Up Retail Savings Bond, which is aimed at people who want to make regular investments, is scheduled to be launched by early next year.
Details of another new retail bond, the pension-providing Annuity Retail Bond, are due to be released next year. A National Treasury team is working on the terms and conditions of the Annuity Retail Bond.
Currently, two types of RSA Retail Bonds are on offer, both of which allow for lump sum investments only:
* The fixed-rate bond, which has a term of two, three or five years, and the interest rate is fixed for the investment period; and
* The inflation-linked bond, which has an investment term of three, five or 10 years. The floating interest rate is adjusted for inflation twice a year.
The minimum investment amount for both the fixed-rate and the inflation-linked bonds is only R1 000.
You can buy RSA Retail Bonds at the Post Office and Pick n Pay outlets or directly from the National Treasury (www.rsaretailbonds.gov.za).
Finance Minister Pravin Gordhan said this week that, as a result of the National Treasury’s interactions with the public, “we realised that many more people would invest [in RSA Retail Bonds] if they had the option to top up their investment rather than have a once-off investment”.
The Top-Up bonds will have a minimum initial investment of R500, and you will be to add to your savings at any time – the minimum top-up investment will be R100.
Other features of the Top-Up bond will be:
* The minimum investment term will be three years from the date of your first deposit. At the end of the three years, you will be able to roll-over (reinvest) your savings.
* If you want to make an early withdrawal, the total amount that you wish to withdraw must have been invested for at least 12 months. You will be charged a penalty on the early withdrawal. The capital balance remaining after the early withdrawal and penalty must be at least R250.
* Interest will be capitalised. In other words, it will not be paid to you but added to your savings.
* The coupon rate (interest rate) will be derived from the effective discount rate of the 91-day Treasury Bond (TB) determined by the last auction of the quarter. TBs are money market instruments used by the government to fund its short-term financing needs. TBs are auctioned to large institutional investors. Gordhan says the interest rate offered on the Top-Up bond will be very competitive.
* The maximum investment amount per investor will be R5 million.
* As with the existing RSA Retail Bonds, there will be no investment fees or commission.
* Top-Up bonds will not be transferable and may not be sold to another person.
DO IT FOR YOURSELF AND FOR THE COUNTRY
Entrenching a culture of saving among South Africans will enable both individuals and the country to achieve important goals, Finance Minister Pravin Gordhan says.
You will save yourself much agony if you save for your goals rather than borrow to satisfy unnecessary wants, Gordhan says. At the same time, you will enable the country to meet its need for investments without its having to rely on the vagaries of fickle foreign investors.
By saving, you will support the government’s commitment to a developmental state, he says.
Adequate savings will provide you with a decent retirement, a basic right that only 10 percent of South Africa’s pensioners enjoy, Gordhan says.
The rest of the elderly population – many of whom were once able to work and provide for themselves – are forced to rely on the government or other people for support once they retire, he says.
Savings enable you to protect yourself financially in the face of unforeseen events. Insurance against short-term risks, such as a car accident and losing your property, and longer-term risks, such as death or disability, is an important form of saving, Gordhan says.
Contributing to a medical scheme will ensure that you do not have to maintain large cash reserves to meet unpredictable healthcare needs, he says.
But “we need to go beyond what we term ‘necessities’ in terms of the role of savings.
“An entrenched savings culture means South Africans must develop an attitude of saving for major expenses and goals instead of relying on easy credit and long repayments to purchase whatever luxury good seems desirable at the time (the car that adorns the neighbour’s driveway or the watch that weighs down their wrist),” Gordhan says.
Adults should teach children to save by setting the right example, he says. “Show our young people the value of setting money aside each month for an overseas trip, a deposit on a house and their education.”
South Africans must learn to save for a rainy day, Gordhan says.
“No matter how well we manage our finances, events occur that we don’t have control over. Without savings, such rainy days can wash away our money and drown us in debt,” he says.