Pension fund reform towards development of national economy : a South African case study

Moleko, Nthabiseng (2019-04)

Thesis (PhD)--Stellenbosch University, 2019.


ENGLISH SUMMARY : South African pension assets have grown astronomically over the past few decades. The implications of this phenomenon on savings, capital markets and growth in the economy are investigated in this study. The research seeks to empirically investigate the effects of pension assets through six research papers that will address this question. Chapter 1 outlines the problem statement, research objectives and significance of the study. Chapter 2 gives a historical perspective of the South African pension fund sector using secondary data and desk review of existing literature. It shows various legislative frameworks passed by the South African government, spurring reforms in the sector. Providing a descriptive review of the trends of the type and number of funds, total assets under management and legislative reforms provides evidence of the significant developments in the pension fund sector. Analysis of available data shows the contribution of pension funds to the South African economy, the growth trends in funds contribution and the role of the state controlled Public Investment Corporation (PIC). The huge growth of pension funds industry, more particularly the PIC rekindles the debate on how the PIC and its share in the sector can be used for driving growth and employment in the economy. South Africa has one of the largest pension systems in the world, but low savings continues to constrain growth. Chapter 3 examines the exact nature of the relationship between pension funds and savings remain unsettled in the literature. It is for this reason that this study seeks to interrogate the effects of pension funds on savings using the ARDL methodology. We find evidence suggesting that rising pension assets have a negative impact on the national savings rate. The analysis also shows that for our control variables, unemployment has negatively impacted the savings rate while the level of income affects savings rate positively. In Chapter 4 we seek to provide empirical evidence to establish the effect of pension fund assets on overall capital market development. It uses proxies for both stock and bond markets and uses the autoregressive distributive lag (ARDL) and the vector error correction model (VECM). The results show a positive relationship between pension savings and stock market development. No long-run relationship was established between pension savings and the bond market development. We find only unidirectional relationship between pension fund savings and stock market development. Evidence shows that policies in the stock market are conducive for its development, with contrary shown in the bond market. Chapter 5 investigates the relationship between pension assets and economic growth within the context of South Africa in. In spite of the fact that South African pension assets have been adjudged as being amongst some of the best performing and fastest growing in the world in recent decades, there exists a gap in the empirical literature on the role institutional investors like pension funds play in the finance-growth nexus. It is against this backdrop that the chapter seeks to investigate the impact of pension funds on economic growth within the context of South Africa. The study therefore employs the Vector Error Correction Model on time series data spanning the period 1966 to 2011. The study found the existence of a causal relationship between pension fund savings and growth however, the study did not find causal association running from capital market development to economic growth but rather found the existence of a reverse causality running from growth to capital market development. The policy implications of the findings is geared towards encouraging savings within the context of the South African labour market with a concomitant effect on investment and growth of the economy. The following Chapter 6 examines the cointegration between pension assets and economic growth in the presence of structural breaks. We find that pension assets have a positive but minimal impact on growth in the presence of structural breaks. The direction of the results is similar for the model with or without structural breaks. In Chapter 7 we investigate the Public Investment Corporation (PIC) incentives and decisions within a socio-economic, political and multiple level of governance context. Using the Institutional Analysis and Development Framework (IADF) we outline policy recommendations and identify gaps for institutions in the context of financial markets and outline policy recommendations. Studies have dwelt on the role of pension funds in the development of capital markets, however there is paucity of works pertaining to the incentives and operations of institutions that manage pension funds. Literature has focused on pension reform and its linkages to growth, savings and macro-economic variables using econometric analysis. The value addition in this study is the use of a theoretical model in the analysis of pension fund institutions given the multiple governance levels and collective action that characterise the sector. Adopting the IADF in this regard will provide theoretical foundation for the reformation of the PIC to drive national development goals that will reduce poverty and inequality. The significance of the study lies in making use of different methodologies to understand the relationship between pension assets and growth (Chapter 4). In addition, measuring the transmission of pension assets and growth within capital markets, namely bond markets is significant (Chapter 5). Institutional analysis of pension funds and the entire pension system is a new approach using relevant methodology (Chapter 7). The role financial markets through pension funds play in poverty alleviation relooks policy frameworks and investigates alternative mechanisms necessary for growth outcomes. Greater detail is provided in Section 1.5. of the significance of the study.

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