Parliament’s finance committee has rejected the proposed DA bill that would allow pension fund members to use 30% of their pension savings as a loan guarantee, to help alleviate the financial pressure they may be experiencing due to Covid-19.
The rejection was expected, not only because the government has its own solution, but because it was an ill-considered proposal, well-meaning perhaps, but lacking insight into the likely financial and tax consequences. It was an idea a politician might put forward to win votes, but not a serious policymaker.
ANC MP Gijimani Skosana was more diplomatic, saying that, “Any pension fund amendment bill requires a feasibility study with options.… Parliament cannot be expected to consider draft legislation that lacks the comprehensiveness that is required for such a serious matter.”
No such feasibility study accompanied the amendment bill, nor had the DA issued a discussion paper to get the retirement industry’s thoughts on the matter. From that point alone, the proposal was always likely to fail.
But it also made no sense conceptually. Fund rules permitting, the Pension Funds Act already allows members to obtain a direct loan from the fund or use their savings as a guarantee. This, however, is strictly limited to loans related to immovable property, and even then most funds’ rules don’t allow it, due to the cost and complexity it adds to the administration.
Underlying both the direct loan and the fund guarantee is the requirement that members can service the loan. In both cases, they are still liable for monthly interest (at the prescribed rate in the case of a direct loan from the fund) and capital repayments, and are evaluated accordingly. This means that a member who cannot afford a housing loan under normal considerations would also not qualify for a pension-backed loan.
If a loan was nevertheless granted to a person who cannot afford the repayments, as the DA envisages, it is likely that the guarantee would soon be called by the lender. This then becomes a roundabout way to access pension benefits by way of an early withdrawal, leaving a retirement funding gap that would be further enlarged by the lump-sum tax on the early withdrawal.
Beyond these preservation issues, the idea also undermines a core safeguard of the Pension Funds Act to protect members’ retirement savings from creditor claims, even in insolvency proceedings.
Although the DA’s proposal flies in the face of public policy, there’s no denying that fund members who are in serious financial difficulties don’t care about public policy. Many people are in that situation, even more so after the pandemic containment measures, and have no other recourse than their fund assets.
Our regulators and politicians have long struggled with this dilemma of competing needs. The ideal would be a system that facilitates both: immediate relief in emergencies plus also better retirement outcomes down the line.
Fortuitously (or perhaps not), the finance committee’s rejection of the DA bill comes just as National Treasury is about to publish its own paper on a more flexible pension system, to address this very issue. The Treasury’s proposed “two-pot” system will let savers access a portion of their fund (perhaps up to one-third) provided they then save the remainder until they retire.
It’s a pragmatic solution that balances short and long-term needs and brings in the compulsory preservation that the National Treasury has long strived for, albeit through the back door.
The current system allows pension and provident fund members to withdraw their savings every time they leave their employer. Per the 10X Investments South African Retirement Reality Report 2021, the percentage of fund members who do so remains stubbornly high at 60%. Other studies suggest the number is closer to 80%.
Even before the pandemic hit, exiting fund members frequently took all the money whether they had an urgent need for it or not, indicating that they don’t appreciate the importance of compound returns in a long-term savings plan. In the 10X report, almost half the respondents believe they can secure their retirement in under 30 years (rather than the recommended 40), unaware that the 10-year delay will halve their pension.
Practically, the partial withdrawal merely accelerates access to that portion of the fund that is inevitably taken as a lump sum at retirement any way. But by having to preserve the balance, which then becomes subject to mandatory annuitisation at retirement (other than for vested balances), it will also guarantee those fund members receive an ongoing retirement income, which in turn reduces reliance on the state’s old age grant.
It is a win-win proposal that promises to lessen the state’s burden at both points of access. While we wait to see more details in the discussion paper, from what we know so far, this plan has, unlike the DA’s folly, broad industry approval. DM/BM
Tobie van Heerden is chief executive officer at 10X Investments.