WeeklySA_AdminDANGER:Today’s needs at expense of much older self
• Cosatu is pushing hard for the amendment of the Pension Funds Act to allow members to access their savings.
• But the amendments have become a source of great anxiety to other stakeholders and fund administrators.
• Amendments to the Act before Parliament Standing Committee on Finance.
Some pension fund industry players and stakeholders are up in arms following the proposed amendment in the Pension Fund Act that seeks to grant loans to fund members. The Pension Funds Amendment Bill, which is currently before the Parliament Standing Committee on Finance, aims to amend the current Pension Funds Act to enable pension fund members to access up to 75% of the value of their pension fund before retirement as a guarantee for a loan.
While some industry players and political parties have acknowledged the bill as crucial in the fight for “people’s power” over “state power” in South Africa, other players including fund administrators have rejected the amendment bill claiming that the issuing of loans from the pension funds to members will rock the system and deplete the country’s already low savings.
The draft amendment bill was introduced by the opposition Democratic Alliance (DA) in Parliament earlier this year to alleviate financial pressure affecting fund members during an emergency such as Covid 19.
“Individuals should be free to choose, in unison with the trustees of their pension funds, how their financial assets are utilised when it comes to providing collateral for responsible loans” the DA said in a statement.
While the country’s main opposition says it does not expect the changes to act as a “silver bullet”, the party however argues that there is “an inherent problem in the system where South Africans are facing severe current financial hardship” while owning a financial asset.
Currently, Section 19 of the Pension Funds Act, 1956 (Act No. 24 of 1956) already enables pension fund members to access a loan, where the pension fund asset acts as security for such a loan, but this is, in essence, restricted to loans related to immovable property. The Act also permits a direct loan from the fund for this purpose. However, the Act does not permit pension fund members to obtain a loan for any other purpose.
In its submission before the Parliamentary Standing Committee on Finance, National Treasury rejected the proposed amendment saying the bill does not have the support of the Department. It pleaded with the Standing Committee on Finance to also reject a private member’s amendment bill as it will rock the industry and deplete the country’s already low savings. Some of the banks and union federations including the Congress of SA Trade Union have come out in support of the DA’s Private Member’s Bill while other industry players and stakeholders such as administrators are in support of the Treasury saying the proposed amendment is in violation of the Credit Act and will render members virtually impossible to maintain a suitable standard of living when they stop working.
Worsening the situation is the culture of consumerism, conspicuous consumption and instant gratification and there is no way of guaranteeing that retirement fund cash withdrawals will be used responsibly, allege the stakeholder opposing the amendment. Mica Townsend, business development manager at 10X Investments, said while the proposal might be well meaning it was not necessarily well considered.
“The danger is that this amendment would give retirement savers another way to prioritize today’s needs at the expense of their much older (and likely more vulnerable) selves. This is highly undesirable from a public policy perspective.”
Townsend, who is also an Employee Benefits Consultant at 10X, adds that the bill risks exacerbating an already dire situation where the vast majority of South Africans had almost no way of supporting themselves in retirement, with many thousands spending their final years struggling to make ends meet. Townsend argues that a member who does not qualify for a housing loan under normal considerations, because he or she cannot afford it, would also not qualify for a pension-backed loan.
He says findings in 10X Investments’ annual Retirement Reality Report and various other studies show that members’ understanding of the existing benefits of their retirement funds is poor and confirm that alarmingly few people are on track for a decent retirement.
“Adding layers of complexity would likely only worsen these problems,” says Townsend.
Section 37A of the Pension Funds Act provides that pension benefits are not (with few specified exceptions) reducible, transferable or executable. The proposal in the DA’s memorandum, he says, would negate, or undermine, this vital and fundamental safety feature of retirement funds. Naheem Essop, senior legal advisor at the Office of the Pension Funds Adjudicator, says though the amendment is a policy issue that should rightly be decided in parliament, those who advocate for early access to retirement savings tend to lean on the economic circumstances brought about by Covid-19. Although this is the simple argument against early access, there are however more fundamental issues that arise should early access be allowed, says Essop.
“Retirement funds should generally be treated with a long-term view. Its original purpose after all is to provide money to members during their retirement years.
This also means that a fund needs to be invested in long-term assets and that provide substantial investment returns to be enjoyed during retirement.” Allowing personal loans to be taken by members of retirement funds against their savings, he said, will mean that a pension fund will require a fair amount of liquidity (cash) which does not align itself well with long-term strategies.
The system of allowing early access to pension funds was implemented in Peru, and according to Essop, this had a disastrous effect on the Peruvian economy.
Quoting the IMF report, he says that measures, such as allowing withdrawals from individual accounts in private pension funds, were not as effective in providing relief to most vulnerable groups while at the same time they compromised the integrity of the pension system.
