The Pension Funds Amendment Bill - Balancing Act Between Survival & Long-Term Financial Objectives
As a consultant, a common question often raised by retirement fund members, is whether one is able to access part, or all, of one’s retirement fund savings to cover emergency expenses. The frequency of this question has increased during the pandemic as many members have been feeling the pinch over the past 12 months.
The answer to this question is what the Pension Funds Act, 1956 (Act No. 24 of 1956) (‘‘the Act’’) currently allows in respect of accessing retirement fund savings without leaving the retirement fund:
Section 19 of the Act currently enables retirement fund members to access a home loan, where the retirement fund asset acts as security for such a loan. The Act does not permit retirement fund members to obtain a loan for any other purpose other than a home loan.
For some time now, the Democratic Alliance has been pushing for an amendment to the Act to allow retirement fund members to use a portion of their retirement fund before retirement, as a guarantee for a loan where their rationale is:
“Individuals should be free to choose, in unison with the trustees of their pension funds, how their own financial assets are utilised when it comes to providing collateral for responsible loans,”
To some extent, I would agree with the sentiment that retirement funds in their current form only address long-term savings objectives and aim to restrict members from access prior to retirement age.
Yes, a retirement fund arrangement is surely a tax efficient way of saving over the long-term and the employer is being “socially-responsible” in offering a retirement fund arrangement, together with other associated benefits like group risk insurance. However, it is true that many retirement fund members in South Africa are in desperate need of a means to survive or save significantly towards their more “immediate” needs over the short and medium-term.
Parliament’s Standing Committee on Finance has recently invited interested parties to submit written submissions on the Pensions Funds Amendment Bill (“the Bill”).
The objects of the Bill are stated as follows:
The unfortunate outbreak of the COVID-19 pandemic in the Republic has severely impacted the already crippling South African economy and has led to many South Africans becoming financially destitute. The Bill thus seeks to amend the Act in order to allow pension fund members to obtain a loan, secured by a guarantee from a registered pension fund, to alleviate financial pressure during an emergency such as the COVID-19 emergency or any other emergency similar to COVID-19. By enabling a member to access a pension-backed loan, that member will be able to leverage their pension fund investment prior to their retirement date, without eroding their provision for eventual retirement. Lending institutions will be enabled to offer loans to pension fund members at competitive interest rates and over extended or deferred payment periods given that the loan is fully guaranteed.
What this means in summary for retirement fund members:
The Bill (if approved in its current form) would amend the Act to allow retirement fund members to obtain a loan, secured by a guarantee from their fund, to cover immediate emergency expenses. In this case, the Bill makes direct reference to the Covid-19 emergency or another similar emergency (we can expect such emergency to be determined through the Disaster Management Act 2002).
This would enable members to leverage their accumulated retirement fund savings value prior to retirement, without having to withdraw and ultimately erode their eventual retirement fund benefit at retirement. In addition, financial institutions should be able to offer loans to retirement fund members at competitive interest rates given that the loan is fully guaranteed by the accumulated retirement fund savings value held in the member’s name.
Further, the Bill could amend the Act to enable retirement funds to furnish a guarantee up to a maximum of 75% of the member’s accumulated retirement fund savings value.
The final details and conditions are still to be contemplated, however, there could be some form of compulsory preservation criteria imposed on members utilising this option which members must be very clear on to understand the impact of utilizing this option and the effect on future retirement fund benefits.
We know that most young to middle-aged members are particularly vocal about the fact that they struggle to make ends meet on a daily basis, which is impacted (in their minds’ negatively) by employee deductions to the retirement fund. For the most part, members may appreciate the ability to save, but retirement is not an immediate requirement or need for them and limits their ability to accumulate emergency, short-term savings.
With the above comment in mind, this may very well be a positive change in assisting retirement fund members with emergency savings, but given that the current proposal is very restrictive, whether this is the case or not remains to be seen and we look forward to industry engagement and further developments around this amendment in due course.