The DA is about to submit a private member’s bill to Parliament, which proposes that individual pension fund members should be allowed to use their private savings as collateral for lending proposes. The banks and unions have come out in support of it, but other industry players remain sceptical.
At present, in terms of the Pension Funds Act, retirement fund members can only use their pension money as surety to obtain a home loan, but according to the proposed Pension Funds Amendment Bill 2020, which was written by the DA’s deputy finance spokesperson, Dion George, members will be allowed to do so for all types of loans, and for up to 75% of their fund balance.
“The idea behind it is not a silver bullet to solve everyone’s financial woes,” says George. “It is a simple intervention for people who are suffering under current economic conditions, and/or who have lost their income or businesses due to Covid-19 lockdown restrictions.”
George makes it clear that the bill does not propose any form of withdrawal, as they don’t want to see people dilute their retirement savings, but he says that “we are facing the biggest crisis in over a century and it will be with us for a while. It is time for us to start thinking creatively about the matter.”
He also says it is time we treat responsible savers like adults, and give them the power of attorney over their own funds, or even offer people who invested all their money into their business the opportunity to get back on their feet.
“It should be the member’s choice if he/she wants to use his/her pension as surety for a loan,” he adds, saying that it is the opposite of prescribed assets, where the government makes the decisions on behalf of pension fund members.
Rosemary Hunter, pension funds lawyer at Fasken, says it is an important and well-considered submission and states that the National Treasury has paid little mind to the proposal that retirement funds be allowed to grant special relief benefits, as reported by Business Maverick earlier this year. “The recent reports on the state of household finances are terrible,” she adds.
Ismail Momoniat, the head of tax and financial sector policy at National Treasury, did not respond to BM’s request for an update on the matter.
Andrew Crawford, director at Seshego Benefit Consulting, also agrees that it is a good idea for private savers to have access to the money they have put aside themselves. “It is consistent with the multi-purpose income-smoothing principle where people can access their savings during their work-life, and not have to wait until retirement age.
He says the system works well in Australia, despite some members abusing the privilege.
Both trade union federation Cosatu and the Banking Association of South Africa, which represents the 30-odd licensed banks in the country, have come out in support of the proposed bill, by submitting letters of support to the DA, with the latter also writing to the Speaker of Parliament.
The puritans among industry players, like the Institute of Retirement Funds, do not support the bill, but George says they did not provide any alternatives to deal with the current crisis in their submission during the public comment period which closed at the end of last week.
Another opponent to the notion is Erich Kröhnert, managing director at Ultreia Consulting Services. In a letter addressed to the Speaker of the National Assembly, Committee Chair and Secretariat to the Standing Committee on Finance, he says this “appears to be nothing than a scheme for the industry to generate new revenue streams that will benefit lenders, retirement administrators and other providers in the retirement value chain – all the expense of overindebted workers, which will be a captive market”.
He states that it is important to consider that the interest rate charge is not the only charge levied against pension-backed loans.
The Pension Funds Act Notice 2 of 2017 prescribes the interest rate that institutions may levy for pension-backed housing loans at the repo rate plus 2% per annum. “Unfortunately, it does not prescribe the transactional fees and costs that institutions may levy for these loans,” Kröhnert says. “At present these costs vary from provider to provider but include a range of fees from inception fees to monthly service charges and in some cases other transactional fees.”
He notes the proposal is in conflict with the National Credit Act, because the “ability to repay” criterion is not only the most important determinant in whether loans are granted or but “has a direct impact on the continued ability of borrowers to service the debt. The application of this criterion alone would deny many members the relief sought irrespective of the quantum or cost of the relief”.
For most members, the fact that members are applying for access to funding in times of distress is already an indicator of an inability to pay which is indicative that the relief is unlikely to be granted.
He further states that various financial institutions have already spoken out in support of the need for members to remain invested until retirement even during the Covid-19 pandemic.
The Association for Savings and Investment South Africa (Asisa) did not want to be drawn into the matter yet.
“Unfortunately, we cannot comment on the Bill at this stage. Asisa gathered comments from member companies and consolidated feedback was submitted to the DA on Friday. Protocol is to allow the DA sufficient time to study the comments before engaging with them. Only once this process is complete, would Asisa be able to comment publicly,” their spokesperson told BM.
On Wednesday, 21 October, the Mercer CFA Global Pension Index survey (MCGPI) were released. It compares pension plans across the world. It found South Africa had an overall index value of 53.2 among the countries analysed, scoring better than Austria, Italy, Indonesia and South Korea.
The index highlights key strengths of retirement pension systems around three sub-indexes – adequacy, sustainability and integrity, where South Africa scored 43.0, 46.7 and 78.3, respectively.
“It was interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, do not permit early access to pension assets, even though the assets of each pension system are more than 150% of the country’s GDP.
Retirement assets in South Africa amount to around R4.24-trillion, which is around 84.4% of local GDP. DM/BM