Government is paying parents to save for their children’s higher education.
The Association of Collective Investments (ACI) — in partnership with the education department — has launched a savings plan for tertiary education where government pays an additional 25% of whatever parents have saved for the year as a bonus to beef up the savings plan.
The department has contributed R20-million for the bonus top-up and institutional fund managers have added R14-million. Although the plan is still in pilot phase, Di Turpin, chief executive of ACI, says further donations from industry will be required to fund this ongoing bonus.
Overall it is a good plan that encourages saving by being simple and cost-effective, but one does have to look a bit deeper at the numbers. The first concern is that the money is invested in income funds, which for a long-term investment is not the correct asset class and the savings would not keep up with inflation.
If the pilot phase is successful, Turpin says they will consider offering a second fund that invests in equities. However, at this stage, considering it is aimed at lower-income earners, lack of financial education and understanding of the product made it prudent to keep to risk-free assets.
Although the annual fee on the savings plan is only 1,25%, which would be low for an equity fund, for an income fund it is a bit high. Most income funds charge about 1% a year in fees.
The reality, however, is that the less one invests, the higher the percentage of costs because there are fixed administration costs whether one invests R40 or R1 000 a month.
Pieter Koekemoer, chairperson of ACI, says the chosen fund managers, which will tender for the business, will receive only about 0,1% of this, which will barely cover costs and they view this as a national savings building project rather than a money spinner.
But the big kicker is the 25% bonus from government. If one adds in the annual bonus to the estimated 8% per annum return on the income fund, one would effectively receive 32% a year, which is outstanding for a virtually risk-free investment.
To receive the full amount one’s child will have to go on to a recognised public tertiary education institution. The savings, with the bonus, will be paid directly to the institution.
The flexibility around the product is well thought out. First, the saver can withdraw the amount at any stage. One will forfeit the annual bonus and the returns will not be spectacular, but it is there in case of an emergency.
There is also no contractual agreement, so if one is unable to make regular monthly payments there is no penalty. One can invest using a debit order or add ad hoc lump sums.
The fund can be transferred to another learner if the child parents have been saving for does not go on to tertiary education. This provides an opportunity for people who wish to sponsor a child as long as the learner is a South African citizen.
The one technical and annoying part is that one must have an Mzansi account or equivalent low-end banking product. But this is not difficult to open. Although the fund is aimed at lower-income earners, it is open to everyone, so the bonus is capped at R600 a year or 25% of R2 400.
Although one can invest however much one wants in the fund, practically it would not make sense to invest more than R200 a month as any additional investment would be better off in a fund with higher exposure to equities for higher growth. But, as a starting point for a child’s education, this fund should appeal to a wide audience.
Finally, the name is clever. Fundisa means “to teach”, but as the logo turns the “I” into a pencil, it also reads Fund SA. As a campaign to encourage savings in South Africa for tertiary education, this is an excellent start.