Debt, false rumours fuel pension cash-in

Over-indebtedness appears to be a key feature behind the mass resignations of public servants. (Gallo)

Over-indebtedness appears to be a key feature behind the mass resignations of public servants. (Gallo)

Over-indebtedness appears to be a key feature behind the mass resignations of public servants, following false rumours of tax-related retirement reforms.

Unconfirmed figures suggest that by the end of March this year almost 27 000 civil servants resigned, and only about 1 500 transferred their pension payouts to registered funds, suggesting the rest cashed in their savings.

But the treasury said this week that 27 000 resignations out of a total of 1.2-million public servants was routine every year.

“These resignations are normal and cannot in any way be attributed as a response to retirement reform,” said Ismail Momoniat, the deputy director general of tax and financial sector policy in the treasury.

But he did say the treasury was getting figures from the government pensions administration agency.

The implementation of the tax-related retirement reforms, which reportedly sparked the scare, were postponed by a year in October to allow further discussion in the National Economic Development and Labour Council.

The changes, laid out in the Taxation Laws Amendment Act of 2013, were meant to come into effect on March 1 next year. They are, in part, aimed at aligning the tax treatment of provident funds with pension and retirement annuity funds and allow provident fund members to receive the same tax benefits granted to retirement annuity fund members.

They are also aimed to provide regular income for provident fund members on retirement through the “annuitisation” of pension benefits rather than lump sum pay-outs, which are quickly spent and leave pensioners stranded.

The new laws would not have affected provident fund members over the age of 55 and whose savings had been accumulated before the implementation date of March 1 2015, according to the treasury.

The new laws would only have applied to members younger than 55 and to the savings they accumulated after that date, requiring that a portion of their savings be “annuitised”, instead of their retirement benefits being paid out in a lump sum.

Furthermore, the new laws would not have prevented employees from receiving their pensions as cash payouts if they resigned or lost their jobs. And they would not have applied to members of the government employee pension fund, which does not allow benefits to be paid out as a lump sum on retirement.

Rumours began circulating that the government planned to nationalise workers’ pensions and stop all lump sum payouts, closing off what many individuals may have seen as a way to pay off their debts.

Alarm over the resignations, objections from labour over a lack of consultation and the need for greater clarity on a comprehensive social security system prompted the government to delay the reforms.

The matter is also believed to have affected the private sector.
Two large pension fund administrators raised the issue with the trade federation Cosatu, according to its retirement funds co-ordinator, Jan Mahlangu.

Cosatu believed the retirement reform could not be done in a “piecemeal approach”, and the question of retirement preservation could not take place without more clarity on a comprehensive social security system.

He said the federation was concerned about the effect of resignations on workers, because they would be left with little in their old age.  The treasury believed over-indebtedness, particularly among civil servants, provided fertile ground for rumours to take seed and possibly sparked untimely resignations.

“We strongly believe that over-indebtedness could arguably be the dominant reason based on public interactions, confessions and statistics,” Momoniat said, adding that household debt to disposable income was about 75%.

Easy access to retirement savings through resignation provided an easy means to pay off debt, he said.

But there were other possible causes, including the false perception that the government wanted to nationalise pension funds, he said.

In addition, it was clear that many “do not understand the rules of their retirements funds and seem not to be regularly informed about developments which could affect their funds”, Momoniat said.

It appeared that unscrupulous advisers and brokers were circulating the rumours, he said.

Delaying the reforms has come at a cost for the many employers who were preparing for the changes. Beatrie Gouws, the associate director of the advisory firm KPMG, said, besides the costs incurred by businesses to adapt their systems, the loss of momentum of the changes was a worry.

Employers had been informing their employees about retirement and the impetus had now been lost, Gouws said.

Momoniat said the government sympathised with those who had incurred costs. But the tax harmonisation law, which was only one of many reforms initiated, had only been postponed to 2016 and not repealed. Consensus was needed for retirement reforms and it was worth delaying if more buy-in could be achieved, he said.

This would also reduce the scope for mixed messages.

“The delay in implementation will also enable employers, government and unions to educate and extensively inform the public on the nature of these reforms,” he said.

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