/ 11 October 2020

Beware the pension fund loan proposal

Dion George
Enabling: Amendments to the Pension Fund Act proposed by Dion George would give members another option of how to manage their finances in times of crisis. The Act allows the use of savings, but only for immovable property. Photo: ER Lombard/Gallo Images

A private member’s Bill proposed by Democratic Alliance MP Dion George would amend the Pension Fund Act to enable fund holders to get a percentage of their pension fund before they retire as a guarantee for a loan.

But experts in the industry say the proposal could spell doom for fund holders who choose to get the funds, because they will be required to spend more paying off the debt rather than saving for retirement.

The Act allows fund holders to use a portion of their savings as a guarantee for a loan, but it is restricted to loans related to immovable property. 

In an explanatory memorandum, George said the proposed amendment would ease restrictions to allow members to access up to 75% of their funds to alleviate financial strain “during the Covid-19 emergency or any other emergency similar”.

But, according to Mica Townsend, the business development manager at 10X Investments, many South Africans are already reaching retirement age with insufficient savings and, should the Private Member’s Bill become law, even more people could find themselves at risk. 

According to the 10X retirement reality report released last year, only 6% of South Africans had enough savings to retire comfortably. One of the key issues highlighted in the report shows that consumers are facing mounting pressure and that is preventing them from being able to save enough to see them through retirement. 

“The danger is that this amendment would give retirement savers another way to prioritise today’s needs at the expense of their much older — and likely more vulnerable — selves,” Townsend said. 

In addition, many people choose to cash in their savings when they leave their jobs, and the loans would have to be settled. If people are given another way [through the Bill] to get their funds, it will probably “make this phenomenon even worse, because you will now have more people accessing their savings earlier rather than being incentivised to keep it untouched until they reach retirement,” Townsend said. 

Michael Prinsloo, the head of products at Alexander Forbes, said the wording in the Bill — “emergency similar to Covid-19” — was too broad and could be exploited. Fund holders could use retirement savings for consumption purposes or debt repayment instead of in an investment. 

Giving credit through pension-backed loans to “individuals who are unable to repay their debts any other way” would amount to reckless lending, he said. 

No study has been undertaken to show that the benefits proposed by the Private Member’s Bill would be worth the costs that will be incurred. 

Prinsloo said that to judge whether the pension-backed loans could be fair, various conditions would have to be met, including analysing the number of people who could benefit and ensuring fund holders would be able to repay the loans. 

In addition, administrators of the funds would have to assess whether the loans would be the best possible solution to get credit in a time of crisis. 

“We don’t know what those [pension-backed] loans could look like to judge whether or not they could be fair,” he said. 

People should save enough to receive a substantial post-retirement income of about 75% a year of their final annual salary if they are to maintain their standard of living during retirement, said Anne-Marie D’Alton, the chief executive officer Council of Retirement Funds for South Africa. 

If these savings are tampered with during the period of employment, it could reduce the amount of savings at the time of retirement. 

“Using retirement savings as a ‘piggy bank’ should be carefully considered in addressing the need for emergency funding and potential hardships during old age,” she said.

Covid-19 has battered the economy, leaving millions of South Africans either unemployed or with significantly reduced incomes. Data from the National Credit Regulator released this week showed that lenders rejected 67% of applications received during the second quarter of 2020. This is the highest number of rejections recorded by the regulator.

The period also coincided with the implementation of the hard lockdown, which prevented consumers from shopping for higher-end goods. 

The hard lockdown also showed the country’s workforce decreased by 2.2-million, according to the latest unemployment figures from Statistics South Africa. 

George said the amendments would alleviate the financial strain on households. The pandemic presented a unique opportunity to “do things differently” and that included how people received credit. At the heart of his proposal, he said, was choice and opportunity. 

“This is not a silver bullet to solve every personal financial crisis. It is enabling legislation that would give members the option to decide how best to navigate their financial futures,” he said. 

The Bill is out for public comment until 17 October. 

Thando Maeko is an Adamela Trust business reporter at the M&G