In pen­sions

If you are a govern­ment worker, you need to be wary of ad­vis­ers who rec­om­mend re­sign­ing to ac­cess your pen­sion be­fore re­tire­ment, writes

CityPress - - Tenders -

From April 2012, a new cal­cu­la­tion was used that took into con­sid­er­a­tion the un­der­ly­ing share of the mem­ber in the to­tal value of the fund.

This ap­plies “float­ing fac­tors”, which take into con­sid­er­a­tion cer­tain vari­ables or as­sump­tions within the fund, such as the ex­pected re­turns and in­fla­tion in the long term (eco­nomic fac­tors) and the rate at which mem­bers exit the fund – through death, dis­abil­ity or re­tire­ment (de­mo­graphic fac­tors).

The out­come was that fund ben­e­fits for the ma­jor­ity of mem­bers im­proved by up to 300% overnight. Sud­denly, mem­bers re­ceived a state­ment show­ing that their pen­sion, if taken on res­ig­na­tion, had tre­bled.

This be­came very tempt­ing for mem­bers to ac­cess and has led to un­scrupu­lous ad­vis­ers us­ing this as an op­por­tu­nity to en­cour­age em­ploy­ees to re­sign the day be­fore re­tire­ment so that they could ac­cess their pen­sion as a lump sum rather than wait for re­tire­ment, when they would re­ceive a lump sum equiv­a­lent to a third of their pen­sion plus a monthly in­come for life, which would in­crease with in­fla­tion.

“The mem­bers are then en­cour­aged to in­vest the money with the ad­vis­ers in in­vest­ment ve­hi­cles that at­tract a hand­some fee for such ad­vis­ers,” says Abel Sit­hole, prin­ci­pal ex­ec­u­tive of­fi­cer of the GEPF.

In other cases, the mem­bers use the money to start a busi­ness that of­ten fails, leav­ing them with no money in re­tire­ment. In the worst-case sce­nario, ad­vis­ers would con­vince the mem­bers to in­vest in pyra­mid schemes.

Sit­hole ex­plains that the sit­u­a­tion has been ex­ac­er­bated re­cently as the mar­ket per­for­mance has neg­a­tively af­fected mem­bers’ ben­e­fits on res­ig­na­tion. Re­mem­ber, GEPF mem­bers are not used to the fluc­tu­a­tions of mar­ket-re­lated re­turns be­cause, un­til 2012, they al­ways re­ceived a fixed for­mula that in­creased with years of ser­vice and earn­ings.

Since 2012, the mar­ket and there­fore the GEPF in­vest­ments have in­creased, but last year mem­bers saw their ben­e­fit es­ti­mates fall, mostly due to a down­ward re­vi­sion in ex­pected long-term mar­ket con­di­tions, which are ex­pected to be weaker.

“The tem­po­rary re­duc­tion in the float­ing fac­tors re­duces the over­all size of the fund – in other words, the to­tal size of the fund. Mem­bers’ in­di­vid­ual ben­e­fits, be­ing a share of the fund, are also re­duced,” ex­plains Sit­hole.

This gave ad­vis­ers fur­ther lev­er­age to con­vince mem­bers to re­sign, even though the weaker mar­ket per­for­mance only af­fects their res­ig­na­tion ben­e­fit and not their re­tire­ment ben­e­fit, which is guar­an­teed.

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