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