Many commentators have attributed a spike in government employee resignations just before retirement to the recent changes to how provident funds will be treated on retirement. The changes, in fact, have no effect on Government Employees’ Pension Fund (GEPF) members and are not the reason for the resignations, which are driven largely by changes in the way the fund has been valued after April 2012, combined with opportunistic behaviour by unscrupulous financial advisers.
To put the GEPF into context, it is important to understand that the fund is unlike any other pension fund in the country. Despite being the largest pension fund in South Africa, it is not governed by the Pensions Fund Act and any changes to it have to go through Parliament as a separate bill. Secondly, it is a defined benefit fund, not a defined contribution fund.
Most corporate retirement funds one reads about are what we call “defined contribution” – that means the amount you receive when you retire is based purely on how much you contributed and on the growth of that contribution.
A defined benefit fund is one where the level of the benefit a member receives on retirement is calculated by a formula based mainly on the member’s salary and years of service.
Until about 20 years ago, most corporate retirement funds were defined benefit funds, but companies became concerned about the investment risk they were carrying on behalf of their employees – they have to guarantee the retirement benefit irrespective of market conditions. By moving to defined contribution, the investment risk now sits with the employee.
The GEPF has continued as a defined benefit fund, which means that the market performance of the fund is irrelevant to the members who retire from the fund because their retirement benefits are guaranteed – irrespective of investment performance.
If, as has happened in the past, the fund underperforms, then government, albeit with taxpayers’ money, is required to make up the difference to meet the formula. Fortunately for taxpayers, the fund has performed in excess of the required level since 1995, which has allowed it to pay annual pension increases above the guaranteed level.