Cash­ing

CityPress - - Tenders -

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.

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