Children of GEPF members are the biggest winners in the improvement to benefits.
One of the more frequent questions we receive from members of the Government Employee Pension Fund (GEPF) relates to the treatment of their pension fund on divorce. This issue has been addressed as part of a review of the GEPF benefits along with other important benefit changes, including when a child qualifies for their parent’s pension.
Of the eight changes that have been communicated to members, three came into effect on 1 October 2017, while the remaining five require a change to the law and are still undergoing parliamentary process. “Those changes that only required a rule change by trustees have already been finalised, however those that require changes to the GEP Law have been submitted to parliament and will hopefully be finalised early next year,” explains GEPF Principal Officer Abel Sithole.
It is important for members of any retirement scheme to know their benefits, especially when it comes to financial dependents, as this will have an impact on estate planning. This is what GEPF members need to know:
Children to receive a higher pension (awaiting parliamentary approval)
This is the most significant change for members as it represents a major benefit increase for their children. The resolution before parliament is to change the Orphan’s pension fund to a Child’s pension fund and to extend the age until which the child receives the benefit from 18 years old to 22 years old, irrespective of whether or not the child is still studying.
“This is a significant improvement in benefits,” says Sithole who explains that currently the law requires that the child has to prove that both parents are deceased before they can receive the benefit. In many cases, especially with single mothers, the child does not have any contact or financial support from the other parent, yet the current ‘orphan’ rule prevents them from receiving the benefit to which they are entitled. Once parliament approves the changes, a child will benefit from their parent’s pension fund irrespective of whether there is another parent in their lives.
The amount of money received by the child has been increased from 10% to a maximum of 25% of the member’s pension benefit, but this is reduced proportionately depending on the number of children eligible and whether there is a spousal pension.
For example, if a member dies, leaving a spouse and two children, under the current rules the spouse would receive 50% of the pension and the children would receive 10% each of the member’s pension (20% in total). Under the new rules each child would be entitled to 25% of the member’s pension (50% in total). However, if there are three children they would each receive 16.67% of the pension (50% in total).
In the case where there is no spouse and therefore no spousal pension, the children would each receive 25% unless there are more than four children. If there are more than four children the pension would be divided equally between them – for example five children aged 22 or younger would each receive 20% of the member’s pension. If there are more than ten children, each child would still receive a minimum benefit of 10%.
No more pension ‘debt’ on divorce (awaiting parliamentary approval)
The clean break principle applies where a divorce agreement allows for the non-member spouse to receive a portion of the member’s pension fund. Currently the way the pension withdrawal is calculated uses the concept of debt and interest in the apportionment of pension benefits on divorce. This means that members effectively have a “debt” owing on their pension fund. The resolution before parliament is to amend the GEPF law and adjust the member’s service following payment of a divorce settlement by the fund. For example, if you have 18 years of service and the divorce settlement entitles the non-member spouse to 50% of the pension fund interest, then the years of service would be reduced to nine years in terms of benefit calculations. If a member chooses, they can select to buy back those years of service by either paying in immediately or increasing their monthly contributions. “It is important that members understand that the GEPF does not determine the sharing of the benefit. That is part of the divorce agreement and the GEPF is only acting on the court order,” says Sithole.
Improvement in funeral benefits (immediate)
As from 1 October 2017, funeral benefits for members and their spouses increase from R7 500 to R15 000. Funeral benefits for eligible children and stillborn increases from R3 000 to R6 000.
Voluntary fund to boost retirement savings (awaiting parliamentary approval)
For members who are worried about a shortfall in their retirement funding, the GEPF has passed a resolution that will allow members to increase their retirement contributions while in active employment and allow members who have a fixed contract of 36 months or more, and who are not currently members of GEPF, an option to make provision for retirement.
Currently most GEPF members have a total contribution of 20.5% of salary (7.5% by member and 13% by government). The maximum one can pay into a retirement fund and receive a tax deduction is 27.5% of salary (capped at R350 000 per annum), so this change will allow members to contribute additional tax-free funds if they choose to.
“For members who feel that they want to put more money away for retirement, they can do so through the GEPF which is the most cost-effective fund in South Africa,” says Sithole who adds that the details of the additional contribution scheme still need to be finalised as it would not form part of the defined benefits fund and would be treated purely on investment returns.
Establish a preservation vehicle (awaiting parliamentary approval)
The GEPF plans to form a preservation fund so that members changing jobs can leave their retirement funds within the scheme and benefit from economies of scale in respect of administration and investment costs. This is a voluntary option and not compulsory.
Young spouses will not be cross-subsidised (awaiting parliamentary approval)
The GEPF provides an automatic spousal pension of 50% of the member’s pension, however, if a member chooses, on retirement they can sacrifice 3.5% of their monthly income to boost the spousal pension to 75%. The problem arises when the spouse is much younger than the member. Sithole says they have a case where they have been paying a spousal pension for 40 years as the spouse was 30 years younger than the member. Irrespective of age, the spouse will still receive the 50% spousal pension, but where a member wishes to boost the spousal pension to 75%, the gender and age of the spouse will be taken into consideration when calculating the cost.
Discharge benefit (immediate)
The GEPF has changed the rules to remove the anomaly between the resignation benefit and the discharge benefit for members with less than 10 years’ service. Normally on retirement the GEPF pays one-third lump sum and provides an income to the pensioner with the remaining two-thirds. However, members retiring with less than 10 years of service receive the full lump sum on retirement. The anomaly between the member’s contribution and the actuarial interest meant that a member who resigned within 10 years received more money than if they retired within 10 years of joining the GEPF. As from 1 October this anomaly has been removed and a retiree with less than 10 years of service will receive the same amount of money as they would if they resigned. As the tax tables are far more favourable for a retirement than a resignation, it makes sense for the employee to select the retirement option.
Market value adjustment (immediate)
This change is largely technical and only relates to a situation where the GEPF is underfunded which is not the case at the moment. Market value adjustment meant that the benefit of a member who transfers to another retirement fund many be lower than the benefit payable if the same member was to resign and cash in. As this goes against the principle of retirement funding, the GEPF amended its rules from 1 October so that market value adjustment will not be applied. This means the member transferring to another fund will receive the same amount as if they cashed in the funds (before tax).
However, if there is a large transfer of members – for example if an entire department transfers to another scheme, then the market value adjustment would apply to protect the fund from paying full benefits to those leaving the scheme at the cost of those staying behind.
This article first appeared in City Press.