As a financial journalist I am increasingly concerned about misinformation provided to members of the Government Employees’ Pension Fund (GEPF) by unscrupulous financial advisers.
A recent example is a reader who was told by an adviser that on retiring after 20 years of service, she would only receive five years’ annuity income in retirement. This is completely untrue.
Some advisers use fear tactics, telling members that their funds will be stolen or mismanaged by the government. Many GEPF members have been convinced by financial advisers to resign before retirement so that they can place their funds in a market-linked pension preservation fund.
What underlies these mistruths is the desire by these unscrupulous advisers to get their hands on members’ significant fund values on which they can earn commission, rather than providing sound financial advice.
What many members do not fully understand is that the GEPF is a “defined benefit” fund. This means the pension received by members has nothing to do with the investment performance of the fund. It relates purely to the number of years of service, your average salary in the last two years multiplied by the accrual rate. The accrual rate is defined under the law that governs the GEPF.
Market performance is irrelevant
Irrespective of the performance of the markets or individual investments within the GEPF, on retirement a member receives a guaranteed pension whether the fund value rose or fell in the years before retirement.
This is different to a “defined contribution” retirement fund or retirement annuity, where the final retirement value depends on market performance.
When the market crashed in 2020 due to COVID-19, members retiring from private funds may have seen a reduction in the value of their pensions of up to 40%. Those already in retirement, who were relying on an income from their living annuities, either had to opt for a lower income or watched their capital reduce significantly, which impacts future income.
Yet members of the GEPF who were retiring in 2020 where unaffected. Their pension is determined by years of service and salary – not market performance. Those GEPF members already in retirement are still receiving their guaranteed income for life.
There are many advantages to belonging to a defined benefit fund, and you need to know what you are losing by switching out.
It is important to note that while private pensions may provide these benefits, they come at an additional cost. If you wish to include life cover, a spousal pension, or funeral cover, a portion of your contribution goes to paying these premiums. With the GEPF, your full employee contribution goes directly to retirement funding, not these additional benefits.
In terms of the income in retirement, for a member with more than ten years of service, the GEPF provides a guaranteed income for life with a 50% pension for a spouse, should the main member pass away first. There is no additional cost for providing the spousal pension unless the member wishes to increase it to 75%.
As the GEPF does not have to pay retail prices for annuities, it is able to get better value than if the member had to purchase an annuity with a resignation benefit.
The first five years of the annuity are guaranteed, which means if the member passes away within the first five years, the nominated beneficiaries will receive the balance of the annuity payments up to the end of the five-year period as lump sum.
The GEPF guarantees an annual pension increase each year at 75% of inflation. Historically it has paid an annual increase in line with or slightly higher than inflation. Due to 2020’s market turmoil, next year’s increase may be lower, but it cannot go below the 75% of inflation guaranteed, even if market performance is weak.
If a member passes away before retirement with ten or more years of service, the spouse would receive a once-off lump sum (death-in-service gratuity) as well as a monthly pension equal to 50% of the annuity the member would have received had the member retired on their date of death. This is a lifelong pension and does not stop if the spouse remarries.
If the member has less than ten years’ service, the value of the pension fund will be paid out to beneficiaries, of which the spouse is entitled to 50%.
If the spouse was a dependant on the medical aid, the spouse is entitled to a medical benefit.
A child is entitled to a child’s pension up to the age of 22, which could be extended if the child is studying or disabled. A child is entitled to a maximum of 25% of the benefit depending on the number of children. If there is a spouse, the remaining 50% would be divided by the number of children. If there is one child, that child would receive 25%. If there are three children, each child receives 16.67%. In the case where there is no spouse, each child receives a maximum of 25% unless there are more than four children.
Members and spouses have a funeral benefit of R15 000, while children have a funeral benefit of R6000.
Leaving a legacy and securing your income
Most parents dream of leaving a legacy for their children and hope they can do this with their retirement fund. The reality is that most of us have insufficient retirement benefits to meet our own income needs for our retirement, considering we are likely to live at least 20 years post-retirement.
If, however, you have enough income from your GEPF pension to meet your needs, then you could consider using the gratuity lump sum, which is also available as part of your retirement package, for your children.
You could invest this amount and if you do not require it for your income needs, you can leave it to your beneficiaries. For example, if you received R500 000 as your gratuity benefit and invested it for 20 years with an average return of 5% above inflation, it would be worth R1.3 million in today’s value.
GEPF in numbers
In the last financial year, ending March 2020, the GEPF paid out the following benefits:
- 9bn paid in gratuities
- 2bn in annuity income
- 2bn resignation benefits paid to 22 678 members
- R6bn paid in death benefits
- 8m funeral benefits paid for 21 274 claims
- 9 million paid in orphan’s annuities
This article was sponsored by the GEPF.