You are Here > Home > My Debt > Treasury says “no” to pension loan proposal

Treasury says “no” to pension loan proposal

May 27, 2021

Treasury says “no” to pension loan proposal National Treasury has made it clear that it does not support any calls to allow members to borrow money from their pension funds.

This was in response to a Private Member’s Bill to amend the Pension Funds Act. This Bill was put forward by DA MP Dr Dion George as a proposal to help alleviate financial pressure during an emergency, such as the coronavirus pandemic.

George explained that the bill was not meant to be a silver bullet.

“This is not a proposal aimed at someone who is over-indebted and could not afford to repay a loan. This is for a member of a fund who is not overindebted but is facing a financial crunch due to the pandemic. For example, they may have family who have lost their job. A pension-backed loan means that they could possibly get a loan at a better interest rate.”

George added that this is a similar principle already allowed for in the Pension Funds Act which enables members to use their funds for pension-backed mortgages.

However, it is left up to the each individual retirement fund to decide whether to provide pension-backed home loans.

George’s proposal received support from Cosatu, but it was widely criticised by the retirement industry which argued that it would have a negative impact on retirement outcomes.

Mica Townsend, Business Development Manager and Employee Benefits Consultant at 10X Investments argued that using retirement funds as collateral for a loan is not feasible.

“Realistically, members who are experiencing such financial pressure could not afford the loan repayments, which means that even if a loan were (recklessly) granted, such a loan – or rather the guarantee – would be recalled quite quickly by the lender.”

Admin burden for retirement funds

In terms of the logistics of providing for such a loan, Townsend pointed out that if someone chose to cash in their retirement fund when leaving their job, it would mean that the loan would have to be settled.

“This, in essence, would then be little more than a roundabout and expensive way to access pension benefits early, by way of an early withdrawal. Early withdrawals are subject to withdrawal lump-sum tax, further eroding the pension benefit,” said Townsend.

In addition, there would be a burden, both in terms of cost and complexity, to the retirement funds, which are not set up to administer such guarantees.

“Even if it were simple to monitor that people were accessing these loans only as a last resort, it would cause a greater administration burden, potentially causing an increase in costs to the fund and, therefore, the members themselves,” said Townsend.

Treasury has supported these arguments and in its submission to the Standing Committee on Finance argued that members are already over-indebted and that “incurring further debt could have a significant impact upon members’ financial security over the long-term, including into their retirement years,” adding that if a member defaulted, it would substantially erode their retirement savings.

Treasury added that providing loans would also have a significant impact on the liquidity of the funds as those funds could not be invested for long-term growth, which would reduce the growth of the entire fund.

It stated that “providing guarantees for loans would create potentially substantial contingent liabilities for pension funds. If a guarantee is called upon, a pension fund would need to make a rapid sale of assets.”

Treasury did, however, confirm that it is engaged in creating a more comprehensive bill which will include limited withdrawals along with preservation, as well as auto-enrolment and other reforms regarding the lowering of costs and improving governance.

This bill would only be introduced after agreement with the National Economic Development and Labour Council (Nedlac).

This article first appeared in City Press.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Maya Fisher-French author of Money Questions Answered

Previous Articles

Should I use my retirement lump sum to settle my debt?

A question that I often receive is whether it's a good idea to use one's lump sum on retirement to pay off short-term debts, such as car debt or one's credit card. For example, Ntombise recently wrote to me: “I have just retired from work and expect a lump sum...

Immediate access to retirement funds unlikely

Retirement reform paper calls for comment but no move on immediate access. Retirement fund members hoping to access their retirement funds for urgent financial relief will be disappointed by the retirement reform paper issued by National Treasury last month. In the...

The 2022 survival budget

As if the last two years were not tough enough, there is no silver lining awaiting us in 2022. In 2021 we absorbed further fuel-price increases, a 15% hike in electricity costs, and an interest-rate increase of 25 basis points – and this is only the start. It is...

How ‘bad timing’ affects retirees’ income

Retirees need to work with their financial advisers to carefully determine the structure, size, and affordability of their future pension withdrawals, particularly in a volatile market environment, says Jean-Pierre Matthews, product head at Matrix Fund Managers. When...

Video: Plan for retirement

Retirement is something we can plan for ‒ and the better our planning, the more we get to enjoy our retirement years. In this video, I am joined by Guy Chennells, Head of Product at Discovery Employee Benefits, who will give us some tips around what you need to be...

Pay off my bond or invest?

Stephen Katzenellenbogen and Brendon Wright of NFB Private Wealth Management address a common dilemma faced by many: should I put all of my spare cash into my bond, or invest it instead? Many people are working towards the goal of being free of all debt, including...

Retirement diversification in action

Rocco Carr, Business Development Manager at Glacier by Sanlam, explains how we should be thinking about different layers when it comes to retirement diversification. What does diversification mean? The dictionary meaning of diversification comes down to the process of...

What happens to your GEPF pension after five years?

As a financial journalist I often come across misinformation spread by unscrupulous financial advisers when it comes to the Government Employees Pension Fund. Most of these untruths relate to members’ funds at retirement, as the financial advisers are hoping for the...

Listen: Advance payments on your car finance

We did this podcast a year ago, about paying off your vehicle and home loan sooner – but I thought it was worth sharing again, as Absa has now released updates on its banking app for car finance. Absa car finance customers can use the app to pay in additional funds to...

Beware bad advice at retirement

Many members of the GEPF are being given bad advice by financial advisers, who are telling them that they should resign from the GEPF before retirement. Members of the Government Employees Pension Fund (GEPF) are being approached by financial advisers and being...

Pin It on Pinterest

Share This