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

Fancy new car or a fabulous retirement?

Khwezi Jackson, investment consultant at 10X Investments, explains how buying a fancy new car could sabotage your retirement funding. Seeing a headline, ‘Spending R10,000 per month on a new car’, got me thinking: Why would anyone spend that much money every month to...

Video: The true cost of cashing in your pension

Do you know the true future cost of cashing in your pension? The long-term consequences are not reversible and will leave many financially destitute when it comes to retirement. This video, as part of a member education series for the Government Employees’ Pension...

Video: Make sure you receive your retirement benefits on time

As you enter retirement, one of your biggest risks is a delay between when you receive your final salary and the first payment from your pension. This video, as part of a member education series for the Government Employees’ Pension Fund (GEPF), explains what you need...

Video: Changes to provident funds

On 1 March 2021 the Taxation Laws Amendment Bill of 2020 came into effect. It contains changes that have a direct impact on the members of provident funds. These changes are part of a process to simplify the retirement fund industry and bring provident funds in line...

Don’t ignore your credit providers

The Credit Ombud wants to remind consumers that there are ways to ease the woes that come with being unemployed while having debt, and you shouldn’t just ignore your credit providers. If you’ve just lost your job or have had your salary reduced due to the Covid-19...

Supporting your retired parents

Many retirees have not saved enough to meet their financial needs, leaving children with the burden of supporting their retired parents. A retirement survey by Sanlam found that 51% of retirees cannot make ends meet, and one-third do not have enough money to cover...

The true cost of cashing in your pension

Have you heard of the term Sdudla? I recently came across it in relation to members of the GEPF, specifically members who are teachers and nurses. This is the practice of resigning from your post to access your pension fund. As teachers and nurses can work as...

Think before you plunder your retirement fund

Right now you may be feeling overwhelmed by debt, but the impact of drawing on your retirement fund will leave you financially destitute at a very vulnerable time in your life when you may be too old to work. You may not have many options in terms of earning an income...

Make sure you receive your retirement benefits on time

As you enter retirement, one of your biggest risks is that you could experience a delay between when you receive your final paycheque and the first payment from your pension. This is true in both the private and public sectors and managing this transition should form...

Video: GEPF: Who receives your pension benefits?

One of the questions I receive most often from retirement fund members is about who has a claim to their retirement funds if they die in service. This video, as part of a member education series for the Government Employees Pension Fund (GEPF), explains who is...

Pin It on Pinterest

Share This