EDITORIAL: The use of pension fund money as security for loans opens a can of worms
A legislative proposal to make this possible has the wellbeing of the poor in mind, but is misguided
Pensions are sacrosanct in providing security for one’s retirement years and should not be tampered with lightly. So careful consideration needs to be given to a legislative proposal by DA MP Dion George to allow members of pension funds to use their pensions as security for loans. It touches on a sensitive topic that is sure to arouse considerable debate.
The proposal in the form of a private member’s bill is well-intentioned and comes at a time when many are suffering financial distress as a result of the Covid-19 pandemic that has thrown many people out of work. They may well question the rationale for having an asset they cannot access and may even go to the desperate length of resigning from their jobs to get their hands on it. Many probably have done so already.
In terms of George’s proposal there will be no restriction on the purpose of the loan which will, however, be limited to 75% of the value of the pension fund. Pension fund trustees will decide if they want to offer loans and the loan limits, and it will be up to financial institutions to decide if they want to offer a loan.
The Pension Funds Act already allows pension funds to offer pension-backed home loans, though not all of them do, which leaves many people as permanent tenants when they could buy their own homes. But this is for the purpose of investment in a fixed asset that can be attached in the event of a loan default, rather than for consumption expenditure, which George’s bill would allow.
Banks are likely to be more lax about providing loans for just about anything if they had the security of a pension asset to fall back on in the event of default on repayment. The banking sector already suffers from bad debts, a situation that has worsened dramatically in 2020 during the pandemic. SA is a heavily indebted nation and it would seem reckless to open the window to more indebtedness.
This is one of the Treasury’s reservations about the proposal. Instead of loosening the reins, it would rather tighten them to prevent people cashing in their pensions when they leave their job preretirement.
According to the National Credit Regulator’s credit market report, the total outstanding gross consumer credit for the quarter ended June 2020 was R1.96-trillion, of which unsecured credit amounted to R221bn.
Linked to the overindebtedness is SA’s low savings rate, which is among the lowest in the world, amounting to about 15% of GDP in 2018 compared to a world average of 25.1%. So the level of personal savings for retirement is probably very low.
One could argue that the trade-off is between destitution now and destitution in retirement, but what draining off pensions means in the case of a loan default is that the pensionless in retirement will become dependent on state old-age pensions.
The state bears the cost of allowing people access to their pensions, and the financial burden of supporting them is passed on to future generations. This would go against the government’s stated commitment to fiscal consolidation. The Treasury is already budgeting to spend R274bn on state old-age pensions over the next three years.
Admittedly George is not proposing to make mandatory the use of pensions as security for loans. It would be up to pension fund trustees to decide whether to grant them or not, though whether they would want to play the role of loan adjudicators and bear the additional administrative burden is questionable. And as George himself concedes, expectations would be created that they do so.
George’s proposal is well-intentioned with the wellbeing of the poor top of mind, but it is misguided in the broader scheme of things. More will be said about it during public hearings on the bill held by parliament’s finance committee when the voice of the pension fund industry will be heard.
In any event, his proposal would be better considered within an overall reform of the pension regime, which is under discussion among the Treasury, industry and labour.
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