Alarmed by the possibility that the PIC, which invests their retirement money, may be plundered,  many government employees, such as teachers,  are considering whether to resign from the government's pension fund. Picture:  Rogan Ward
Alarmed by the possibility that the PIC, which invests their retirement money, may be plundered, many government employees, such as teachers, are considering whether to resign from the government's pension fund. Picture: Rogan Ward

Jittery members of the Government Employees Pension Fund are considering resigning from it to get hold of their retirement savings for fear the Public Investment Corporation falls victim to state capture - even though resigning would result in them having to forfeit certain benefits.

The PIC manages the state pension fund, which has assets of more than R1.6-trillion. It has about 1.2million active members and more than 406000 pensioner members and beneficiaries.

Financial advisers said this week the problem was weighing heavily on the minds of members of the GEPF and advisers.

Craig Gradidge, a certified financial planner and director of Gradidge-Mahura Investments, says that the best advice for some retiring GEPF members used to be that they remain in the fund and take the pension on offer, because "it was very difficult for industry products to beat". But it's near impossible to give that advice now, because members want to avoid anything related to the PIC.

"We read the same news as they do and understand their fears. While there are fund rules and legislation governing the running of the fund, there is an increasing distrust that these will be enforced ... As one GEPF member recently put it to me, 'Thieves are not known for obeying rules and regulations,' and it's difficult to argue against those sentiments. We do fear that this can leave people in a desperate position years from now, but the usual refrain is that they could find themselves in an even more desperate situation by remaining in the fund."

Gradidge says that two years ago he would have discouraged people from taking early retirement, given the potentially devastating impact on a retirement plan. "Now we cannot say, hand on heart, that they should leave their funds there. All we can do is assist them to avoid making other bad decisions which could compound their position."

Debated topic

Magdeleen Cornelissen, a financial adviser at PSG Wealth Menlyn, describes the challenge facing GEPF members as "one of the most debated topics in our industry".

Whether you decide to retire in the fund or resign from it to provide for your future, there are risks and benefits to both options, and these will impact the rest of your life.

Rumours surrounding the GEPF stir up fear and uncertainty at the very time when people reaching retirement need certainty about their future income, says Cornelissen.

Tracy Jensen, the chief operating officer at 10X Investments, says the GEPF is traditionally a hotbed of rumours: "The underlying theme is always the same: that members are at risk of losing their benefits, or will be disadvantaged by some or other change in law." But, she says "there is no real cause for concern for GEPF members".

10X's view is that the PIC is potentially vulnerable to influence from the government, but for that to succeed, the PIC board would have to be captured and veiled in secrecy, which is unlikely, she says.

"Fresh from the retirement reform process, the government is acutely aware of the risk of a public backlash on attempts to interfere with pensions and payouts. The government will not risk this, especially not ahead of elections. If the PIC board is watchful and acts in the interests of its clients, there should be no cause for concern."

1.2 million

The number of active members of the Government Employees Pension Fund

Unlike private pension funds in South Africa, the GEPF is governed by the Government Employees Pension Fund Law and not the Pension Funds Act. However, the imminent introduction of a market conduct regulator is expected to enhance the protection of all members of retirement funds.

While the law gives the board of trustees say over the fund's investment policy, this is subject to consultation with the finance minister, Jensen says. "With a 50% representation, employee representatives on the board are, on paper, in a strong position to influence board decisions."

However, the GEPF rules mandate that decisions require a majority of votes, so if the employer representatives oppose a change in investment manager, it would not be possible, she says.

When the Treasury told the National Assembly in May that it was considering the PIC as a possible equity partner to recapitalise SAA, the fund assured members and pensioners that their money was safe and urged them not to panic over "speculation".

The fund had not received any such proposal, nor had it been party to discussions on the use of GEPF assets to rescue SAA, according to a note issued by the fund.

Jensen says GEPF members who resign before they retire stand to lose some benefits, most importantly a guaranteed pension for life - because the fund is a defined benefit fund - as well as lifelong medical benefits, in exchange for a lump sum.

Cornelissen says that before you decide to retire early, you must consult an accredited financial adviser to discuss your options. Failing to take account of all factors can have negative results, she says. Such factors include your choice of annuity - a guaranteed annuity or a living annuity - and costs.

Cornelissen says that although a living annuity enables you to control your investment capital, it's crucial to remember that you take the investment risk and it cannot be guaranteed that the income will last for your life.

"Great care must be taken to ensure that the long-term growth of the capital invested in the living annuity exceeds the income withdrawal rate and that you are comfortable with the fee structure. You need to have a clear understanding of the construction of the living annuity and the risks associated with the underlying assets."

Risk

Gradidge says using a certified financial adviser will reduce the probability of bad advice or finding yourself caught up in a scam.

Many GEPF members are being told to disinvest completely from retirement products and take their funds offshore, he says. "This is scaremongering and bad advice. We think members could be well served within other retirement products. Members are being lured into scams and expensive products which will place a further dent in their retirement provisioning. So it is important that in their haste to exit the GEPF they do not take bad advice and they must be wary of unscrupulous brokers and scams," he says.

GEPF members who resign and opt to invest in a private fund will pay higher charges. Retirement annuities and preservation funds in the private sector are unlikely to have lower charges than the GEPF, because it has the benefit of economies of scale.

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