ALLAN GREENBLO: Should some pension money be released sooner for urgent help?
Ways are being considered of making earlier withdrawals possible without hugely depleting the amount people will get when they retire
For many people in this Covid-afflicted environment, retirement funds have come to serve as the provider of last resort. This was never their purpose.
But when people lose their source of income and so cannot put food on the table at age 45, they can hardly be told to wait for retirement at age 65 before they can have access to their accumulated savings. More often than not their sole savings vehicle is the retirement funds they have been obligated by employers to join.
That’s just as well, because, in all probability, multiples of cash-strapped individuals would otherwise now have nothing to fall back on. On the other hand, the greater their immediate pre-retirement withdrawals the fewer funds await them at retirement. Either way, the paramount question for policymakers is whether fund members will be permitted to confront the crisis of affordability sooner rather than later.
It gets worse. The dire economy has forced numerous employers to reduce contributions to group risk and occupational funds or to abandon them entirely. On the employee side, and this is the more tragic when unemployment surges, the escape hatches into retirement savings are retrenchment or resignation.
Regarding the former, few people have much choice. As far as the latter is concerned, desperation dictates its own course of events. Paradoxically, it’s better to lose or leave a job – in order to obtain the retirement cash – than to starve. However, that’s to prioritise the short term over the long. It’s also to allow the cashing-in at the lowest point in the investment cycle, and to jettison the tax incentives designed to keep fund members in their retirement savings.
Is there a way to square the circle; in other words, to minimise the depletion of retirement funds and yet at the same time release a lifeline? At present there’s a loose proposal to allow the withdrawal of, say, 10%-15% from a member’s fund value without adverse tax consequences.
Given the smallish amounts in workers’ individual accounts, such a proportion might simply be insufficient to cut it for a reasonable period. Conversely, if you run it through large numbers of members, the liquidation of investments could provoke a self-defeating crack in already depressed markets.
A tighter proposal is from DA MP Dion George, who’s apparently trying to put his Unisa doctorate on retirement funds to good use. Knowing enough to realise that there cannot be a complete answer, he’s put out for public comment the draft of an enabling bill that will permit fund members to borrow against their fund values in the same way as in the case of home loans.
In this way, George argues, the money remains in the fund while the loan is repaid over extended periods as market conditions presumably improve. In this way tax penalties could be avoided and asset sales during a market low could be averted, while the possibility of loan repayments from dividends and capital appreciation is facilitated.
The draft bill proposes that a registered pension fund should be allowed to offer a guarantee to pension fund members at a maximum 75% share of their value in the fund. George explains: “By enabling a member to access a pension-backed loan, that member will be able to leverage his or her pension fund investment prior to retirement date without eroding provision for eventual retirement.”
Given that the loan is fully guaranteed, he envisages that lending institutions will be able to offer loans to pension fund members at competitive interest rates over extended or deferred repayment periods.
In theory, George’s proposal appears an extension of the Pension Funds Act principle that allows use of fund values to back housing loans. In practice, it’s more convoluted.
Application of the concept is limited to those who can afford repayments. If loans aren’t or can’t be repaid, constraints on affordability being what they are, widespread defaults can seriously affect funds generally. Loans for consumption are consumed, unlike loans for houses, which are for investment.
Also, the act and rules of respective funds will need to be amended. Fund trustees will then be hard-pressed to decide which loan applications are genuinely for life crises and which are for discretionary spend. Adding to trustees’ pressure is that loans for averting life crises require much more urgent processing than loans for housing.
Under such circumstances, it could be that banks are much better placed to administer loans than pension funds are. An executive at a large umbrella sponsor argues: “The role of funds should be purely to provide surety to the banks for these loans, as they are for pension-backed housing loans. Another reason to work via the banks is that they’re better equipped to prevent mass abuse, even fraud.”
An unnecessary complication is in the suggestion that the employer repays the loans by deductions from the employee’s salary. As long as there is a bank to provide the loan and a fund to provide the surety (not to settle any exit benefits until the bank gives clearance) it might be more efficient for the bank to work directly with individuals.
Much as regulators and institutions could be inclined to pooh-pooh a proposal that wasn’t initiated by them, and especially if it’s from within the DA, they cannot be seen as insensitive. There’s real hardship on the part of those desperate for money due to them later when they need it sooner.
The draft bill probably won’t be before parliament until early next year. There’s reasonable time to refine it, but not much time to delay it.
Interestingly, according to 2020 Sanlam benchmark research undertaken before Covid, there was little support for a measure “to enable fund credits not only for housing loans”. The finding made back then was in a different world.
- Allan Greenblo is editorial director of Today’s Trustee, a quarterly magazine mainly for principal officers and trustees of retirement funds
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