A pension plan is a scheme designed to provide for income post-retirement. It is a long-term investment which is expected to grow through interest and further contributions made, so that a member has a stable source of income at retirement.
These long-term investment plans may also come in the form of a retirement annuity or preservation fund. They can be either state managed or privately managed.
It is an asset that forms part of your personal estate. Most of these plans have maturity and surrender values. The former is the expected value as at the date of your retirement, whereas the latter is the value as at the date of cancellation of your policy.
Because it is an asset in your personal estate, it also has an attachment value for potential creditors that you may have. It can, for example, be used by enforcement authorities be attached in lieu of a maintenance obligation you may have if you have fallen into arrears.
This article, however, seeks to address the recent proposal introduced by COSATU (the Congress of South African Trade Unions) to alleviate the burden of Eskom’s debt as it applies to the South African Economy, which includes the use of pension interests.
COSATU introduced an elaborate and comprehensive debt recovery plan to Government which is being seriously considered. The plan was devised by COSATU to “save” Eskom in its insurmountable debt. The figures relating to the debt are allegedly in the R400-billions and the plan is to reduce this debt by at least R200 billion.
The proposal made by COSATU was proposed in November 2019 and received a lot of support from the political councils. The proposal, however, is not that will be favourably received by the Public. The proposal seeks to place the burden of saving Eskom’s indebtedness on the shoulders of workers, consumers, state enterprises, and the economy.
The proposal itself is a “special purpose finance vehicle involving a social compact between government, the Public Investment Corporation and development finance institutions.The problem with this is that part of this proposal is the use of public and private pension fund.
Herein lies the problem. The extent of Eskom’s debt is such that the plan is only able to alleviate 50% of Eskom’s indebtedness through this proposal. If this plan is being sought to alleviate 50% of Eskom’s indebtedness, it begs the question as to how they propose financing other over-indebted state-managed institutions (for example PRASA, RAF, and SAA). Is private funding going to be the recourse for bailing out all state-funded institutions, even those plagued by known corruption?
Until we know for certain, you should be aware that private financing options are being explored by Parliaments as a means to alleviate State debt. Pravin Gordhan has indicated his openness to taking this proposal quite seriously.
The numbers all add up; but for the COVID-19 crisis, it estimated to have been implemented by March 2020. Whether or not this plan will still prevail following a resolution of the COVID-19 pandemic, at least insofar as South Africa is concerned, is an unanswered question.
What I can tell you is that almost every pension fund scheme has experienced a loss, a sad side-effect of the COVID-19 pandemic on the South African economy. The Government Employees Pension Fund is included in this assessment. With the Stock Exchange having collapsed as well, it is difficult to estimate when this proposal will be best implemented. Both the private and public sectors have taken a severe knock.
Insofar as this is concerned, in the event that a large chunk is redacted from the member’s maturity value, I envisage a “give and take” scenario transpiring where the Government (in its enactment of the proposal) must provide the Member with a significant tax rebate on its monthly stipend pursuant to the Member retiring. There are drawbacks to not allowing this i.e. the potential for people to work beyond retirement to the detriment of their overall health simply because they now do not have sufficient capital to survive retirement, or even the risk of having to apply for a pension grant themselves. It could potentially turn into a vicious circle if this plan does not see a derivative benefit to the Members (both private and public).
This is a complete conundrum. A living annuity takes the Member’s pension / preservation / provident / retirement annuity funds and places them into an insurance scheme which then pays a monthly stipend to the member until his or her death. A living annuity does not form part of the Member’s separate estate as the risk falls upon the insurance company. It is unknown whether or not the Government will place an obligation on all pension schemes to first redact a portion of the Member’s funds before being able to determine the amount payable to the insurance scheme, or if this be skipped entirely.
If you are a young person who has not yet started investing for your retirement, as it is highly conceivable that this proposal will be enacted by Parliament (albeit the specifics are unknown), I suggest alternative means of investment. Speak to a senior financial advisor to provide you with other avenues within which you could provide for your long-term investments; investment options which allow you to maximise your enjoyment of the benefits at the time that it matters: your retirement.
If you already have a pension / preservation / provident / retirement annuity interest, withdrawing this benefit may attract a tax liability of approximately 38% for bulk withdrawals. If you are prepared to absorb that loss, I suggest first exploring alternative investment options. It is better to have a backup plan until we know more about the Government’s plan to cushion the blow on the pockets of its private and public pension funds holders – if there is a plan to “give” or if it is a plan only to “take”.
If you are close to retirement, I would suggest speaking with your broker about the possibility of applying your benefits to a Living Annuity. The returns would be higher if, at the time the Government decides to execute the proposal in the most liberal manner, all of your Funds are immediately applied to your insurance policy, with the possibility that it will be free from deduction.
A further update on this topic will follow once more information is available. My opinion is subject to change and will be reviewed as the topic progresses.
Aleisha Oliver
Senior Attorney
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