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Retirement funds as a guarantee for loans

Retirement funds as a guarantee for loans

The COVID-19 pandemic has forced many individuals to significantly adjust their lifestyles. The personal finances of most South Africans have been greatly impacted by job losses, salary cuts or no bonuses/increases, so much so that their livelihood have taken a significant knock, writes Kedibone Sono (CA)SA, SAICA Project Director: Members in Business Technical.

There are also concerns regarding government institutes who owe staff members their salaries as well as the unemployment rate rising to a staggering 32.6% in the first quarter of 2021, of which 46.3% is the official unemployment rate of youth (aged 15 to 34 years) who are meant to be the main participants in the economy.

South Africa has long been battling with its money habits, and it has been proven that we are not a nation that saves money, which will no doubt also cause a long-term financial burden on government when South Africans who do contribute to the economy reach retirement age. The National Treasury has also alluded to this in the introduction of policies such as the tax-free savings accounts (TFSA) whereby they are trying to entice citizens to save more for their retirement. One can contribute a tax-free amount of up to R36 000 annually, with a maximum of R500 000 in contributions over one’s lifetime into a TFSA through licensed financial institutions.

Looking at the new proposed Pension funds amendment bill, one just wonders if this is really a good idea and does not contradict and erase the efforts made by the abovementioned policy and others of similar nature. The Bill proposes that pension fund members should be able to utilise up to 75% of their pension fund savings as a guarantee or surety for loans. This would mean that pension fund members would be able to secure loans taken for covering any living expenses they may have, with the consequence being an abrupt slowdown in progress made thus far.

The Bill acknowledges the unfortunate impact the outbreak has had on an already crippling South African economy, which has led to many South Africans becoming financially destitute. The Bill thus seeks to amend the Act in order to allow pension fund members to obtain a loan, secured by a guarantee from a registered pension fund, to alleviate financial pressure during an emergency such as the COVID-19 pandemic or any other emergency with a similar financial impact. By enabling a member to access a pension-backed loan, that member will be able to leverage their pension fund investment prior to their retirement date, without eroding their provision for eventual retirement. Lending institutions will be able to offer loans to pension fund members at competitive interest rates and over-extended or deferred payment periods, given that the loan is fully guaranteed.

In a situation where all else is going according to plan – for example vaccination roll outs, lockdown restriction adherence, government’s economy recovery plan being implemented – this would easily be a great temporary measure to help alleviate the pressure caused by the pandemic. However, given the rising unemployment rate, delays in vaccination roll out and economic activity disruption caused by lockdown restrictions, this can result in more pressure on the government should there be large uptake by policyholders and loan defaults. This is also exacerbated by the consumer debt levels, which are already high as well as the ever-increasing life expectancy of South Africans, which has been on a steady increase since 2004. It will be interesting to see if the pandemic has had an impact on life expectancy as well, given the pressure it has had on the health system and how it has also worsened or heightened health issues.

The submissions made in May 2021 are being deliberated and considered by the portfolio committee, who are also working on a final proposal for parliamentary deliberation, which should take place in mid-August 2021.

 

 

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