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Is borrowing from our retirement savings a good idea?

South Africans are drowning in debt and it is hard to imagine that more debt is the solution to the structural economic issues we face.

The Pension Funds Amendment Bill aims to provide members of retirement funds the ability to use their retirement savings as security for a loan. The bill proposes that members be allowed to borrow up to 75% of their fund values, using their retirement savings as a guarantee of repayment. Current pension fund legislation only allows for retirement fund benefits to be applied for home loans.

The bill is being considered by Parliament and claims that:

“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 enabled 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.”Pension Funds Amendment Bill, B30-2020 

If the goal is to alleviate hardship in what must be some of the worst economic conditions many South Africans have ever experienced, it is worth looking into. The problem is, there is not much to look into. The full proposed amendment is simply:

  1. Section 19 of the Pension Funds Act, 1956, is hereby amended by the insertion after subsection (5B) of the following subsection: ‘‘(5BB) A registered fund may, if its rules so permit and subject to prudential standards, furnish a guarantee in favour of a person other than the fund in respect of a loan granted or to be granted by such other person to a member, which guarantees may not exceed 75% of that member’s share in the value of the fund’’.

That is it. No guidelines as to what loans may be applied for, no attempt at minimising the abuse from lenders that this could lead to when desperate individuals start to give up their rights to their retirement funds when applying for loans from the “wrong” lenders at the “wrong” terms.

With so few parameters, we have to wonder how this bill could even be up for consideration at all in light of the compulsory annuitisation of provident fund benefits that has just been implemented in March this year. It seems completely contradictory in an environment where the government is supposedly trying to encourage saving for retirement. Will it be taking with the one hand and giving with the other?

This matter is obviously very complex. On the one hand, you have a country on its knees, and this may bring relief to many people if they choose to use the loans responsibly. On the other, it has the potential to exacerbate the situation exponentially. Lenders now have no risk. They can grant loans to anyone with a fund value with a full guarantee that they will get repaid.

The bill quite cheekily states that it will have no financial implications for the state. I can almost guarantee that it will in no way help the state to reduce the number of people dependant on government grants after they leave the workplace at retirement age.

I am not convinced that the long-term impact on the fund member was considered either. Yes, in an ideal world having access to funds when you feel you most need them should improve your financial position but unfortunately, more debt is not the solution for most people. There will always be the minority of individuals that will only ever use this guarantee when there is truly no other option and there may even be many people out there who are extremely responsible with debt and settle it quite diligently. The problem is “many” is not the same as “most”.

There is a lot of pressure from the public to expedite the passing of the bill due to the financial impact of Covid-19. The truth is we were in trouble well before the pandemic hit!

Household debt to disposable income

We have to assume that the passing of this bill, will not improve the above picture. South Africans are drowning in debt and it is hard to imagine that more debt is the solution to the structural economic issues we face.

This bill is likely to disadvantage the people who can afford it the least. Perhaps the idea is that each fund’s trustees will be able to adapt the fund rules to provide more prudent use of the guarantees by governing their use, but in its current format, the proposed bill is just too vague.

Maybe that is because trying to regulate the various scenarios in which a member may borrow against their fund value is likely to open a whole new can of worms. There are too many questions:

  • Should there be set conditions for the loans that may qualify other than just the 75% (of fund value) limit?
  • Should qualifying lenders be limited to large banks?
  • Should there be a cap on the interest rate that the lender may charge?
  • Should members only be allowed to use the guarantee if they have more than a certain number of years until retirement?
  • Does the time to retirement even matter since nothing stops a member from leaving his employer a month after obtaining the loan?

These questions only scratch the surface. There is so much more to consider. Like with most things, it will be impossible to find a solution that will be optimal for everyone. To do that, you would have to somehow strike a balance between providing access to funds in a time of need, without impacting long term savings. You would have to set rules and regulations that are both fair to members and make it worthwhile for lenders.

We are not generally opposed to banks and reputable lenders making sensible and fair profits. Over-regulating could create a situation in which it is not worthwhile for lenders to even consider granting these loans in the first place. We are acutely aware of the hardship many South Africans are experiencing at the moment. If there is any way at all to alleviate some of it, we are all for it…we are unfortunately just not convinced that this amendment is the answer. At least not in its current format.

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Michael Haldane

Global & Local Investment Advisors

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COMMENTS   5

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Regarding the heading, one doesn’t lend FROM, one lends TO or borrows FROM.

Thank you so much for bringing this to our attention. We have updated the heading accordingly.

Thank you for bringing this to our attention. The mistake slipped through during the editorial process. We apologise for the error and have updated the headline accordingly.

The headline is grammatically incorrect. Where was the editor?

Thank you so much for bringing this to our attention. We have updated the heading accordingly.

End of comments.

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