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Addressing retirement fund member needs? Consider TFSAs

We cannot possibly believe that retirement is the only important financial consideration in every member’s life.

Employers providing retirement fund arrangements for their employees may not necessarily always be adding the real value they believe they are to members. Yes, a retirement fund arrangement is surely the most tax-efficient way of saving over the long term and it may be said that the employer is being “socially-responsible” in offering a retirement fund arrangement, there are also usually other associated benefits like group risk insurance. However, South African members, not unlike many others across the globe, are in desperate need of a means to save significantly towards their more “immediate” needs over the short and medium term.

Under no circumstances, should the above be construed as me advocating that a group retirement arrangement (whether a pension, provident or retirement annuity fund) is not important or should be disregarded. However, just by looking at the Net Replacement Ratios (NRR) of many funds averaging 35%, it is clear that despite even the best intentions of many funds, they are not achieving a positive outcome at retirement for members. 

Why do we think this is?

Most young to middle-aged members are particularly vocal about the fact that they struggle to make ends meet on a daily basis, which is impacted (in their minds’ negatively) by the employer contribution (coming off their salaries anyway in a Total Cost to Company (TCTC) structure) and employee deductions to the fund. For the most part, members probably do appreciate the ability to save, but retirement is not an immediate requirement or need for them.

This is further exacerbated by something that most members don’t even know, that in a TCTC structure, the employer contribution is essentially the same thing as an employee deduction coming out of their “cash component”. Employers should consider the need for greater clarity on this when communicating on retirement fund savings matters. Prior to March 1 2016, there was a good reason for employer contributions to be structured into TCTC, but since then there isn’t.

Although the Pension Funds Act makes provision for some other form of financial assistance with pension-backed housing loans, not all funds offer this. Even so, this is not beneficial to most members given that the standard National Credit Act regulations apply and members require a reasonably large fund credit to be able to take advantage of this. Furthermore, those members that do have a loan of this nature in place often leave the fund prior to the full settlement of the loan and their retirement savings end up taking quite a severe knock as a result.

If it were even a possibility for South Africa at this stage, the best solution would be to consider the way in which other developed nations’ social security plans provide benefits to members. Consider, for example, the 401(k) plan in the US under which some plans allow loans to be taken for specific reasons such as:

  1. Purchasing a primary residence;
  2. Paying for education;
  3. Unforeseen or high medical expenses; and even
  4. Financial assistance in the case of severe financial hardship.

I believe that in South Africa, there is an even greater need for a similar form of financial assistance for needs such as housing, education and medical expenses. However, given that in South Africa, we have more than enough difficulty in implementing our proposed retirement reform programme as it is, an arrangement similar to the 401(k) plan is not something I believe we will see in South Africa anytime soon, to say the very least.

In the absence of the opportunity to be part of such an arrangement, employers could consider supplementing their employee benefits arrangements in addition to the provision of a retirement fund, with a group tax-free savings account (TFSA). Perhaps instead of motivating our members to increase their retirement fund contributions (if flexibility is offered), employers could assist employees to save for other (more immediate) needs through this type of arrangement on a group basis.

Much has been published since their introduction, about the features, advantages and disadvantages of participating in a TFSA, so I don’t believe it necessary to discuss each of these in detail. However, offering a voluntary group TFSA may assist employees by addressing the gap between what retirement funds are able to provide compared to what employees desperately need today.

Hopefully, in some way or another, this type of arrangement could assist with:

  1. A decrease in the number of employees resigning for the sole purpose of accessing retirement fund savings to service debt or meet daily living expenses (and being taxed heavily); and
  2. Employees being able to save meaningfully, to meet their more immediate needs like housing, education and emergency medical (and other) expenses.

Obviously, financial constraints faced by employers and employees alike will always be a factor, so I am not in any way suggesting that this is an immediately viable solution, but perhaps when reviewing the employee benefits structure, it may be considered in attempting to address employees’ shorter-term financial needs.


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What about the government using the government employees pension as a piggy bank? Do they know they will get next to nothing when they retire?

It’s a defined benefit fund, so any shortfalls shouldn’t impact the member. Ultimately it will come to the taxpayer to make up any shortfall

In my personal experience pension schemes with their fees and costs are a pathetic investment. Tho only saving grace for the individual is the company’s contribution. On retirement members should be able to withdraw their funds with the same tax advantage as handing it over to a financial institution, who immediately deplete it with costs and fees. Besides you being able to involve yourself in a limited option of investment choices, they take control of your funds with a limit of the rate at which you can withdraw, and charge exorbitant fees and costs until the fund runs dry. No guarantee whatsoever that they will not lose your money hand over fist while they continue to charge you for it as well.

I think that there are a few fundamental problems to consider. It’s no secret that South Africans have access to far too much credit. According to the Reserve Bank “Households Debt in South Africa decreased to 74.40 percent of gross income in 2016 from 78 percent in 2015.” This shows that we as a country on average live far beyond our means. Psychologically all people are wired to maximise pleasure and minimise pain. The temptation of being able to use one’s retirement funding for a lump sum to pay off debt or to buy a new car is in hind sight not in the best interest of the individual. The idea of a separate TFSF to fund the needs of a new car or a future deposit on a house is a good one. As part of holistic financial planning each individual of an employee pension fund should have a financial planner to help them formulate a retirement plan and contribution goals over a rolling 2 year period. This will allow individuals to know whether or not they are able to dip into their retirement funding without compromising their ability to adequately retire.

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