I am a Government Employees Pension Fund (GEPF) member. If I retire now or next year with 36 years of service at age 57, will I be able to get all my years of service pension of 34 years, as my first ten years of service is carried over from the former Transkei Government Pension Fund (of which I was a member from 1984 to 1996)? How will the current pension fund calculate my pension?
Mduduzi Luthuli - Luthuli Capital (Pty) Ltd
As one of the last few remaining defined benefits scheme, and the sole compulsory retirement savings vehicle for government employees, I do sometimes wonder why not more is done to educate and inform GEPF members about how the funds works. Granted it is a complex scheme, and in many ways a unique fund, but I’m of the opinion more should be done in educating members about the GEPF. As already stated, it is a complex scheme and perhaps my judgment of the powers that be is unfair or unfounded… If so, I welcome any information that may change my opinion on the activeness of government in implementing educational seminars about the GEPF, and retirement savings in general.
That being said, I’ll try give you my understanding of the fund, in relation to your question. I’ve assisted my fair share of GEPF members in various issues ranging from:
- Existing products to privately supplement their GEPF funding;
- When is it best to resign or retire from the GEPF and;
- If retiring within the GEPF is the best option as opposed to opting for external private options offered by the post-retirement market?
The GEPF is an intricate beast that keeps challenging one’s knowledge and expertise. Let’s start by defining what makes it vastly different from most retirement funds on the market.
Defined benefit vs defined contribution
The GEPF is a defined benefit fund. A defined benefit (DB) fund is a fund where the benefits are defined in terms of the fund rules. A defined benefit plan identifies the specific benefit that will be payable to you at retirement. Your basic retirement benefit (how your pension will be calculated) is usually based on an actuarial formula (exit factor) that considers factors like the number of years you’ve worked for your employer (years of service), your final average salary over the last two years of your employment, inflation and other various other factors. In this type of fund benefits are generally guaranteed and are not dependent on the investment returns of the fund or on the level of employer contributions.
DB funds are expensive to maintain as they require regular contributions from the employer to be funded. Most DB funds are underfunded and fail because of this financial burden. This is because the funding expense usually accrues entirely to the employer. It is because of this financial burden that most, if not all, employers who have a choice will opt rather for a defined contribution fund. More and more employers are replacing defined benefit plans with defined contribution plans, primarily due to this expense and long-term obligations associated with running a defined benefit plan. Currently, most existing defined benefit plans are for government employees, union employees, with a smattering of legacy plans.
If you have a defined benefit plan through your employer, be sure to regularly let your employer know that you really appreciate your retirement plan; it’s a benefit well worth keeping. Personally, I’m not afraid to admit that I wish I was part of a DB fund.
A defined contribution plan specifies how much money will go into a retirement plan today. The amount typically is either a percentage of an employee’s & employer’s salary or a specific rand amount. The benefits are mainly based on the accumulation of contributions plus investment returns. Essentially, the benefit (maturity value) is not known given that everyone’s investment result will differ and are not inherently predictable, but the contribution is. The advent of the defined contribution fund has allowed corporate society to disengage from defined benefit funds and to push the responsibility for retirement planning onto the employee.
There’s nothing wrong with this, I must make a point to mention that. There’s no point in a company becoming bankrupt through funding a DB fund, in the pursuit of ensuring their employees retire with enough. DC funds try and equate this responsibility between the employer and employee. Unlike defined benefit funds, the accumulated retirement money is portable, i.e. it can be withdrawn or transferred to another account, within the limits of the Pension Fund Act rules.
The amount you have at retirement depends on how your employer contributes to the plan, how much you as the employee save in the plan, how long you leave those funds invested, and how well your investments perform inside the plan.
Is my service and contributions from the Transkei Government Pension Fund accounted for?
The short answer to that question is it should be accounted for. If you are transferred from one government department to the other, your pensionable service will continue uninterrupted and your benefits will accumulate with service as before. Without knowing anything else about your situation, yes, they should be accounted. The operative word being “should” because in our country what should happen, and what happens sometimes is not the same thing.
Toward the end of its rule, the apartheid government in South Africa converted its contributory pension system for employees in the public sector from one that effectively functioned as a pay-as-you-go (PAYG) scheme to a fully funded scheme. This saw the amalgamation of various state pension funds and the formation of the GEPF into largely what we know today. The current regime in support of a progressive agenda involving social spending and dealing with poverty through non-contributory public pensions has allowed this to continue in the hopes that it will have benefited many poverty-stricken black South Africans. The Transkei Gov’t pension fund formed part of this amalgamation into the GEPF.
Following the recommendations of a Task Team on Restructuring Pensions, the government amalgamated a range of public sector pensions (including the pension funds of Transkei, Venda, Bophuthatswana, Ciskei and the Government Service Pension Fund) into a huge Government Employees Pension Fund, directly accountable to the South African national assembly.
This rationalisation of the various apartheid-era pension schemes followed a provision of the Interim Constitution of the Republic of South Africa (Act No. 200 of 1993), which entitles all public servants to a fair pension and provides for the establishment of a pension fund to manage them. It was also directly related to the establishment of one public service for the country through the passage of the Public Service Act in 1994.
Just a bit of interesting history for your reading pleasure. Yes, the contributions should be accounted for. The only way to confirm that is to contact the GEPF directly and confirm this with them prior to retiring.
Speak to a qualified and accredited wealth-manager to assist you in how best to structure your post-retirement years. Retiring from the GEPF is as complex as understanding it in the first place. Your options will be governed by the Pension Fund Act and the GEPF scheme rules so I must emphasise that you work with a professional to make sure you make an informed decision.