Parliament’s Standing Committee on Finance has rejected a proposed amendment to the Pension Funds Act (PFA) that would allow retirement fund members to take out loans of up to 30% against their pension fund assets.
The Pension Funds Amendment Bill was introduced by the DA’s Dr Dion George earlier this year. It sought to remove the restriction, in section 19 of the PFA, that loans granted by pension funds to their members can be used only for buying or improving a home.
The aim of the amendment was to provide relief to fund members who are suffering financial hardship because of the impact of the lockdowns on the economy.
The Bill initially proposed allowing pension-backed loans of up to 75%, but Dr George reduced this to 30% after public hearings and submissions on the Bill.
The Standing Committee on Finance received submissions on the Bill from National Treasury, Cosatu, Fedusa, the Association for Savings and Investment SA, the Batseta Council of Retirement Funds, the Institute of Retirement Funds Africa, the South African Institute of Chartered Accountants, the Banking Association of SA, and the Dear South Africa campaign.
Problems and objections
Although most of the stakeholders sympathised with the objectives of the Bill, they rejected it. The concerns raised by the submissions included:
- If members defaulted on their loans, this could substantially erode their retirement savings. Incurring substantial indebtedness would have a significant impact on members’ financial security over the long term, including into their retirement years.
- Only a minority of members would benefit because lending would be subject to the affordability requirements of the National Credit Act. This would preclude relief being accessed by those who do not have sufficient income to meet the affordability requirements or are blacklisted.
- The Bill contained no clear mechanisms for the operation of the loan scheme.
- There was no evidence that competitive interest rates would automatically be granted by lenders if the loans are pension-fund backed.
- In terms of the Income Tax Act, retirement annuity funds may not provide for access to cash prior to retirement (and only up to one-third of the proceeds at retirement). These funds would not be suitable as guarantors of the proposed loans because pre-retirement access to funds is not allowed.
- The amendment would create a significant administrative burden for retirement funds.
- No socio-economic or financial impact study had been submitted to support the Bill.
- The Bill did not take into consideration the implications for the liquidity of pension funds, given that members’ contributions are invested in terms of a long-term investment plan, and changing a fund’s investment profile will have a direct bearing on its growth and sustainability.
- The Bill was silent on the tax implications.
- A separate money bill would be required to adjust the tax regime to allow for withdrawals against pension-guaranteed assets. In terms of the Constitution and the law, only the Minister of Finance can introduce a money bill.
National Treasury also pointed out if a guarantee is called because a fund member can no longer service a loan, the retirement fund assets that are withdrawn to honour the guarantee will be taxed at the pre-retirement withdrawal rates. If the guarantee ensures that the post-tax amount of the loan is paid to the lender, there may be cases where more than the full amount of the available retirement fund assets is used to service the debt. There would therefore be nothing left in the fund. Indeed, this may create an additional liability that cannot be serviced by the member’s assets.
The DA could not muster sufficient support for the Bill from the committee’s members, and the motion of desirability was defeated.