Is the state coming for your pension and is there anything you can do about it?
By Wouter Fourie (CFP®), CEO of Ascor® Independent Wealth Managers, 2015/16 FPi financial planner of the year and co-author of The ultimate guide to retirement in South Africa
Are we entering a new phase of prescribed assets for pension funds? And if so, should you be worried?
These questions have become more prevalent in the last few weeks after President Cyril Ramaphosa and finance minister Tito Mboweni publicly discussed a proposal from Cosatu to use the Government Employee Pension Fund (GEPF) to help bail out the ailing Eskom.
Mboweni went so far as to say if pension money was used, it should include private pension funds, a comment that many believe foreshadows a new era of prescribed assets – where a pension fund is legally required to invest a certain portion of its funds in state assets.
Mboweni said Cosatu's proposal was not a bad idea. The GEPF controls about R1.8 trillion of the total pension pool of R10 trillion, and in light of all that money, R250 billion invested to help Eskom back on its feet doesn’t sound too bad.
But as my co-author of The Ultimate Guide to Retirement in South Africa, Bruce Cameron rightly points out; this is a recipe for disaster.
For one, we have walked this road before. Bruce points out that in the Apartheid era, the government forced pension funds to invest in its own bonds, often at a discount. This meant that the money could not be invested in the fast-growing stock market which, in the 1970s, meant that pension funds shrunk by 2% while the stock market in the same era grew by 24%.
Funding state projects or state-owned enterprises, says Bruce, also means that the money will not be available for private sector investment. New businesses and fast-growing economic sectors will be deprived of much-needed money, which they rightly deserve, while poorly performing state assets, which have a track record of mismanagement, receives funding.
Furthermore, the state is not known to control its appetite for money. If channelling the pension funds of teachers and policemen from the GEPF to Eskom works, it is only a small leap of political justification to start channelling pension funds to invest in Prasa, the SABC, SAA, Transnet and the many other ailing or failing state enterprises.
With all this said, one should not start panicking as decisions made in a panicked state will never deliver positive long-term outcomes. Here are a few possible actions to take:
1. Consider offshore investments
While most pension funds invest a part of their money abroad, nothing prevents you from channelling some of your own investments into an offshore brokerage account.
It is important to note that this should not be done at the expense of your pension fund contributions, as no prescribed asset rules exist yet and you gain tremendously by offsetting your pension fund contributions against your personal income tax.
2. Max out your tax-free savings account
You are now allowed R36 000 a year in a tax-free savings account, and the saving on dividend withholding tax, capital gains tax and other taxes could mean millions over a single person’s lifetime (provided that you fully fund your investments in your tax free account, which is currently R500 000 per individual).
3. Focus on fees
If prescribed assets come into effect, there will be an inevitable impact on the growth of your pension savings, and you must do everything in your power to contain that impact by focusing on the things you can control.
One of the most important areas you should focus on is the fees you pay to your financial services provider, broker and any other intermediary. These fees may, when viewed in isolation, seem very small, but in combination they could have a significant effect on the growth of your pension over time.
4. Get sound independent advice
At the risk of sounding like a broken record, the advice you receive may be the difference between retiring comfortably and being forced to work into an advanced age. Be wary of any doomsayers who try to force you into a product or plan by using fear.
Always look for an independent financial adviser who is not aligned to any financial institution and who carries the Certified Financial Planner (CFP) mark.
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