JOHANNESBURG – Amid efforts to ensure more South Africans can retire comfortably, National Treasury has been at pains to point out that the reform process is not an effort to nationalise pension funds.This came against the background of anecdotal evidence that many government employees were resigning to access their pension benefits.
A study by the School of Statistics and Actuarial Science at Wits University confirms that there has been a steady increase in the percentage of resignations from the Government Employees Pension Fund (GEPF) between 2011 and 2015, with a slight reduction in the last few months.
Bheki Mkhize, Actuarial Manager at the GEPF, says the study found that around 2.5% of the GEPF’s members resigned in 2014 and 2.8% in 2015.
He says although some of these individuals did not cash out their benefits (but transferred or preserved it), the majority did.
The recent resignations compare to an average annual resignation rate of roughly 1.5% from 2011 to 2013.
The GEPF is the largest pension fund in Africa with roughly 1.3 million active members.
Failure to preserve retirement benefits when resigning is arguably the main reason many South Africans aren’t in a position to maintain their standard of living in retirement. What is concerning however, is that some of the members who chose to cash out, were long-serving members who were close to retirement and already in a position to retire from the fund, thus arguing that cashing out would be better than retiring.
While the conditions of service differ, typically the retirement age for government employees is 60, being the earliest age an individual could retire without a reduction factor being applied (i.e. forfeiting some benefits).
Although in a defined benefit fund individual circumstances may be of such a nature that cashing out could be a better move (those who are single and in very poor health for example), it is highly unlikely that this would be the case for the majority of members.
It is therefore important to understand the implications of resigning from the GEPF close to retirement.
The background
The GEPF is a defined benefit fund, which means the fund takes on the investment as well as the longevity risk. Due to the size of the GEPF, members benefit from economies of scale as far as costs are concerned.
These benefits have to be weighed against cashing out and buying an annuity in the private market. If the pensioner settled for a living annuity, she would have to carry the risk of outliving her money and the risk that markets don’t perform as expected.
The average life expectancy of a GEPF member who is 60 years old at retirement is roughly 20 more years (slightly longer for females and slightly shorter for males).
Mkhize says at retirement, the fund pays a guaranteed annuity to the member for life. In the case of the member’s death, a spouse’s pension is paid to the spouse for life. The annual pension rises broadly in line with inflation.
At an accrual rate (the portion of the salary that converts to a pension for every year of service) of 1/55th, an employee who retires from the GEPF after working for 40 years without cashing in her pension can expect to replace 72.7% of her final average pensionable salary in retirement. Thus, an employee who earned an average pensionable salary of R10 000 during the two years prior to retirement would receive a pension of R7 270. These numbers exclude any gratuity or other enhancements that members may be eligible for due to long service.
This is high by world standards, Mkhize says.
Tax and medical benefits
But arguably the most important factors members who are contemplating cashing out close to retirement age need to consider are the tax implications and the impact on their medical expenses in retirement.
While the tax implications of retiring will differ depending on individual circumstances and is best left to a tax expert, this is very important to consider. The relatively higher tax rates applicable to cashing out retirement benefits can leave the pensioner with a significantly smaller benefit with which to buy a pension in the private market.
Another factor that is often overlooked is membership of the Government Employees Medical Scheme (GEMS).
Mkhize explains that GEMS is a closed scheme for public servants and the post-retirement medical aid is only for those individuals who retire with the public service. This benefit would lapse in the case of resignation.
This is very important for members who resign to consider because often pensioners find their medical costs skyrocketing after retirement, he says.
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