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File Image: IOL

A pension holiday is ‘not that unusual’

By Opinion Time of article published Dec 14, 2020

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"Offering public servants a pension payment holiday as part of attempts to break the deadlock in the public service wage negotiations might look like simply kicking the problem down the road but," says Andre Tuck, Senior Investment Consultant at 10X Investments, "it is also a pragmatic solution to resolve an immediate impasse."

Offering a pension holiday for government employees provides them with an immediate boost to their take-home pay without a commensurate reduction in their pension benefit. That is because members of the Government Employees Pension Fund (GEPF) are on a defined benefit plan, meaning they are entitled to receive a pension at a predetermined level according to the fund’s rules.

This is regardless of the fund’s value. The GEPFs defined pension benefits are guaranteed by the state, and thus ultimately, underwritten by taxpayers. Given the GEPF’s current funding level, this guarantee is unlikely to be called any time soon. And before that happens, the government, in consultation with employees, will be able to modify the benefit formula.

The cost of this payment holiday would simply manifest as a reduction in the fund’s value relative to what it would have been without the payment holiday. At its last actuarial valuation, in 2018, the GEPF's future liabilities were 108% funded.

In the financial year to March 2020, the GEPF collected some R80 billion in contributions (approximately 4% of assets, which now stand at approximately R1,8 trillion). Losing out on contributions for one year would thus not change the fund's funding position materially.

Nor is this an unheard-of scheme. Decades ago, when most pension funds offered defined benefit plans, with pensions guaranteed by the employer, the employer would be entitled to take a pension holiday if their company's pension fund was adequately funded (with the proviso that they would make this up in future, if necessary).

Most public servants pay 7,5% of pensionable salary towards their pension every month; the state stumps up another 13%. It is not yet clear, says Tuck, whether the government plans to give the full benefit of the pension holiday to employees, or just the 7,5% they would normally pay.

Even if only the employees’ contribution were included in their pay package this year, it still begs the question whether, if this becomes the new base for future wage negotiations, how this will then be funded.

But if the government can keep its 13% contribution, this would go some way to curtail South Africa’s current funding shortfall and debt trajectory.

“Even the rating agencies might see this positively as it would address the short-term budget deficit and debt levels,” added Tuck.

PERSONAL FINANCE

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