ATC211207: Report of Standing Committee on Finance on the Pension Funds Amendment Bill [B30 – 2020], 1 December 2021

Finance Standing Committee

Report of Standing Committee on Finance on the Pension Funds Amendment Bill [B30 – 2020], 1 December 2021

 

The Standing Committee on Finance, having considered the Pension Funds Amendment Bill [B30 - 2020] (National Assembly- section 75), referred to it and tagged by the JTM as a Private Member’s Bill, reports the Bill as follows:

1. INTRODUCTION AND BACKGROUND
   1. The Pension Funds Amendment Bill (“the Bill”) seeks to remove the existing restriction that loans granted by pension funds to their members can only be used for purchasing or improving a home.  The Bill was introduced by Dr Dion George, a Member of Parliament, National Assembly.
   2. Section 19 of the Pension Funds Act, 1956 (Act No. 24 of 1956) (‘the Act”) currently enables pension fund members to access a loan where the pension fund assets act as collateral for such a loan in order to obtain a home loan. The Act however does not permit pension fund members to obtain a loan for any other purpose.
   3. Given the unfortunate outbreak of the COVID-19 pandemic, severely impacting the economy, has led many South Africans in financial hardships and destitution. The Bill sought to amend the act in order to provide relief whereby members of pension funds could obtain a pension-backed loan, secured by guarantee from their pension funds to leverage their pension fund assets prior to their retirement date, without eroding their provision for their retirement.
   4. The Bill also would enable lending institutions to offer loans to pension fund members at competitive interest rates and over extended or deferred payment periods given that the loan will be fully guaranteed.
   5. The Bill contained on one Clause which seeks to amend section 19 of the Act to offer these pension-backed loans which will not exceed 75 per cent of their share in the value of the fund.

 

1. PUBLIC PARTICIPATION AND PROCESS
   1. The Committee was briefed Dr Dion George, the Bill sponsor, on 16 March 2021. On 19 May 2021, the Committee held public hearings and received submissions from nine stakeholders, six of whom also made oral presentations. The stakeholders who made submissions were: National Treasury (NT), COSATU, FEDUSA the Association for Savings and Investments South Africa (ASISA), the Batseta Council of Retirement Funds (BATSETA), the Institute of Retirement Funds Africa (IRFA), the South African Institute of Chartered Accountants (SAICA), Banking Association of South Africa (BASA), and the Dear South Africa campaign. 
   2. On 24 August 2021, the Committee received a briefing on the public submissions and deliberated on the Bill.
   3. On 30 November 2021 the Committee received a letter from the Bill sponsor, Dr George seeking to effect amendments to the Bill to limit the percentage of the pension funds backed loans to 30 per cent, instead of the 75 percent initially proposed in the Bill. The Committee met on 01 December to deliberate on the Bill and to pass a Motion of Desirability as required by the National Assembly Rules.

 

1. KEY ISSUES RAISED DURING THE PUBLIC HEARINGS
   1. The submissions generally empathized with the objects of the Bill but rejected it for a variety of reasons. Other stakeholders supported the Bill, albeit conditionally, as shall be discussed below.
   2. The majority of stakeholders expressed general sympathy towards the objective of the Bill of providing relief to those members of pension funds who were temporarily in financial hardship as a result of the current COVID-19, but rejected the Bill. They stated that many of the statements made in the Explanatory Memorandum on the Objects of the Bill were not valid and needed to be supported by hard evidence.
   3. Other stakeholders, particularly Labour, supported the use of pension funds as surety for workers in applying for loans. They said that this built upon the existing home loan provisions in the Act which allowed workers to access their funds. They however submitted that limits needed to be put in place and submitted that the 75 per cent proposed in the Bill was too high. They submitted that any guarantees be limited to 30 per cent of a pension fund members’ assets.
   4. Stakeholders raised issue about the impact of the Bill on retirement savings, stating that if members end up defaulting on their loans, this could substantially erode their retirement savings. They said that incurring substantial indebtedness could certainly have significant impact upon the pension fund members’s financial security over the long-term, including into their retirement years.
   5. They added that retirement savings by South Africans have been extremely low for a lengthy period of time and have not shown any signs of improvement. Citing the recent 10X 2020 South African Retirement Realities Survey, they said that 49 per cent of people surveyed did not have a retirement plan.
   6. Issues were also raised on the loan provision, with stakeholders stating that the Bill contained no clear mechanisms for the operation of the loan scheme. They added that there was no evidence that competitive interest rates would automatically be granted by lenders if the loans are pension-fund backed. They also stated that the loans may end up being unaffordable for highly indebted pension fund members. They stated that loan defaults could result in guarantees for the loans being called and this will effectively give fund members premature access to retirement savings. They said that there was a great risk that the longer-term financial consequences of the proposed loan guarantees will far outweigh any short-term benefits.
   7.  Stakeholders stated that the Bill would only benefit a small minority of pension fund members as lending will be subjected to affordability requirements of the National Credit Act (NCA). They added that this would preclude relief being accessed by those who do not have sufficient income to meet affordability requirements or are blacklisted.
   8. Stakeholders further submitted that the Bill could result in an older population that is marred by deficits and insufficient pensions. They said that this would likely increase the number of persons who rely on the state for old age pensions.   
   9. Stakeholders pointed out that there was no socio-economic or financial impact study that had been submitted to support this Bill. They further said that the Bill has not taken into consideration the implications on the liquidity of pension funds, given that member contributions are invested in terms of a long term investment plan, and that any change in the current investment profile of any retirement fund will have a direct bearing on the growth and sustainability of such funds. They said that the Bill further did not take into account the tax implications in instances where the loan guarantees are called when a member defaults.
   10.  The National Treasury and other stakeholders raised the issue of the Bill being silent on the tax implications of using a guarantee for up to 75 per cent of the members’ fund assets. It explained that any adjustment to the tax regime would require a separate money bill. It said that the current tax regime would require that any payouts from the fund that are made before retirement funds are taxed according to the withdrawal tax table. It explained that payouts from retirement funds are taxable since the contributions are made before tax is paid, otherwise the income could be received completely tax free. It explained further that the tax on withdrawals before retirement ranges from 18 per cent on amounts above R25,000 up to 36 per cent on withdrawn amounts above R 990,000.
   11. NT continued to explain that if a guarantee is called because the member can no longer service a loan, the retirement fund assets that are withdrawn to honor the guarantee would be subject to this tax. If the guarantee ensures that the post-tax amount of the loan is paid to the loan provider, there may be cases where more than the full amount of the available retirement fund assets are used to service the debt. There would therefore be nothing left in the fund for the member in such a case, and may also create an additional liability that cannot be serviced by the individual’s assets.
   12. It was further added that under the provisions of the Income Tax Act, retirement annuity funds may not provide for access to cash prior to retirement (and then only 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 monies is not allowed.
   13. Other stakeholders proposed that a provision be inserted in the provisions of the Bill to provide that withdrawals not to be subject to tax. They said that this could provide clarity on how the tax payable will be treated on the occurrence of a withdrawal event.
   14. Stakeholders submitted that the amendments proposed by the Bill would create significant administrative burdens on the Boards of pension funds. They said that amendments to fund rules would be required, as well as systems and other administrative changes. The administrative issues raised included the noting/recording of loans on systems, payment of creditors on loan defaults after verifying the correctness of the amounts claimed, applying for tax directives and calculating what balance remains, and staff training.
   15. Other submissions made alternative suggestions. One suggestion was that instead of passing this Bill, NT should introduce appropriate amendments in Parliament through the Financial Sector Laws Amendment Bill during the next 12 months.
2. COMMITTEE OBSERVATIONS
   1. The Committee notes that while stakeholders sympathized with the objectives of this Bill, they regarded it as inadequate and submitted that it did not address issues in a comprehensive manner.
   2. Among the issues raised by stakeholders were on: the impact of the pension-fund backed loans on indebtedness and long-term savings; implications of the scheme on the state; its interplay with the National Credit Act; and tax implications in the event of withdrawal when guarantees on defaulting loans are called.
   3. The Committee notes that the Bill was not accompanied by any socio-economic impact study. Although this is not a prerequisite for the passing of Bills by Parliament, it is regarded as one of good practices that ensures that the costs and benefits of a particular amendment are balanced and do not lead to unintended consequences.
   4. The Committee notes further that the interplay of tax issues with this Bill may require the introduction of a money bill, which, in terms of the Constitution and the law, may only be introduced by the Minister of Finance.
   5. The Committee further notes the letter dated 30 November 2021 from Dr. Dion George, MP, seeking to insert further amendments to the initial proposal by capping guarantees to 30 per cent of a pension fund members’ assets.
   6. The Committee also notes the formal written responses sent to the Committee on 30 November 2021, responding to the public comments.
   7. Lastly, the Committee notes the comments by some stakeholders that NT should introduce a Bill that will be comprehensive and cover all the above raised issues during the public hearings. 

 

1. CONCLUSION
   1. The Standing Committee on Finance, having considered the Pension Funds Amendment Bill [B30 - 2020] (National Assembly- section 75), rejects this Bill

Report to be considered