Are your retirement funds at risk?


Are your retirement funds at risk?

By Kyle Wales

South Africans have been on the receiving end of a stream of bad news lately. Unfortunately that stream shows no sign of abating.

One area that I believe hasn’t received adequate response in the press is Cosatu’s suggestion that assets belonging to Government Employee Pension Fund be used to reduce Eskom’s debt and that private pension funds should be forced to invest in local infrastructure assets.

Current press coverage seems to suggest that this is an act of benevolence on their behalf and private pensions should be roped in as a quid pro quo. Nothing could be further from the truth.

The reason for this is that Government Employees Pension Fund is a defined benefit plan. This means the benefits paid to its beneficiaries are typically calculated as a proportion of their final salaries and guaranteed by the government. Should a government employee retire and the pot of savings that has been set aside to fund their retirement is inadequate, the government will step in and make whole the difference. There is no risk to the retiree if reducing Eskom’s debt proves to be a poor investment decision.

The same cannot be said for pension funds of employees in the private sector who are largely beneficiaries of defined contribution plans. In these cases, employees bear the investment risk for their own retirement savings. Should their savings be inadequate at the end of their working lives, this could have a material impact on how comfortable their retirement is.

This would not be the first time the interests of public sector employees are advanced ahead of those of the private sector. By some estimates, employees in our ill-functioning public sector earn as much as 50% more on average than their private sector counterparts.

Private sector employees and retirees (including Cosatu members in the private sector) should realize that any burden for bailing out Eskom sits disproportionately with them. They should also ensure that they limit the contributions to their retirement funds to the annual ceiling of R350,000 (as no tax deduction can be claimed for anything exceeding this amount) and invest anything which they save above this amount privately so it is not subject to prudential regulations. They should also ensure that they have an appropriate balance between their local and offshore investments.

Kyle is a co-portfolio manager of Flagship Asset Management’s global funds.