Pension and annuities

Writing about a subject as broad and controversial as pension funds is very daunting indeed. Not only are there many controversial issues abound, but because pensions (be it the contributions or the benefits paid out) affect people’s standard of living, we all tend to be emotional about it.

The Gini co-efficient of 0.67 for South Africa (which is one of the highest in the world) measures the gap between the richest and the poorest on a scale of 0 to 1 with 1 representing complete inequality and 0 indicating complete equality.

According to a recent study at UNISA a mere 4 percent of the population earns 40% of total personal income, while 75% of South Africans take home less than R50 000 a year, once again underlining the vast gap between the rich and poor.

The report says there is a strong correlation between education and income, with 89.4% of adults with no schooling earning R50 000 a year or less. The bulk of income earned in the R300 000 to R500 000 category was earned by people with a secondary or tertiary qualification.

Given this background it is small wonder that such a large percentage of South Africans (and mainly rural black people) are dependant upon social grants – state pensions, or non contributory pensions.

Currently the amount payable monthly is R1 010 and is controlled through a means test that disqualifies people earning more than a certain limit to benefit.

The point is R1010.00 is not a lot of money and everybody that can, should put money away from as early as possible to:

  • Get into the habit
  • Make use of the 8th wonder of the world – compounding interest.
  • Not having to look into the face of a welfare officer for a pittance.

Employer Pension Schemes:

Another controversial subject, but one that needs more than just a mention in passing, is most pension schemes these days, particularly with smaller employers, are managed on a group basis by administrators like the insurance giants or huge brokerages like Alexander Forbes.

These pension schemes are without fail defined contribution schemes – in other words neither the employer nor the administrator will guarantee growth – the risk lies squarely with the employee (or member of the fund).

Depending on the market, the fund manager, politics, the odd recession etc. one can normally expect a fairly decent growth on the pension (savings) portion of the scheme.

The formula is (in most cases) quite simple: The employee contributes 5% of their salary and employer matches it with 5%. This premium is then used to buy various components of a scheme, more than likely according to the status of the employee in the rankings of the company.

The ordinary scheme would be compiled as follows:

Death benefit – choose a multiple of salary between 1 and 5 times annual salary.

Disability benefit – choose a multiple between 1 and 3 times salary.

Temporary disability – up to 12 months salary.

Funeral benefit – per family (Example)
Member – R10 000
Spouse – R10 000
Children 16 to 21 – R7 500
Children 7 to 16 – R5 000
Under 7 – R2 500

Whatever is left over is saved as an old age pension.

This then causes a problem for the lower paid employees in most cases. Because funeral cover is a preferred benefit they would normally opt for it. If a lower paid employee then earns (say) R3 500 per month his contribution would be R75 plus the Employer portion which will bring it to R150 per month. Say R35 to funeral, another R50 to pay for R84 000 life cover (2 x annual salary) that would leave probably R50 for savings – after admin costs!

Having serious salary negotiations and sometimes strikes then become an option – don’t you think? Maybe just something for employers to ponder on, although admittedly we have no answers to the problem.

Contributing to the dilemma and creating a vicious circle is the fact that current economic realities (children’s schooling, debt, job losses) cause employees to take (and spend) their pensions prematurely and in the process erode a chance of proper retirement, in many cases by forfeiting the employer contribution and also having to pay tax on the amount received.

Our view is that pension contributions are sacred and only to be used for the purpose it was intended for.