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Pension Funds
Sunday, January 1, 1989
Milking taxpayers

The buy-back pension scheme, legislated in parliament in May 1988, could cost ratepayers millions. Since its inception, the scheme has caused much controversy amongst ratepayers and councillors alike. It operates in very much the same way as the state pension buy-back scheme.
The public servant member’s pension is based on the number of years in service and final average salary. This is in contrast to the money purchase method of calculating pensions, which operates almost in the way that a straight savings account does.
Many, if not all, pension funds allow for members to buy past service. However, the majority of private sector buy-back schemes are not as generous as the state or municipal ones.
The scheme allows for a member to buy back actual service for up to 1 5 years at a very nominal rate. Members are only eligible if they are over 60 years old and have served as a public servant for at least 15 years. In addition, members can borrow from their existing pension funds in order to buy back pension rights.
The problem lies in the fact that the state does not have enough money to fund such a scheme. According to the Pension Fund Act 24 of 1956 there are certain stipulations regarding the solvency of a pension fund. To be considered financially sound, a pension fund’s existing assets must equal accrued liabilities; not only must accrued liabilities be matched by assets in the fund, but the fund must ensure that future contributions will be enough to pay pensions due at the end date.
The state pension fund does not have to conform to the Pension Fund Act, and the result is that the state fund was in a deficit to the order of R6,7 billion (latest available figures). The buy-back scheme will only serve to increase this deficit and the question to rightly ask is, “Who is going to pay?” The answer, of course, is the taxpayer.
In addition, members of state funds are subject to a highly preferential rate as far as tax is concerned, especially as regards the withdrawal benefits. A member can commute in cash up to one third of his pension, which is totally tax free.
Apart from the added perks of a state pension, the state also contributes more towards the fund than the member. According to the 1986 Registrar of Pension Funds Report (which was issued in March 1988), for every rand that a member contributed, the state contributed approximately two rands. This can be compared to private sector pension funds where, on average, the private employer contributes R1,50 for every rand that the member contributes.
The recent pre-election hand-out of a 15°% salary increase to all civil servants also affects the state fund quite drastically. This is because it increases the public sector employees’ final average salaries and thereby increases their pensions. As regards the buy-back scheme for councillors, ratepayers are arguing, and rightly so, that a councillor’s job is only part- time and he should not look towards them to provide that sort of perk.

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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