The newly appointed Pension Fund Adjudicator, Professor John Murphy, has made his first ruling. In this case the ruling went against the applicant. However, the ruling deals with a very important grey area the right of an employer to deduct money owing from your retirement savings when you resign, are retrenched, fired or take retirement.
What happened in this case was Mr K, on being employed by retailer Woolworths, was granted a housing loan of R37 500. In signing an acknowledgement of debt Mr K agreed that "any money owing to me by the Wooltru Group Pension Fund may be off-set against the outstanding balance of the loan".
Mr K used the housing loan, which was granted at a preferable rate of interest, to pay off part of an existing mortgage loan.
Two years later Mr K was retrenched. The retrenchment was contested and a settlement was reached at the Commission for Conciliation, Mediation and Arbitration which made no express or implied reference to pension benefits.
After the settlement Mr K was told he could not claim his pension benefits until the outstanding loan and the interest due (about R37 000) were repaid. Mr K claimed this was illegal in terms of the Pensions Fund Act, which deals with housing loans.
Mr K argued that the loan should have been secured by a mortgage bond on the property as would have been the case if the retirement fund had lent him the money.
Murphy disagreed and found in favour of Woolworths. In other words a company can lend you money to buy a property and use your assets in its retirement fund as security rather than your home as a bank would do.
An interesting aspect of the ruling was that Woolworths applied for costs to be granted against Mr K. Murphy decided otherwise, saying the purpose of establishing his office was to "create an informal, cheap and expeditious means of resolving pension disputes".
Murphy says as a general rule he will only award costs when the complaint is frivolous or vexatious, taking account of the complainant's level of education and access to suitable advice.
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While on the subject of home loans from retirement funds, the number of people abusing the scheme, with the connivance of the funds, has vexed the Registrar of Pension Funds.
It appears people have been using loans from retirement funds for all sorts of things other than housing.
Two years ago the Guy Smith committee which investigated retirement funding suggested that funds should be able to lend money to members for a number of life crises and life necessities from housing to education to large medical bills.
The government is expected to issue a policy paper soon on a number of issues relating to retirement and this subject will no doubt be included.
In the meantime the Registrar of Pension Funds wants abuses of home loans from retirement funds stopped. According to a note he has sent out to funds the following things are happening:
* Retirement funds have redeemed loans granted by an outsider to a member and the loans have not been secured by a mortgage bond over immovable property;
* Loans have been granted to members or their spouses for properties they do not own (or even occupy);
* Loans are used to buy second homes and even a holiday homes;
* Loans are granted for purposes other than housing;
* Loans in excess of the cost of additions, alterations, maintenance or repairs to homes are granted; and
* Loans for periods longer than 30 years have been made while in other instances conditions for repayment do not involve equal instalments.
This kind of abuse of retirement funds is a total no-no. Trustees allowing these things to happen could find themselves in hot water, including being personally liable if things go wrong.
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Now for a bit of advice to members, particularly of defined contribution retirement funds, who want to use their retirement funds for home loans.
Try to avoid borrowing from your retirement fund, particularly at preferential rates of interest. All you are doing is undermining your final benefits. Effectively you are borrowing money from yourself and paying yourself a lower return. This means less money when you retire.
When you consider that most retirement schemes do not match income needs in retirement, you are adding to your future problems.
Rather encourage your fund to negotiate preferential lending rates from a financial institution using the weight of the number of members in the fund and the fact that the fund will guarantee your loan.